05.15.2013

Emir Comes Into Force

05.15.2013
Terry Flanagan

The first implementing measures of the European Market Infrastructure Regulation (Emir) have entered into force, marking the beginning of the gradual implementation of Emir over the next two years.

Emir applies widely to both financial and nonfinancial counterparties to derivative contracts, including energy derivatives. In particular, new clearing and risk mitigation requirements for uncleared trades will apply to over-the-counter (OTC) derivative contracts, and a new reporting requirement will apply to both OTC and exchange-based derivative contracts. Some of these requirements are already in force.

“In the short term, firms entering into derivative contracts should ensure that compliant recordkeeping and valuation measures are in place and that OTC trades are promptly confirmed to counterparties,” said William Yonge, a derivatives lawyer at Morgan Lewis & Bockius. “In the longer term, firms should prepare for the implementation of a full suite of Emir reporting obligations, further risk mitigation measures, and the entry into force of a clearing obligation for eligible derivative contracts.”

Emir was agreed by the European Union on August 16, 2012, with the aims of managing counterparty credit risk more effectively and increasing the transparency and stability of OTC derivative markets. Until the first six implementing measures took effect on March 15, 2013, almost all aspects of EMIR had yet to take effect under secondary implementing measures.

“The full scope of the Emir rules are still being hammered out, meaning that many ‘off the shelf’ products will become quickly outdated, creating a real compliance headache,” the new service said Chris Bates, founder of Abide Financial, a UK Approved Reporting Mechanism (Arm).

Abide Financial, one of only three commercial Arms, has launch a service to help financial and non-financial counterparties to comply with Emir. The service complements Abide’s existing MiFID reporting service, allowing clients to send their raw data to Abide who can extract everything needed for both regulations in one seamless process.

“We work with raw data, which allows us to tailor our solution at any time without inconveniencing our clients, whether they need MiFID or Emir compliance reporting, or indeed both,” Bates said. “This means that once they have signed up to the service, clients are automatically compliant even if the rules keep changing.”

There is a significant degree of overlap between the Emir obligations and the provisions of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which was passed in July 2010, according to Yonge.
Both Emir and Dodd-Frank represent the implementation of the G-20’s commitment to improving risk management and reducing systemic risk in OTC derivative contracts by the end of 2012.

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