EMIR (European Market Infrastructure Regulation) is a key European regulation for the regulation of derivatives markets. Adopted in 2012, in the wake of the 2008 financial crisis, EMIR aims to enhance financial market transparency, reduce systemic risks and improve the stability of the European financial system. This regulation is a direct response to the risks identified during the crisis, in particular those linked to over-the-counter (OTC) derivatives, which had contributed to the spread of the global financial crisis.
The main aim of EMIR is to regulate derivatives transactions and reduce the potential risks they can generate. Derivatives are complex financial instruments whose value depends on the evolution of other underlying assets (equities, bonds, commodities, interest rates, etc.). Prior to EMIR, a large proportion of these transactions were carried out over-the-counter, i.e. directly between two parties without going through an organized market. This created significant opacity and increased systemic risk, as market participants did not always have a clear view of the risks taken by their counterparties.
The European Market Infrastructure Regulation introduces three main obligations for derivatives market participants:
- Central clearing obligation: One of EMIR’s most important measures is to require certain OTC derivatives transactions to be executed through central clearing counterparties (CCPs). CCPs act as intermediaries in transactions, guaranteeing proper execution of contracts even if one of the parties defaults. This reduces counterparty risk, i.e. the risk that one of the parties to a transaction is unable to meet its obligations. By making the use of CCPs mandatory for standardized derivatives, EMIR reinforces market transparency and stability.
- Reporting obligation: EMIR also requires all derivatives transactions, whether cleared via CCPs or not, to be reported to a Trade Repository. These repositories centralize information on derivatives transactions, enabling regulators such as theEuropean Securities and Markets Authority (ESMA) to monitor market activities, detect risks and identify potential vulnerabilities in the financial system. This contributes to greater transparency, as regulators can now have an overview of the exposures and positions taken by financial institutions.
- Risk management requirements: For derivatives not cleared via a CCP, EMIR imposes strict risk management requirements. In particular, counterparties must exchange collateral (known as margins) to protect themselves against the risk of default by their trading partners. In addition, they must implement robust risk management procedures to limit the potential risks associated with uncleared OTC derivatives.
EMIR applies to a wide range of financial players. It applies not only to large financial institutions such as banks and insurance companies, but also to non-financial companies that use derivatives to hedge risks, such as fluctuations in commodity prices or interest rates. However, obligations differ according to whether companies are classified as financial counterparties (FC) or non-financial counterparties (NFC), depending on the volume of their derivatives transactions. NFCs that exceed certain transaction volume thresholds are subject to obligations similar to those of financial counterparties.
ESMA, as the European regulator, plays a key role in the application and supervision of EMIR. It is responsible for authorizing CCPs and transaction registries at European level, and works closely with national regulators to ensure that the regulation is properly implemented.
Since its adoption, EMIR has undergone several adjustments, notably via EMIR Refit (adopted in 2019), a reform aimed at simplifying and improving certain provisions of the regulation, while reducing regulatory burdens for certain counterparties, particularly smaller firms. EMIR Refit introduced changes to ease clearing obligations for smaller financial counterparties and adjust reporting requirements, while maintaining the robustness of the regulatory framework for larger institutions.
The impact of EMIR on European financial markets has been significant. By increasing transparency and limiting counterparty risks, EMIR has helped to make derivatives markets safer and more resilient to economic shocks. However, certain criticisms have emerged, notably concerning the cost of complying with the new requirements, especially for smaller companies and non-financial players. Margin management, central clearing and reporting obligations involve significant administrative and operational costs.
