Understanding EMIR

EMIR (European Market Infrastructure Regulation) is the latest EU regulation on OTC derivatives. EMIR affects all entities “established” in the EU that enter into derivatives, whether they do so for trading purposes, to hedge commercial exposure or as part of their investment strategy.

Federico Ossola

Counterparty classification

  • Financial Counterparties (“FC”): these include banks, investment firms, insurers etc
  • Non-Financial Counterparties (“NFC”): a non-financial company or corporate entity
    a) NFC+: a NFC which exceeds the clearing threshold
    b) NFC-: a NFC which meets the hedging test and/or does not exceed the clearing threshold.

Tests to determine NFC status

Many of PMC’s clients are lower volume users of OTC derivatives and will be classified as a “NFC-“.

  • Commercial purpose hedging test
    OTC derivative contracts which were entered into in order to reduce risks relating to the commercial or treasury financing activity of the NFC are excluded from the calculation of the clearing threshold, i.e. one of the following conditions needs to be met:
    a) The OTC derivative covers the risk arising from the normal course of business
    b) The OTC derivative covers indirect risks
    c) The OTC derivative is consistent with the International Financial Reporting Standards (IFRS) hedging definition.
    OTC Derivatives that do not meet the hedging test will be aggregated and subject to the clearing threshold test.
  • Clearing threshold test (selected Asset classes)
      Asset class of OTC

    Clearing threshold

      Interest rate derivatives

    EUR 3 billion

      FX derivatives

    EUR 3 billion

New Obligations by “NFC-“

  • Timely confirmation of OTC transactions:

    Credit / IR derivatives


    until 31/8/2014



    From 1/9/2014



  • Reporting: All derivatives have to be reported to a regulated Trade Repository (from 1 Jan 2014).
  • Portfolio reconciliation:  Counterparties need to agree on “key” trade attributes and valuation terms before entering into a transaction (from 15 Sep 2013).
  • Dispute resolution: Counterparties must agree on a process to resolve disputes within 5 business days (from 15 Sep 2013).
  • Portfolio compression: Bi-annual process for portfolios of 500 or more OTC derivatives (from 15 Sep 2013).

Action to be taken for NFC-

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