Derivatives Regulation in Europe: an update

At our recent seminar our experts looked at the current status of the European Market Infrastructure Regulation (EMIR) and the challenges it brings.

For the full report of the speakers' discussion please click here.

Key points:

  • The European Market Infrastructure Regulation (EMIR) was adopted in 2012 to reduce the systemic risks relating to derivatives through greater transparency and mandatory clearing of standardised derivatives, their trading on recognised trading venues, and risk mitigation for uncleared derivatives
  • The scheduling time for adoption of many aspects of the regulation, including mandatory clearing and margin requirements for uncleared derivatives, has slipped
  • EMIR distinguishes between four categories of market participant: financial counterparties, less and more active non-financial counterparties, and third-country entities. These are subject to different rules and compliance deadlines
  • The requirement to use a central clearing house (CCP) interposed between the two parties to a derivative transaction is designed to avert systemic risk by ensuring that if one party fails, the other should not be affected because the risk is absorbed by the CCP. They use margin and/or default fund contributions to cover their own potential losses
  • Big derivatives dealers will in practice become members of the clearing house, while other counterparties will become clients of a clearing member
  • There are three main types of account offered by CCPs, net and gross omnibus accounts and individual segregation accounts, offering increasing protection against losses through commingling of client assets
  • Under EMIR, clients must be able to transfer their cleared transactions and associated collateral from one clearing member to another
  • CCPs may demand margin payment from clearing members on multiple occasions within a day, which might pose problems for end-clients and require them to create a margin buffer for such eventualities
  • Documentation for derivatives transactions may run to as many as 150 pages, and clearing members may makes changes to standardised documentation, while the CCP may impose its own distinct rules
  • The online FIA CCP Risk Review, a collaboration between the FIA, Linklaters and Milbank, summarises and analyses the rules of CCPs worldwide in a standardised format
  • Interest rate swaps are first in line for mandatory clearing, but the regulatory technical standards are not yet in place. Once this occurs, probably in September
    or October, credit default swaps are set to be next. There are currently no plans for mandatory clearing of OTC equity or commodity derivatives
  • ‘Frontloading’ of existing transactions is due to take place once the mandatory clearing rules are in place for each class of derivatives, but the industry is lobbying for this requirement to be dropped or eased
  • Final draft rules on initial and variation margin requirements for uncleared derivatives are due to be submitted to the European Commission in the autumn, based on participants’ notional transaction volume
  • The EU Bank Recovery and Resolution Directive empowers regulators to close out derivative contracts involving a failed counterparty as part of a debt ‘bail-in’


Pauline Ashall, Partner, Derivatives and Structured Products, London

Emmanuel Henrion, Partner, Investment Management, Luxembourg

Nicki Kayser, Partner, Capital Markets and Banking, Luxembourg

Deepak Sitlani, Partner, Derivatives and Structured Products, London