The Regulation on over-the-counter derivatives, central counterparties and trade repositories (commonly referred to as the European Market Infrastructure Regulation or "EMIR") was published in its final form on 27 July 2012 and entered into force, subject to transitional provisions, on 16 August 2012. On 27 September, the European Securities and Markets Authority ("ESMA") submitted its final advice on technical standards (the "Final Report") to the European Commission. Many of the provisions in EMIR will not be effective until the technical standards have been adopted by the European Commission.
EMIR requires certain counterparties to clear all over-the-counter ("OTC") derivative contracts that meet certain eligibility criteria through an authorised central counterparty ("CCP"). EMIR sets out a complex dual process to be followed by ESMA for determining the classes of OTC derivative contracts subject to mandatory clearing. The classes of OTC derivative contracts, and hence the scope of the clearing obligation, depends on the outcome of this process and therefore remains uncertain.
EMIR also imposes an obligation on CCPs and counterparties to ensure that details of derivative contracts, whether they are traded on exchange or OTC and whether or not they are cleared, are reported to authorised trade repositories.
In addition, for non-cleared OTC derivative contracts, EMIR requires counterparties (including those otherwise exempted from the clearing obligations) to put in place appropriate procedures to measure, monitor and mitigate operational and counterparty credit risk.
Further, EMIR introduces an initial authorisation requirement and a framework of common requirements for CCPs to ensure that CCPs are regulated on a consistent basis. Some requirements also extend to clearing members of CCPs. As well, EMIR deals with the authorisation and regulation of authorised trade repositories.
There are some open questions about the timeline for EMIR compliance. It is not always obvious which requirements are self-standing and which can apply only once technical standards have come into effect. Further, some of the procedures envisaged by EMIR – such as the authorisation of CCPs and trade repositories and the determination of the classes of OTC derivatives contract subject to mandatory clearing – will take time to implement, making it difficult to predict when exactly the clearing and reporting obligations will be applied. Finally, the clearing and reporting obligations also apply retrospectively to certain transactions entered into before EMIR became effective. This so-called ‘frontloading’ adds to the regulatory burden faced by participants in OTC derivative markets. At the same time, the uncertainty about the timeline and about which transactions will be affected by mandatory clearing presents challenges when preparing for compliance with EMIR.
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© 2012 White & Case LLP