EMIR stands for “European Market Infrastructure Regulation”
European regulation to regulate European Union market place to stabilize OTC
The core of EMIR is Electronic or Exchange trading of OTC Derivatives trades,
clearing through Central Clearing Party (CCP), Trade repositories, Trade
reporting, Monitoring of Credit risk and Operational risk.
It is entered into the regulatory force on 16-Dec-2012.
The regulation applies to any form of Derivatives transactions.
As per G20 leaders commitment in Pittsburgh in September 2009:
“All standardized OTC derivative contracts should be traded on exchanges or electronic trading
platforms, where appropriate, and cleared through central counterparties by end-2012 at the
latest. OTC derivative contracts should be reported to trade repositories. Non-centrally
cleared contracts should be subject to higher capital requirements. We ask the Financial
Stability Board and its relevant members to assess regularly implementation and whether it is
sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and
protect against market abuse.”
Who will be impacted by EMIR ?
•The collapse of Lehman Brothers, AIG and Bear Stearns in 2008 exposed the fundamental
weaknesses in the regulation of the USD 800 trillion Over-The-Counter (OTC) derivatives
•Most of the time OTC Derivatives trades are not cleared through Central Counter Parties
(CCPs) resulting high credit risk exposure of each parties.
•Major percentage of OTC Derivatives trades are not recorded into Trade Repositories, no
significant control over live and historical trades.
•Operational process of OTC Derivatives trades are not optimal, resulting higher operational
risk faced by financial and non-financial firms.
Financial and non-Financial firms based in Europe who are involved in any sort of OTC
Financial and non-Financial firms based in non-European countries who are involved in
any sort of OTC Derivatives transactions with EU counter parties.
Note: The exemption applies to “commercial end users,” such as industrial firms, utilities and
airlines, which use swaps to counter risk (hedge) in goods they purchase or manufacture and
against fluctuations in interest rates.
Example of standard OTC (Over-The-Counter) Derivatives products are
Swaps, Forward, Options, and any other “Over- The-Counter” contractual agreement between two
parties on the basis of underlying assets.
Each of the standard products have different variations as given below
Swaps: Interest Rate Swaps, Currency Swaps, Basis Swaps, Equity Swaps, Commodity Swaps, Credit Default
Swaps, and other derived structured Swaps.
Forward: Forward Rate Agreement
Options: Swaptions, FX Options, Interest Rate Options, Employee Stock Options, Real Estate Options and
other derived structured options.
What are OTC Derivatives products ?
OTC Derivatives is “Over - The – Counter” contract between two parties whose value depends on underlying
financial instruments like interest rate, FX, Equity, Commodity, Index etc. OTC Derivatives market notional is
around USD 800 trillion globally.
Central Counter Party (CCP) is an intermediate legal entity through which financial
transactions of contractual parties of derivatives contacts are cleared to reduce individual
credit risk. Each party in the transaction enters into a contract with the CCP , so each party
does not take on the risk of the other defaulting. In this way, the CCP is essentially involved in
two mutually opposing contracts.
CCP reduces counterparty risk and strengthens overall market integrity. It also helps with
position segregation and portability in the event of a default, improves transparency for
regulatory requirements and benefits the central management of trade lifecycle events, such
as cash settlement with CCP.
What is Central Counter Party (CCP) ?
OTC Derivatives electronic trading is a facility, trading system or platform in which multiple
participants have the ability to execute or trade derivatives products by accepting “bids &
offers” or contracts made by other participants or broker, through any means of interstate
commerce therefore allowing increased transparency and provides the tools for a complete
trade confirmation and audit. A good example is “Markitwire” platform to execute Swaps,
Options and FRAs.
OTC derivative transactions cleared through CCPs forces counterparties to pay (from day one) initial and
variation margins in highly liquid collateral (cash, gold, government bonds, etc.). EMIR protects collateral
placed with CCPs in the event of insolvency of a clearing member – and from losses from other clients.
Collateral Management with CCPs is a complex topic and varies with CCPs in different countries.
What is Trade Repository ?
A Trade Repository (TR) is regulatory legal entity hat centrally collects and maintains all economics and
records of OTC derivatives trades. In the bank an electronic platform (called TR data warehouse) acting as an
authoritative registries of key economic information regarding open, closed and cancelled OTC derivatives
trades related to a legal entity. Data in the trade repository data warehouse is one of the key source of
various EMIR related reporting.
What is Variation Margin?
Variation margin is paid by clearing members on a daily or intraday basis in order to reduce the exposure
created by carrying highly risky positions. By demanding variation margin from its members, clearing
organizations are able to maintain a suitable level of risk and cushions against significant devaluations.
What is Initial Margin?
Initial Margin is the percentage of the purchase price of securities (that can be purchased on margin) that the
investor must pay for with his or her own cash or marginable securities.
Bank Tarde Risk
ICE Link for CDS (Credit Default Swaps)
Market leading OTC Derivatives Central Clearing Platform
LCH.Clearnet (LCH: London Clearing House)
ICE Clear for CDS
Inter Continental Exchange (ICE)
Designing, testing and documenting business and operational clearing processes, capability and
Designing new management reports to monitor and control confirmation processes, capabilities and
Improving processing efficiency and control in relation to EMIR
Reviewing and adapting trade capture processes, to gather required transaction reporting data and
to develop connectivity with trade repositories.
Designing, implementing and testing regulatory, treasury and transaction reporting systems.
Develop front to back collateral management solution.
New business process and strategy for collateral and liquidity management.
Adapting the firms’ operational, credit and market risk strategy in light of EMIR requirements.
Involvement of CCPs in all sort of Derivatives products.
Valuation of trades including margins and CCP fees.
New regulatory reporting structure related to EMIR for TR.
Changes in IT landscape to trigger “Straight-Through-Processing” (STP), e-trading, auto-
confirmation, reconciliation, CCP interface, reporting data warehouse etc.
Involvement of wide business area to identify any sort of OTC Derivatives trading in the bank.
Gap analysis and health check tools to measure the readiness of EMIR requirements.
Changes in operational model and process when dealing with OTC Derivatives
More focus on centrally cleared rather than bilaterally cleared.
Exchange trading will grow by 25-30% in the future.
Increased costs and higher capital charges will reshape trading and hedging
strategies in a long run.
More requirement on high-quality collateral by CCPs.
Development of new collateral management business models.
Liquidity stresses will increase due to likely short-term gross margin
placements at CCPs.
Firms have to disclose level of protection including legal implications in case of
insolvency, offered to customers by CCPs.