Clearing obligation and risk mitigation techniques under EMIR
EMIR includes the obligation to centrally clear certain classes of over-the-counter (OTC) derivative contracts through Central Counterparty Clearing (CCPs). For non-centrally cleared OTC derivative contracts, EMIR establishes risk mitigation techniques.
The Regulation (EU) 2019/834 amending EMIR, EMIR Refit, introduces changes in the OTC regulatory framework. Some of the most relevant aspects include a change on the way to determine which counterparties are subject to the clearing obligation and the inclusion of a mechanism to suspend the clearing obligation.
Clearing obligation
Counterparties subject to the clearing obligation
The clearing obligation applies to EU firms that are counterparties to an OTC derivative contract including interest rate, foreign exchange, equity, credit and commodity derivatives.
EMIR identifies two categories of counterparties to whom the clearing obligation applies depending on whether their positions are above or below the clearing thresholds:
- Financial counterparties (FC) such as banks, insurers, asset managers, etc.
- Non-Financial counterparties (NFC), firms taking positions in OTC derivative contracts other than financial counterparties.
Intra-group transactions are exempted from central clearing under certain conditions.
Likewise, pension funds are also temporary exempted.
Notifications
Financial counterparties and non-financial counterparties need to inform ESMA and the relevant national competent authority when they exceed the clearing threshold and when they no longer exceed it.
For further details on the calculation of positions and on the procedure to notify ESMA, refer to the section on Clearing Thresholds.
Classes of OTC derivatives subject to central clearing obligation
EMIR introduces the obligation to clear certain classes of OTC derivatives in CCPs that have been authorised (for European CCPs) or recognised (for non-EU CCPs) under the EMIR framework.
EMIR foresees two possible processes for the identification of the relevant classes of OTC derivatives:
- The “bottom-up” approach described in EMIR Article 5(2), according to which the determination of the classes to be subject to the clearing obligation will be done based on the classes which are already cleared by authorised or recognised CCPs.
- The “top-down” approach described in EMIR Article 5(3), according to which ESMA will on its own initiative identify classes which should be subject to the clearing obligation but for which no CCP has yet received authorisation.
In accordance with the clearing obligation procedure and the EC mandate, ESMA shall develop and submit to the EC for endorsement draft regulatory technical standards (RTS) specifying:
- the class of OTC derivatives that should be subject to the clearing obligation;
- the date or dates from which the clearing obligation takes effect, including any phase in and the categories of counterparties to which the obligation applies.
The clearing obligation procedure started in Q1 2014 following the first EU CCPs authorisations. Since then, ESMA has analysed several classes of interest rate, credit, equity and foreign-exchange OTC derivatives and proposed some of them for the clearing obligation.
The table below provides an overview of the current status of the clearing obligation process for those classes.
| Asset Class | Classes | Consultation Paper | Final Report | Other documents | Status of RTS | Last Update |
|
Interest Rate |
Basis, Fixed-to-float, FRA and IOS in EUR, GBP, JPY and USD |
11 Jul 2014 |
1 Oct 2014 |
06 Mar 2015 |
RTS 2017/751 amends RTS 2015/2205 RTS 2022/750 amends RTS 2015/2205
|
8 Feb 2022 |
|
Interest Rate |
FRA and fixed-to-float swaps in NOK, PLN and SEK |
11 May 2015 |
10 November 2015 |
|
RTS 2017/751 amends RTS 2016/1178 |
20 Feb 2018 |
|
Equity |
Lookalike/Flexible equity derivatives and CFD |
11 Jul 2014 |
1 Oct 2014 |
|
No RTS proposed at this stage |
1 Oct 2014 |
|
Credit |
Index Credit Default Swaps |
11 Jul 2014 |
1 Oct 2015 |
20 Nov 2014 |
RTS 2017/751 amends RTS 2016/592 |
20 Feb 2018 |
|
Foreign Exchange |
Non-deliverable Forward (NDF) |
1 Oct 2014 Consultation Paper (n°3) |
|
4 Feb 2015 |
No RTS proposed at this stage |
4 Feb 2015 |
The Public Register for the Clearing Obligation includes the classes of OTC derivatives that CCPs are authorised to clear, and the OTC derivatives subject to the clearing obligation.
Non-EU counterparties
Under certain conditions, the clearing obligation may also apply to third-country (non-EU) counterparties including when:
- EU counterparties trade with entities established outside the EU;
- Two entities established outside the EU trade together, and;
- An impact on EU markets exists (a direct, substantial and foreseeable effect in the EU)
The final ESMA report on draft regulatory technical standards on direct, substantial and foreseeable effect in the EU was endorsed by the European Commission on 13 February 2014 (Commission Delegated Regulation (EU) No 285/2014.)
Risk mitigation techniques
EMIR’s risk mitigation requirements apply to all non-centrally cleared OTC derivative transactions. Those techniques include timely confirmation, portfolio reconciliation and compression, dispute resolution procedures and the exchange of collateral. The RTS will be applied in a proportionate manner to allow counterparties to phase-in the requirements
EMIR’s risk mitigation requirements
| Date of application | FC | NFC+ | NFC- | |
| Daily mark-to-market | 15/03/2013 | Yes | Yes | No |
| Timely confirmation | 15/03/2013 | Phase in per asset class. Final deadline=T+1 | Phase in per asset class. Final deadline=T+2 | |
| Portfolio reconcillation | 15/09/2013 | Every day, week or quarter depending on portfolio size. | Every quarter or year depending on portfolio size. | |
| Portfolio compression | 15/09/2013 | When counterparties have more than 500 contracts outstanding with each other, obligation to have procedures to analyse the possibility to conduct the exercise. | ||
| Dispute resolution | 15/09/2013 | Procedures in place + reporting to the competent authority | Procedures in place | |
| Exchange of collateral* | Phase in per amount of non-centrally cleared derivatives. Final deadline, Sept. 2022. | Yes | No | |
* Intragroup transactions are exempted
In relation to the exchange of collateral for OTC derivatives contracts that are not cleared by a central counterparty (CCP), the Commission Delegated Regulation 2016/2251 contains the following provisions:
- Counterparties have to exchange both initial and variation margin. These provisions reduce counterparty credit risk, mitigate any potential systemic risk and ensure alignment with international standards.
- List of eligible collateral for the exchange of margins, the criteria to ensure the collateral is sufficiently diversified and not subject to wrong-way risk, as well as the methods to determine appropriate collateral haircuts.
- Operational procedures related to documentation, legal assessments of the enforceability of the agreements and the timing of the collateral exchange.
- Procedures for counterparties and competent authorities related to the treatment of intragroup derivative contracts.