EMIR

EMIR (European Market Infrastructure Regulation) is a regulation adopted by the European Parliament, together with delegated and secondary regulations (“EMIR”), which has imposed various obligations upon both financial and non-financial undertakings in connection with the conclusion of derivative, mainly over-the-counter (“OTC”) transactions1.

The regulation came into effect on 16 August 2012; however the full-scope implementation of EMIR requires that the delegated and secondary regulations must also become effective. A majority of them came into force on 15 March 2013, whilst transition periods have been provided for some of those obligations.

Categories of market participants

EMIR has introduced the following primary categories of market participants, with different requirements applicable to particular categories:

Financial Counterparty (FC) means an investment firm authorised in accordance with Directive 2004/39/EC, a credit institution authorised in accordance with Directive 2006/48/EC, an insurance undertaking authorised in accordance with Directive 73/239/EEC, an assurance undertaking authorised in accordance with Directive 2002/83/EC, a reinsurance undertaking authorised in accordance with Directive 2005/68/EC, a UCITS and, where relevant, its management company, authorised in accordance with Directive 2009/65/EC, an institution for occupational retirement provision within the meaning of Article 6(a) of Directive 2003/41/EC and an alternative investment fund managed by AIFMs authorised or registered in accordance with Directive 2011/61/EU.

Non-Financial Counterparty (NFC) means an undertaking established in the Union other than Financial Counterparty

Non-Financial Counterparty+ (NFC+) means a NFC counterparty whose average position in derivative transactions or contracts, over 30 business days, exceeds the relevant threshold:

 

Asset Class Clearing Threshold
OTC credit derivative contracts  EUR 1 billion
OTC equity derivative contracts EUR 1 billion
OTC interest rate derivative contracts EUR 3 billion
OTC foreign exchange derivative contracts EUR 3 billion
OTC commodity derivative contracts and other OTC derivative contracts not specified elsewhere  EUR 3 billion

 

For the purposes of calculation whether or not a given NFC exceeds the above threshold, the notional amounts of all open or not cleared derivative transactions concluded by the NFC or by other non-financial entities from that NFC’s group are taken into account, excluding transactions for which it can be objectively concluded that they are reducing risks directly relating to the commercial activity or treasury financing activity of the non-financial counterparty or of that group.

Criteria for establishing which OTC derivative contracts are objectively reducing risks are indicated inArticle 10 of Commission Delegated Regulation (EU) No 149/2013

Obligations resulting from EMIR

1. Report to a Trade Repository

Each counterparty to a concluded derivative transaction which is subject to EMIR requirements is obliged to report (notify) it to a so called Repository. Such a transaction should be reported by the end of the next business day after the transaction is concluded. Trade Repositories are entities that will be registered in accordance with EMIR regulations.

A derivative transaction may be reported individually by each of the parties to it or by one of the parties to that transaction on behalf of both counterparties or by a third party.

To meet the expectations of its Clients, the Bank will report, in its own name and in the name of its Clients, any derivative transactions concluded by a Client with the Bank. Such activity will be possible after signing the documentation regulating the conclusion of transactions between the Client and the Bank, provided that such documentation specifies such a reporting procedure. The “General Terms and Conditions of Cooperation with Clients with respect to Financial Market Transactions” include the authorisation for the Bank to report transactions to repositories on behalf of the Client.

A Client may also decide to independently report transactions to a repository. However the Client needs to notify the Bank of such decision and must agree with the Bank a procedure to agree the contents of reports to be delivered to repositories, as EMIR regulations have imposed a ban on duplicating certain data included in reports.

The Bank will inform the Clients, on its website or by a message in its electronic system on the trade repositories selected for the purpose of transaction reporting.

The above reporting obligation covers any derivative transactions concluded both outside a regulated market (OTC) and on a regulated market (e.g. derivative contracts concluded on stock exchanges).

Reporting will start:

  • For interest rate and credit derivative contracts – 90 days after the first trade repository is registered for that asset class;
  • For the other derivative contractors – on 1 January 2014 or 90 days after the first trade repository is registered for that asset class (if no repository is registered by 1 October);
  • On 1 July 2015 – reporting directly to ESMA instead of a trade repository if no repository is registered for a given asset class.

As at today, no trade repository is registered. According to ESMA’s website, it is likely that the reporting obligation will come into effect on 1 January 2014.

The reporting obligation will apply to any transactions that will be effective (outstanding) as at 16 August 2012 and concluded on or after 16 August 2012, provided that EMIR envisages a possibility to report transactions concluded prior to 16 August 2012 or cleared prior to the reporting start date falling on a later day.

 

2. Selected obligations under EMIR, including obligations relating to risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty (CCP).

Timely conformation A concluded OTC derivative contract must be confirmed within the time limit set out in the EMIR regulation, which sets out that the time allowed for transaction confirmation will be gradually reduced and ultimately reach:

  • For FC’s and NFC+’s by the end of the first business day following the date of execution of the OTC derivative contract;
  • For NFC’s by the end of the second business day following the date of execution of the OTC derivative contract.

The applicable transaction confirmation dates are specified in Article 12 of Commission Delegated Regulation (EU) No 149/2013.

 

Reconciliation of derivative transaction portfolios
Counterparties who conclude derivative contracts are obliged to have in place procedures for periodic reconciliations of derivative contract portfolios. The frequency of portfolio reconciliation is set out in Article 13 Commission Delegated Regulation (EU) No 149/2013.

 

Dispute resolution
Counterparties that conclude OTC derivative contracts with each other should have in place procedures for resolution of disputes relating to the recognition or valuation of the contract or to the exchange of collateral, pursuant to Article 15 of Commission Delegated Regulation (EU) No 149/2013.

 

Portfolio compression
Counterparties with 500 or more derivative contracts outstanding should have in place procedures to analyse the possibility to conduct a portfolio compression exercise in order to reduce their credit risk in accordance with Article 14 of Commission Delegated Regulation (EU) No 149/2013.

 

Mark-to-market on a daily basis the value of outstanding contracts
Counterparties who are FC’s and NFC+’s are obliged to mark to market or mark to model (if mark-to-market is impossible) their derivative contracts on a daily basis.

 

Derivative contract records
Each counterparty to a derivative transaction is obliged to maintain the records of all the derivative contracts concluded by him, including any changes to them, for at least five years from a contract termination date. The Bank has modified “The General Terms and Conditions of Cooperation with Clients with respect to Financial Market Transactions” with regard to implementation of the requirements relating to portfolio reconciliation, dispute litigation and portfolio compression.

 

3. Central clearing

Some types of OTC derivative transactions will be subject to obligatory clearing by so called central counterparties (CCP). This obligation applies to transactions concluded between:

  • Two FC’s
  • An NFC+ and an FC
  • Two NFC+’s

Transactions between an NFC and an FC are not subject to central clearing. The effective date for the central clearing obligation depends on the date of authorisation of the first CCP and ESMA’s decision to apply that obligation to a given type of derivative contracts. It is likely that the central clearing obligation will come into effect in the second half of 2014.

1. The obligation to report transactions to trade repositories also applies to transactions concluded in regulated markets.

This material is for informational purposes only and in no case may this material be treated as a binding obligation of any person, including mBank S.A., in any respect, also as regards the correctness or completeness of the information contained in it. Any liability of mBank S.A., its Management Board, employees, partners, counterparties and agents in connection with this material and any information contained in it is hereby excluded. This material gives rise to no obligations whatsoever of any of the parties with respect to the conclusion of any transactions referred to herein.

This material is neither advice nor recommendation relating to the rules of fulfilment of obligations imposed by 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 (Official Journal L 201, 27/07/2012 with amendments) (“EMIR”) and by secondary regulations to EMIR, including delegated regulations (“EMIR regulations”).

The Client should not take any decisions relating to the fulfilment of obligations resulting from EMIR regulations solely on the basis of this material without any further own analyses. mBank S.A. recommends that the Client should consult independent, professional advisors, as appropriate. Any decisions relating to the conclusion of a transaction with mBank S.A., including its time of conclusion, rules of reporting transactions to a trade repository or fulfilment of other obligations imposed by EMIR regulations, are taken by the Client freely and independently of mBank SA.

BRE Bank SA is not liable for the above decisions of the Client and their consequences, and especially for any loss incurred by the Client (including any damage, opportunity cost and fines suffered by or imposed on the Client).