EMIR (the European Market Infrastructure Regulation, or Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories) is a directly applicable EU regulation which establishes uniform rules for: entering into over‑the‑counter (OTC) derivative contracts; mitigating the risks associated with such derivatives; and reporting transactions.
EMIR entered into force on 16 August 2012. Since then, various amendments, implementing acts and guidelines related to EMIR have been adopted.
On 20 May 2019, the EMIR Refit amendments were adopted (Regulation (EU) 2019/834 of the European Parliament and of the Council amending EMIR as regards the clearing obligation, reporting requirements and risk‑mitigation techniques for OTC derivative contracts). The purpose of EMIR Refit was to make the original EMIR framework more precise, proportionate and cost‑effective.
On 27 November 2024, the EU adopted EMIR 3.0 (Regulation (EU) 2024/2987), which amends Regulations (EU) No 648/2012, (EU) No 575/2013 and (EU) 2017/1131 with measures designed to reduce excessive risks related to third‑country central counterparties and to improve the efficiency of EU clearing markets.
When referring to EMIR below, we mean EMIR together with these amendments, as well as the related delegated regulations, regulatory technical standards and guidelines, whether referred to specifically here or not.
Objectives of EMIR
EMIR stems from the G20 commitment of 2009 to regulate derivatives markets more effectively. EMIR was introduced as a response to the 2008 global financial crisis, one of the causes of which was a lack of transparency in OTC derivative markets – contracts were entered into privately, and information about transactions was only available to the contracting parties. The complex links and dependencies between transactions made the assessment of risks difficult, which in turn contributed to the materialisation of systemic risk.
The main objectives of EMIR are to:
- increase transparency on the derivatives market, especially the OTC market, with all derivative transactions having to be reported to a Trade Repository;
- reduce counterparty credit risk, with certain types and volumes of OTC derivatives having to be centrally cleared through a central counterparty (CCP);
- reduce operational risk, with risk‑mitigation techniques (such as collateral requirements) being applied to OTC derivatives that are not centrally cleared; and
- increase financial system stability and reduce systemic risk by providing supervisors with detailed information (via reporting) on market and counterparty risk concentrations, i.e. who owes what to whom under outstanding OTC derivative contracts.
Scope of EMIR
EMIR requirements apply to OTC derivative contracts, including certain transactions performed under SEB’s financial markets client agreement (such as interest rate derivatives and foreign exchange derivatives). EMIR applies to both financial counterparties (FC) and non‑financial counterparties (NFC). It does not apply to natural persons or certain public-sector entities.
Which EMIR obligations apply depends on whether a counterparty is a financial counterparty (FC) or a non‑financial counterparty (NFC), and in the case of the latter also on the nature and scale of its derivatives activity. EMIR classification differs from MiFID client categorisation. Financial counterparties (FCs) include banks, investment firms, insurance undertakings, fund managers, occupational pension providers and CCPs. All other legal persons are non‑financial counterparties (NFCs).
Because a bank must know which EMIR obligations apply to a client (e.g. clearing, risk mitigation, documentation and reporting), the bank must identify and remain aware of the client’s EMIR status throughout the relationship. For this reason, the client must inform the bank whether it is an FC or NFC, and whether it exceeds the EMIR clearing thresholds for OTC derivatives – i.e. whether it is FC+ or NFC+, or below the threshold (FC‑ or NFC‑).
If a client does not notify the bank of changes to its EMIR status (e.g. becoming FC+ or NFC+) or does not cooperate with the bank in establishing its status, the bank is entitled to classify the client as a counterparty which exceeds the clearing threshold (FC+ or NFC+). Since the bank does not enter into derivatives transactions with FC+ or NFC+ clients, it may unilaterally terminate the financial markets client agreement in such cases.
AS SEB Pank itself is an FC‑ (i.e. a financial counterparty below the clearing threshold).
EMIR imposes the following core requirements on derivative transactions:
- Reporting of derivative transactions (including entering into, modifying and terminating such transactions) to a Trade Repository
- Central clearing of certain OTC derivatives through a CCP
- Risk‑mitigation techniques for non‑centrally cleared OTC derivatives, such as portfolio reconciliation and dispute resolution procedures
- Collateral exchange (margining), i.e. daily collateral exchange requirements for certain non‑centrally cleared OTC derivatives to reduce counterparty credit risk
- LEI requirement, whereby all counterparties to derivative transactions must have a valid Legal Entity Identifier (LEI) to ensure their identification for reporting purposes
This obligation applies to all counterparts to derivative transactions except natural persons. This means that both parties to a derivative transaction must report any derivative transaction entered into, any modifications made to the transaction and the termination of the transaction to a trade repository holding the relevant authorisation selected by the party. A party to a transaction has the right to delegate the reporting obligation to the counterparty or to a third party. The transaction must be reported within one business day of entering into, modifying or terminating the transaction.
By entering into the financial markets client agreement, the client authorises SEB to report the derivative transactions between the bank and the client to a trade repository selected by the bank, including on behalf of the client. In addition, if the client is a non‑financial counterparty that does not exceed the clearing threshold (NFC‑), the bank undertakes to report the derivative transactions entered into with the client on behalf of the client to the trade repository selected by the bank, unless the client has informed the bank that it wishes to report its derivative transactions independently. The bank may refuse to report on behalf of the client if there are any circumstances that prevent reporting on behalf of the client. The bank’s fulfilment of the reporting obligation on behalf of the client does not relieve the client of its liability in the event of a breach of the reporting obligation. The client is obliged to provide the bank, by the deadline set by the bank, with all of the information that the bank requires for the purpose of reporting transactions. The client is responsible for the accuracy of the information submitted to the bank.
This obligation applies to standardised OTC derivative instruments. The list of derivative instruments subject to the clearing obligation is published on the ESMA (European Securities and Markets Authority) website at www.esma.europa.eu. The clearing obligation for the first derivative instruments came into force gradually up to 2022.
The clearing obligation applies to financial counterparties exceeding the clearing threshold (FC+) and to non‑financial counterparties exceeding the clearing threshold (NFC+). The clearing thresholds are set in such a way that they are only exceeded by undertakings holding very large speculative derivative positions (e.g. more than EUR 3 billion in interest rate or foreign exchange derivatives). The clearing threshold must be calculated on a group basis, not at the level of a single legal entity. Each counterparty must calculate its own aggregated average month‑end positions in OTC derivative contracts for the last 12 months and monitor whether the value resulting from the calculation exceeds the clearing thresholds set out in EMIR. If a counterparty does not monitor (i.e. does not calculate) its average positions in OTC derivative contracts, it is deemed to be a financial counterparty exceeding the clearing threshold (FC+) or a non‑financial counterparty exceeding the clearing threshold (NFC+), and is therefore obliged to clear its derivative transactions through a central counterparty (CCP) in respect of the relevant categories of OTC derivative contracts.
For the purposes of the clearing obligation, the following clearing thresholds apply by type of OTC derivative contract:
- EUR 1 billion for OTC credit derivative contracts
- EUR 3 billion for OTC interest rate derivative contracts
- EUR 3 billion for OTC foreign exchange derivative contracts
- EUR 3 billion for OTC commodity derivative contracts, plus any other derivative contract not referred to in points 1–4
Since 15 March 2013, legal persons exceeding the clearing threshold have been required to notify the Financial Supervision Authority and ESMA of exceeding (or falling below) the clearing threshold. Only transactions in which both counterparties are subject to the clearing obligation have to be cleared.
For clearing, the counterparties must become members of a central counterparty (CCP) with the relevant authorisation, or use the services of a CCP member or its client for clearing. Clearing means that the parties who initially entered into the transaction with each other transfer the transaction to the CCP in such a way that the CCP becomes the counterparty to each of the original parties to the transaction, i.e. the CCP becomes the buyer to every seller and the seller to every buyer. Under EMIR, when calculating the clearing threshold of a non‑financial counterparty that does not exceed the clearing threshold (NFC‑), only derivative transactions that do not objectively reduce risks directly related to the commercial activity or treasury financing activity of the undertaking are taken into account. Transactions entered into for hedging purposes are excluded from the calculation, because EMIR provides exemptions for transactions that objectively reduce the undertaking’s own risks.
In addition, certain intra‑group transactions are not taken into account, as EMIR allows the application of intra‑group exemptions with respect to both the clearing obligation and collateral requirements, considering their lower systemic risk to the financial system compared with transactions between unrelated market participants.
The mandatory risk mitigation techniques that apply to non‑financial counterparties (NFC‑) and financial counterparties (FC‑) that do not exceed the clearing threshold are as follows:
- Timely confirmation of transactions. EMIR sets deadlines for confirmation depending on the counterparty and the type of instrument. Timely confirmation of transactions entered into under the financial markets client agreement with the bank is ensured by the fact that the bank deems the transaction to be confirmed if the client does not notify the bank within 24 hours of receipt of the trade confirmation that the client disagrees with the data set out in the confirmation.
- Portfolio reconciliation. The parties to the transaction must agree on a process for comparing the data of their outstanding transactions, with the aim of identifying discrepancies between the parties. In other words, the purpose here is to ensure the correctness of the terms and value of transactions during their period of validity. EMIR also sets deadlines, based on the counterparty and the number of transactions between the parties, indicating how often this process must be carried out. For the purposes of portfolio reconciliation in respect of derivative transactions entered into under the financial markets client agreement, the bank e-mails the client a notification that they can access a so‑called consolidated report in the client’s Internet bank regarding the values (positions) of outstanding derivative transactions between the client and the bank and, where applicable, a summary of assets that the client has provided to the bank as collateral. If the client does not notify the bank within five (5) business days that they disagree with the data in the report, the bank deems the portfolio reconciliation process to have been completed. For non‑financial (NFC‑) clients who have fewer than 100 outstanding transactions with the bank, the bank performs portfolio reconciliation at least once a year.
- Dispute resolution. The parties to the transaction must agree on a process for resolving disputes between them. The principles of dispute resolution are set out in the financial markets client agreement.
- Exchange ofcollateral (margining). This is one of the key risk‑mitigation techniques under EMIR, used to mitigate counterparty credit risk and market risk in respect of non‑centrally cleared OTC derivative transactions. It is not merely the unilateral provision of collateral, but at minimum a bilateral mechanism whereby collateral is transferred (exchanged) between the parties depending on the value of the transactions and the risk position.
This means that if the value of a derivative transaction moves against one party, that party must provide collateral to the other party, and if the value moves back in its favour, the collateral is returned or set off. For this purpose, collateral provided to cover the risk arising from movements in the value of the derivative transaction (the variation margin) is used, which can consist of cash (a margin deposit, etc.) or securities. The variation margin covers the risk arising from daily or intraday fluctuations in the market value of the derivative contract, calculated on a market‑to‑market basis and usually exchanged daily, or several times intraday.
Another type of exchanged collateral is the initial margin, the obligation to exchange which applies only to large non‑financial undertakings exceeding the clearing threshold (NFC+) and also to financial counterparties (FC). The obligation to exchange the initial margin arises when the Aggregate Average Notional Amount (AANA) of uncleared OTC derivatives of both parties (or their group) exceeds EUR 8 billion. In addition, the uncollateralised exposure arising from the derivative contracts between the parties must exceed EUR 50 million for the obligation to exchange the initial margin to arise. The initial margin is collateral that is provided/collected before entering into transactions or before continuing them after exceeding the above thresholds, and is intended to provide a permanent ‘risk buffer’ to cover potential future losses that may arise (due to market risks and/or counterparty insolvency risk) if the variation margin is insufficient to cover obligations arising from closing out and/or replacing positions.
Certain principles apply to the exchange of the initial margin. The initial margin is exchanged on a gross basis, i.e. it cannot be set off against collateral provided by the counterparty as is the case with the variation margin. The initial margin must be separated from the other assets of the collateral taker, and it does not form part of the collateral taker’s bankruptcy estate in the event of insolvency. The initial margin is subject to a rehypothecation ban, meaning that the collateral cannot be used for another purpose, such as transfer or re‑pledging. For this reason, the initial margin is usually held in another bank or with a central counterparty (CCP). Different calculation methods may be used for determining the amount of the initial margin, such as the so‑called grid method and internal models, e.g. the ISDA Standard Initial Margin Model (SIMM).
In accordance with EMIR, certain large and systemically important financial counterparties exceeding the above thresholds must obtain permission from the supervisory authority before adopting an initial margin model or making any material changes to it.
The collateral described above is exchanged between the counterparties or with the central counterparty in the form of financial collateral. Since November 2025, in accordance with amendments to the Estonian Securities Market Act and Law of Property Act, a so‑called ordinary company may also be a party to financial collateral arrangements in the future, and the amendments further clarify that close‑out netting and/or the satisfaction of claims from financial collateral upon the termination of a derivative contract takes place regardless of any insolvency proceedings initiated or ongoing against the counterparty, including liquidation, enforcement, reorganisation or bankruptcy proceedings. This reduces the counterparty insolvency risk, as a party gains priority (compared to other creditors of the counterparty) in satisfying the claims arising from the close‑out/termination of the derivative contract.
Since, in the future, an ordinary company may also act as a provider or recipient of financial collateral, its access to derivative transactions improves. This in turn creates more favourable opportunities for such undertakings to finance their activities and hedge risks related to their operations.
When reporting transactions, the counterparties to the transactions who are legal persons must be identified by a Legal Entity Identifier (LEI). This 20‑character alphanumeric code is used globally for the identification of legal persons. Each LEI code is unique: it is assigned to a legal person once, and the same code cannot be assigned to anyone else. LEI codes do not replace the registration codes in the Estonian Commercial Register.
The submission of a LEI code in transaction reporting has been mandatory since 1 November 2017, meaning that it is no longer possible to report transactions without the LEI codes of the counterparties.
If the client has not applied for or renewed its LEI code, the bank is unable to report derivative transactions, and will refuse to enter into new derivative transactions with the client.
The obligation to apply for a LEI code (which can be done online) lies with the counterparty to the transaction. LEI code issuers include the following:
The full list of organisations issuing LEI codes is available online at www.gleif.org. The client bears any and all costs related to applying for and maintaining a LEI code.
