EMIR (European Market Infrastructure Regulation or Regulation No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories) is directly applicable EU regulation which sets common rules for OTC derivatives transactions, for risk mitigation techniques related to those transactions and for reporting of transactions. EMIR came into force on August 16, 2012. Different implementing regulations and requirements will come into force gradually.
Objectives of EMIR
EMIR was adopted as a result of the 2009 decision by G20 to regulate OTC derivatives market in more detail, with the objective of increasing the transparency of derivatives market and lowering systemic risk in the global financial system caused by derivatives transactions. EMIR is one of the regulatory acts the European Union is using to implement these objectives.
Area of influence
Requirements of EMIR apply to OTC derivatives transactions, among them also to some of the transactions that can be concluded under SEB Financial Markets Client Agreement – including interest rate derivatives and FX derivatives (forwards, swaps, options). EMIR requirements apply both to financial and non-financial counterparties. Requirements of EMIR do not apply to private individuals and certain government institutions.
Main requirements of EMIR:
- Obligation to report derivatives transactions to a Trade Repository, this requirement is already in force;
- Obligation to centrally clear transactions with certain OTC derivatives through a Central Counterparty (CCP), this requirement will come into force gradually until 2018;
- Mandatory risk mitigation techniques for non-cleared derivatives transactions this requirement is already in force;
- Collateralisation – certain parties to derivative transactions are subject to daily collateral exchange this requirement will come into force gradually until 2019.
Obligation to report derivatives transactions to a Trade Repository
Obligation to report transactions applies to all counterparties of derivatives transactions, only private individuals are excluded. This means that both counterparties to a derivatives transaction must report the transaction, modifications to the transaction and termination of the transaction to a licensed trade repository of their choosing. Reporting obligation can also be delegated to the other counterparty or to a third party. Transaction has to be reported no later than the working day following te conclusion, modification or termination of the transaction.
By signing the SEB Financial Markets Client Agreement, the client authorizes SEB to report derivatives transactions concluded between SEB and the client to a trade repository also on behalf of the client. SEB may refuse to report on behalf of the client if there is some factor preventing SEB from doing this.
In transaction reports the counterparties to the transaction must be identified by Legal Entity Identifier (LEI). LEI is a global identifier of legal entities, which consists of 20-digit alpha-numeric code. LEI code is unique, it is assigned once to a specific company and same code cannot be assigned to any other company. LEI code is exclusive – if legal entity already has LEI code it cannot apply for additional LEI codes. LEI code does not replace Estonian commercial registry code.
As from 1st November 2017 no transactions can be reported under EMIR without a LEI.
If the client has not obtained a LEI and provided it to SEB by 27.October 2017, it is not possible for SEB to report transactions and SEB will from 1. November 2017 refuse to conclude new derivatives transactions with clients who do not have a LEI.
Obtaining LEI is a responsibility of the counterparty of a financial transaction. LEI code can be obtained over the internet. Some organizations that are issuing LEI codes:
Full list of organizations issuing LEIs are listed on webpage www.gleif.org. Costs related to obtaining and maintaining the LEI have to be borne by the client.
Further information (in Estonian) on LEI can be found on the webpage of the Financial Supervisory Authority at: https://www.fi.ee/public/LEI_koodi_kasutamisest_KKK.pdf
Obligation to centrally clear transactions with certain OTC derivatives through a Central Counterparty
Clearing obligation applies to transactions with standardized OTC derivatives. Instruments covered by that obligation will be published on ESMA (European Securities and Markets Authority) webpage www.esma.europa.eu. Clearing obligation concerning the first derivatives instruments is expected to come into force gradually until 2018.
Clearing obligation applies to financial counterparties and to non-financial counterparties exceeding the so-called clearing threshold. Clearing thresholds have been set so that only companies having very large speculative positions in derivatives would exceed them (e.g. a company exceeds the threshold if it has a speculative position in interest rate or FX derivatives with nominal value of more than 3 billion euros). Clearing thresholds are calculated not on legal entity level but on the level of group of companies
Starting March 15, 2013 companies exceeding the clearing threshold have to notify the Financial Supervision Authority and ESMA about it (they also have to notify when they have fallen below the threshold). Transactions must be cleared only when clearing obligation applies to both counterparties to the trade.
To clear a transaction, counterparties must become a member of a licensed central counterparty (CCP) or use the services of a CCP member or its client. Clearing means that parties, who originally conclude a derivatives transaction, assign the transaction to CCP so that CCP becomes a counterparty to both original parties to the trade.
Main risk mitigation techniques affecting non-financial counterparties:
- Timely confirmation of transactions. EMIR sets deadlines for confirming transactions depending on the counterparty and instrument type. Transactions concluded with SEB under the Financial Markets Client Agreement are confirmed timely as SEB considers transactions to be confirmed if our counterparty does not notify us of any errors on the confirmation within 24 hours as of receiving the confirmation.
- Portfolio reconciliation. Parties to a derivatives transaction have to agree on a process to regularly reconcile transactions to identify any discrepancies. EMIR sets deadlines on how often reconciliation has to be performed based on the counterparty type and number of open transactions between counterparties. To reconcile portfolios in terms of transactions concluded under the SEB Financial Markets Client Agreement, SEB will send regular statements to clients on outstanding transactions. If the client does not notify SEB of any errors on the statement, SEB considers the portfolio to be reconciled. Portfolio reconciliation with non-financial counterparties who have less than 100 derivatives transactions outstanding with SEB has to be performed once a year.
- Dispute resolution. Counterparties to a derivatives transaction must agree on a process to resolve disputes. SEB has specified the dispute resolution process in the Financial Markets Client Agreement.
Application of different EMIR requirements depends on the classification of counterparty – whether the counterparty is a financial or non-financial counterparty and in latter case it also depends on what types of transactions and for what purpose and in what amount the counterparty concludes. Classification of counterparties under EMIR is different from client classification under MiFID. Financial counterparties under EMIR are for example banks, investment firms, insurance companies, fund management companies, providers of employer pension and central counterparties. All other undertakings are non-financial counterparties. Under the SEB Financial Markets Client Agreement clients must notify SEB of their categorization. If the client does not notify SEB, SEB will consider the client concluding derivatives transactions under the SEB Financial Markets Client Agreement to be a non-financial counterparty below clearing threshold.AS SEB Pank is a financial counterparty under EMIR.