Frequently Asked Questions
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EMIR Regulations focus on the reduction of systemic risk in the financial markets and helping prevent future financial system collapses, whereas MiFID/MiFIR Regulations are concerned with the detection of market abuse, strengthening investor protection, and increasing the efficiency of the financial markets.
EMIR Regulations established the reporting obligation on both counterparties that should report the details of the derivative trades to one of the trade repositories (TRs), i.e. the buying party should report and the selling party should report. This obligation covers both financial and non-financial counterparties.
EMIR requirements apply both to financial and non-financial counterparties. Requirements of EMIR do not apply to private individuals and certain government institutions.
Although EMIR directly applies to entities established in the EU only, it will apply indirectly to any non-EU entities entering into OTC derivatives with EU counterparties; EU entities have to comply with the EMIR obligations on any OTC derivatives transaction they enter into, whether the counterparty is an EU or non-EU.
EMIR generally applies to all derivative contracts, central counterparties (“CCPs”), Financial Counterparties, trade repositories and, in certain circumstances, to Non-financial Counterparties and trading venues.
The REFIT mainly contains amendments aiming at ensuring the well-functioning of the regulation and bringing regulatory relief to smaller market participants on reporting and clearing. It notably introduced a minimum threshold for the clearing obligation to provide relief to small financial counterparties. In addition, it extended the exemption from the clearing obligation for pension funds arrangements by 2 years to June 2021 with the possibility to extend twice by 1 year and included a mandate to assess an exemption from the clearing obligation for trades resulting from post-trade risk reduction services.
Commission Delegated Regulation (EU) No 2017/2155 of 22 September 2017 amending Delegated Regulation (EU) No 149/2013 with regards to regulatory technical standards on indirect clearing arrangements. 3. Regulation (EU) 2019/8341 amending EMIR, the EMIR Refit, entered into force on 17 June 2019.
EMIR identifies two sub-categories of Non-Financial Counterparties (NFC). All Non-Financial Counterparties must calculate their group’s aggregate month-end average position in derivative contracts for the previous 12 months, excluding derivative trades executed for hedging purpose (the “position”).
Portfolio reconciliation under EMIR is a process whereby counterparties: exchange the valuation attributed to each OTC derivative contract in a portfolio between the counterparties as of the close of business on the immediately preceding business day; and resolve any discrepancy in key terms or valuations.
Initial margin is the collateral collected by a counterparty to a derivatives transaction to cover potential exposure in the period between the last exchange of variation margin and either the liquidation of positions following default of the other party or the hedging of that position.
The Clearing Threshold is an amount set by class of OTC derivative contracts. It is set by regulatory technical standards and will be reviewed on a regular basis following public consultation.
The transaction reporting obligation under MiFID II/MiFIR captures financial instruments which are admitted to trading or traded on a trading venue or for which a request for admission to trading has been made, financial instruments where the underlying is a financial instrument traded on a trading venue, and financial instruments where the underlying is an index, or a basket composed of financial instruments traded on a trading venue.
Over the Counter or OTC is a decentralized dealer market wherein brokers and dealers transact directly via computer networks and phone. Exchange is an organized and regulated market, wherein trading of stocks takes place between buyers and sellers in a safe, transparent, and systematic manner.
The transaction reporting obligation under MiFID II/MiFIR captures financial instruments which are admitted to trading or traded on a trading venue or for which a request for admission to trading has been made, financial instruments where the underlying is a financial instrument traded on a trading venue, and financial instruments where the underlying is an index, or a basket composed of financial instruments traded on a trading venue.
Under MiFID II/MiFIR, operators of all trading venues (including Multilateral Trading Facilities, MTFs, and Organized Trading Facilities, OTFs) must report transactions traded on their platform when executed through their systems by a firm which is not subject to the regulation.
While all investment firms and trading venue operators are explicitly subject to the transaction reporting obligation, UCITS (Undertakings for the Collective Investment in Transferable Securities) and AIF (Alternative Investment Fund) management companies are not (necessarily). They are not, unless they carry out portfolio management and investment advisory services that are outside the mandate or they are given by the funds they act for as the management company.
A Transaction, according to Article 26 of MiFIR, is the “conclusion of an acquisition or disposal of a financial instrument” which can be summarized as any change in an investment firm’s position and/or their client’s position in a reportable instrument. Examples for transactions that are not reportable under MiFID II/MiFIR are contracts arising solely and exclusively from clearing or settlement purposes, post-trade assignments and novations in derivatives, portfolio compressions or internal transfers within the same legal entity (if beneficial ownership remains unchanged).
The Execution of a Transaction includes: the reception and transmission of orders in relation to one or more financial instruments, the execution of orders on behalf of clients, dealing on own account, making an investment decision in accordance with a discretionary mandate given by a client, and the transfer of financial instruments to or from accounts.
The Transmission of an Order is not the Execution of a Transaction if: the order was received from a client or results from its decision to acquire or dispose of a specific financial instrument in accordance with a discretionary mandate provided to it by one or more clients, the transmitting firm has transmitted all relevant information according to ESMA’s regulatory technical standards to another investment firm (“receiving firm”), the receiving firm is subject to the transaction reporting obligation and agrees either to report the transaction resulting from the order concerned or to transmit the order details to another investment firm.
The number of details that have to be reported to identify the financial instrument, the parties to a trade and the venue has increased significantly. The information required has to list the entity submitting the report, branch reporting flags, a quantity notation, a price notation, the currencies, the consideration to trade, a Legal Entity Identifier (LEI) for legal entities eligible for a LEI, the unique national number for natural persons (where available), the decision-maker, further details for natural persons (name, surname, date of birth etc.), an instrument classification, OTC derivatives-specific fields, the Trader ID (investment decision and execution), the Algo ID (investment decision and execution) for algorithmic trades, short-selling-related flags, OTC post-trade flags, waiver flag, commodity derivative flag, result of exercise of options, repos, fields related to the transmission of orders, and a report matching number.
The reporting obligation may either fall upon the investment firm or the trading venue. Firms may choose to report on their own directly to an NCA, through a trading venue or through an Approved Reporting Mechanism (ARM) while the report must be filed by T+1.
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