Regulation 2012/648 - OTC derivatives, central counterparties and trade repositories - Main contents

Summary of Legislation
Legislative text

1. Summary of Legislation

EU rules on derivatives contracts, central counterparties and trade repositories

SUMMARY OF:

Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories

WHAT IS THE AIM OF THE REGULATION?

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The European market infrastructure regulation (known as ‘EMIR’), lays down rules regarding over-the counter (OTC) derivative* contracts, central counterparties (CCPs)* and trade repositories*, in line with the G20 commitments made in Pittsburgh in September 2009.
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EMIR aims to reduce systemic risk, increase transparency in the OTC market and preserve financial stability.

KEY POINTS

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To increase transparency, EMIR provides that all information on all European derivative contracts must be reported to trade repositories and made accessible to supervisory authorities, including the European Securities and Markets Authority (ESMA).
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To reduce counterparty credit risk*, EMIR sets out strict organisational, business conduct and prudential obligations for CCPs. Standard derivative contracts must be cleared through CCPs (see clearing*).
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To reduce operational risk*, EMIR requires that electronic means must be used for the timely confirmation of the terms of OTC derivatives contracts.
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The clearing and reporting obligations apply to firms which have large holdings in OTC derivatives, be it:
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  financial firms, e.g. banks and insurance firms, or;
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  non-financial firms, e.g. energy companies and airlines.

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Intra-group transactions are exempted from central clearing under certain conditions.
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Likewise, pension scheme arrangements are temporary exempted.
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A suspension of the clearing obligation for certain OTC derivative contracts or certain counterparties is possible under certain circumstances.
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ESMA is responsible for identifying contracts that should be subject to the clearing obligation, that is, those that are standardised and must be cleared by CCPs.
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ESMA also supervises trade repositories.
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EMIR sets out the competences of national competent authorities, colleges of supervisors and ESMA for the authorisation and supervision of CCPs established in the EUUnion as well as the competences of ESMA, the non-EU-country CCP college and the central banks of issue of Union currencies for the recognition of third-country CCPs and the supervision on an ongoing basis of the compliance of Tier 2 CCPs (non-EU-country CCPs which are systemically important or likely to become systemically important for the financial stability of the EU or of one or more of its Member States) with EMIR.
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The European Commission has adopted a number of measures, including technical standards on the basis of ESMA drafts, to implement the terms of the regulation. The technical standards developed by ESMA cover a range of topics including, e.g. capital requirements of CCPs, the minimum data to be reported to trade repositories and supervisory reporting of institutions of the liquidity coverage requirement.
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The Commission has also adopted decisions on the ‘equivalence’ of the regulation regimes for CCPs in certain non-EU countries.
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The Commission adopted delegated regulations that determine that some classes of OTC derivative contracts must be cleared through central counterparties:
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  Delegated Regulation (EU) 2015/2205,
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  Delegated Regulation (EU) 2016/592,.
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  Delegated Regulation (EU) 2016/1178,

all amended by Delegated Regulation (EU) 2017/751.

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These delegated contain rules on the classes of OTC derivatives and categories of counterparties subject to the clearing obligation and the dates from which the clearing obligation takes effect.

FROM WHEN DOES THE REGULATION APPLY?

It has applied since 16 August 2012.

BACKGROUND

Over-the-counter (OTC) derivatives are generally negotiated privately. The information concerning them is consequently only available to the contracting parties, which can make it difficult to identify the nature and level of risks involved.

For more information, see:

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Derivatives / EMIR (European Commission)
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Financial stability: new Commission rules on central clearing for interest rate derivatives — press release (European Commission).

KEY TERMS

Over-the-counter (OTC) derivative: a derivative is a financial contract linked to the future value or status of an underlying entity such as an asset, index or interest rate.An OTC derivative is a derivative not traded on an exchange or on an equivalent non-EU market but is instead privately negotiated between 2 counterparties, for example, a bank and a manufacturer.

Central counterparty (CCP): a body that acts between the 2 counterparties to a transaction, acting as the buyer to every seller and the seller to every buyer.A CCP’s main purpose is to manage the risk of a counterparty being unable to make the required payments when they are due, and defaulting on the deal.

Trade repository: a central data centre where details of derivatives transactions are reported. Trade repositories are commercial firms. There are global trade repositories for credit, interest rate and equity OTC derivatives (a particular class of derivative such as options or futures).

Counterparty credit risk: a risk that a counterparty, i.e. the other party in a financial transaction, will default on payment.

Clearing: all activities from the time a commitment is made for a transaction until it is settled.

Operational risk: a risk of loss resulting from inadequate or failed internal processes or external events, e.g. fraud, human error, terrorism.

MAIN DOCUMENT

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 (OJ L 201, 27.7.2012, pp. 1-59)

Successive amendments to Regulation (EU) No 648/2012 have been incorporated in the original text. This consolidated version is of documentary value only.

2. Legislative text

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 Text with EEA relevance

Contents

1.

Summary of Legislation

2.

Legislative text