European Market Infrastructure Regulation (EMIR)

Introduction

The European Markets and Infrastructure Regulation (EMIR) is a European Union law that aims to reduce the risks posed to the financial system by derivatives transactions in the following three main ways:

  1. Reporting of derivatives trades to an authorised trade repository
  2. Clearing derivatives trades above a certain threshold; and
  3. Mitigating the risks associated with derivatives trades by, for example, reconciling portfolios periodically and agreeing dispute resolution procedures between counterparties

EMIR impacts market participants in the EEA (European Economic Area) and market participants outside of the EEA trading with an EEA counterparty.

EMIR may also have extra-territorial impact on trading between two non-EEA counterparties where;

i) Both counterparties trade through branches located within the EU; or,
ii) Either counterparty has a qualifying guarantee for OTC derivative activity from an EU Financial Counterparty (FC)

This is one of the largest regulatory projects being undertaken in Europe.

Are you impacted by EMIR?

When you enter into derivative products with HSBC, including options, forwards or swaps relating to (amongst other things) foreign exchange, interest rate protection, credit, commodities or equities, you become a ‘counterparty’ to HSBC in these transactions. EMIR applies to transactions between all counterparties and the EMIR requirements are different depending on the country where your entity is established.

Considering the complexity of EMIR regulations and the intricacies around the extra-territorial reach of EMIR, we strongly recommend you seek guidance from your usual legal advisors with respect to your obligations under EMIR.

Counterparty Classification

Entering into derivative transactions identifies you as a ‘counterparty’.

EMIR introduces two sets of counterparties:

  • Financial Counterparties (FC) include banks, investment managers, insurance companies or brokers
  • Non-Financial Counterparties (NFC) include all entities that are not Financial Counterparties

EMIR identifies two sub-categories of Non-Financial Counterparties (NFC).

Depending on the volume of derivatives a counterparty enters into, ESMA (European Securities and Markets Authority) has defined a set of clearing thresholds for each class of derivative and NFCs are classified relative to these thresholds.

Important: calculation is based on gross notional values of positions, excluding cash products, spot foreign Exchange (FX ) and that are ‘objectively measurable as reducing risks directly related to its commercial activity or treasury financing activity or that of its group (‘hedging derivatives’).

Clearing thresholds by class:
Credit: EUR1billion
Equity: EUR1 billion
Interest Rates: EUR3 billion
Foreign Exchange: EUR3 billion
Commodities and others: EUR3 billion
The regulatory obligations imposed on NFCs that are subject to EMIR are different depending upon the NFC sub-categorisation.

You are classified as a ‘Non-Financial Counterparty above the threshold’ or NFC+, when your rolling average position over 30 working days exceeds the threshold in any non-hedging derivative class. You must immediately notify ESMA and your competent authority. As a result you will have to apply NFC+ regulations to all your derivatives contracts regardless of their class.

You are classified as a ‘Non-Financial Counterparty below the threshold’ or NFC-, as long as your rolling average position over 30 working days doesn’t exceed the thresholds in any derivative classes.

The ESMA website provides forms for counterparties to notify the authority when their classification changes.

ESMA notifications should be returned via email to EMIR-notifications@esma.europa.eu

Considering the complexity of EMIR regulations and the complexity of interpretation and inputs into the calculation of these thresholds, we strongly recommend you seek guidance from your usual legal advisors with respect to your obligations under EMIR.

EMIR calendar

Please refer to the calendar below as estimation based on current interpretation of the EMIR implementation timeline.

EMIR estimated calendar
  NFC- NFC+/FC
In Force Counterparty classification
Timely Confirmations
Market to market/model valuation  
In Force Timely Confirmations (tighter deadlines)
In Force Portfolio Reconciliation
Dispute Resolution
Portfolio Compression (for 500 or more outstanding contracts)
In Force Trade repository reporting (Credit and Interest Rates)
Trade repository reporting (FX, Equities, Commodities)
In Force Timely Confirmations (new tighter deadlines)  
In Force Timely Confirmations (final regulatory deadlines)
In Force Central Clearing (phased implementation ending 2019)  
In Force Margining (phased implementation ending 2020)  


Last updated: 11 April 2017