EMIR - European market infrastructure regulation has been initiated by European union to avoid situation similar to 2008-09. Financial scenario led Lehman to default and bear stearn near to collapse. This helps EU regulatory bodies to monitor OTC, CCP and TRs.

1. Abdulla Pathan
Prepared with reference regulatory implementation Technical Standard published at
EU Regulations related to EMIR/ESMA

2.  Facts
 Lehman Default in 2008 Financial crisis
 Bear Stearns near collapse situation
 Challenges
 lack of counterparty risk management
 a lack of transparency within the over the counter (OTC)
derivatives market
 Resolution at G20
“All standardised OTC derivative contracts should be
traded on exchanges or electronic trading platforms,
where appropriate, and cleared through central
counterparties by end-2012 at the latest.
OTC derivative contracts should be reported to trade
repositories.
Non-centrally cleared contracts should be subject to
higher capital requirements”

3.  EMIR targeted for OTC Derivatives, Central
counterparties ( CCPs) and Trade
repositories ( TRs)
 EMIR officiated on 4th July 2012 and
enforced from 16 Aug 2012
 ESMA published EU adopted Technical
Standard on 19th Dec’2012
 EMIR made mandatory from 15th Mar 2013
onwards

4.  EMIR is designed to reduce the counterparty risk of OTC
derivative Markets and increase transparency within the
markets
 EMIR Obligations
 Clearing - standardized derivative contracts should be cleared
through central counterparties in order to reduce the risk in the
financial system
 Margin & Capital/Risk mitigation - clearing counterparty shall have
permanent, available and separate initial and variation margins in
the form of highly liquid collateral
 Reporting - all OTC derivative contracts should be reported to trade
repositories
 EMIR will enable
 Reporting to trade repositories
 Clearing Obligations
 Risk mitigation for uncleared trades
 requirements for central counterparties (CCPs) and trade
repositories (TRs)
 EMIR applies to EU Firms trading with non-EU Firms
 MIFID-II/MIFIR and CRD-IV will deliver more regulation for
derivatives in the near future.

5. Entities EMIR Obligations
1. Financial Counterparties
2. Non-financial counterparties
above the clearing threshold
Clearing Obligations
Risk Mitigation Techniques
Reporting Obligations
Non-financial counterparties below
the clearing threshold
Reporting Obligations
Risk Mitigation Techniques ( Timely
Confirmation, Portfolio reconciliation
and compression, dispute resolution)
CCPs Application of organizational
Conduct of business
Prudential requirements
Trade Repositories 1. Reporting
2. Duty to make certain data
available to the public and relevant
authorities
OTC derivatives Clearing and Risk Mitigation
Techniques
All Derivatives Reporting Obligations
All Financial instruments CCP Obligations

6.  Institutions needs to comply EMIR
◦ Financial Counterparties such as Banks, insurers, asset managers
◦ Non – Financial Counterparties
 Exemption
◦ Pension Funds ( 3 years grace period)
◦ Intra group transactions
 The counterparty should be a clearing member, a client of a clearing
member (direct client) or a client of a client by having agreed indirect clearing
arrangements.
 It will depend on the best compromise between protection (full omnibus-
account model/individual segregation/LSOC (“legally segregated, operationally commingled)
Model/future-style elementary clearing model) and operational efficiency.
 OTC derivatives contracts that ESMA has determined subject to a
mandatory clearing obligation must be cleared by CCP
 A Clearing obligation will be applicable to contracts between any
combinations of Financial counterparties and NFCs that are above the
clearing threshold
 Mandatory clearing obligations will apply to trade between such firms
where:
◦ One or more of the counterparties is in the EU
◦ In Limited circumstances, neither in the EU

7. Segregation
Models
Pros Cons
Individual Client
Segregation
•Highest level of protection
•Facilitates Porting
•Return of assets
guaranteed
•Expensive
•Loss of netting benefit
LSOC •High level of protection
•Easier to administer
•Return of assets not
guaranteed
•Porting more difficult
Omnibus Client
Segregation
•Cheaper alternative
•Easier to administer
•Lower level of
protection
•Porting more difficult

8.  €1bn in gross notional value for OTC credit and
equity derivatives (individual thresholds)
 €3bn in gross notional value for interest rate and
FX (individual thresholds)
 €3bn in gross notional value for commodities and
others (combined threshold)
 The clearing obligation applies to all OTC derivative
contracts once one of the thresholds is reached
 Transactions designed to reduce risks to
commercial activity or treasury financing activity do
not count towards the clearing threshold
 When calculating its positions, a NFC must include
all contracts entered into by all non financial
entities within its group

9.  ESMA ( European Securities and Markets Authority)
 ESAM assess clearing obligation for OTC
◦ Top-down approach ( ESMA to Local Market)
◦ Bottom-Up approach ( Local Market to ESMA)
 Clearing Criteria
◦ Degree of standardization
◦ Volume of trading and liquidity
◦ Availability of pricing information

10.  The counterparty risk mitigation on cleared OTC
derivative transactions forces counterparties to
pay (from day one) initial and variation margins
in highly liquid collateral (cash, gold,
government bonds, etc.).
 No cleared transactions will be subject
to additional capital requirements.

11.  Daily reporting to the competent authority will be required for all
trades (OTC cleared, OTC not cleared but also exchanged ones) in
order to identify potential pockets of systemic risk.
 These new trade repositories (around 30 fields to be reported) not
only concern trades openings but also modifications and terminations.
 All counterparties to all derivatives contracts ( OTC and exchange-
trade)
◦ Report, post-trade, contract details to a registered trade repository
◦ Applies to all trades in the EEA
 Information needs to be reported in brief
◦ Parties to the contract/beneficiary
◦ Contract type
◦ Notional value
◦ Maturity
◦ Price
◦ Settlement date
 Reporting Exposure
◦ Only Financial and non-financial counterparties ( NFC) above the clearing
threshold are required to report exposures
◦ Mark to market or model valuations
◦ Collateral value and basis

12. Type of Exemption
Clearing
obligations
Exchange of
Collateral
Reporting
Obligation
Pension scheme
arrangement
Yes, until
15/08/2015
No No
Intragroup
transaction
Yes, following a
positive decision
or a non-
objection by the
competent
authority
Yes, following a
positive decision
or a non-
objection by the
competent
authority
No

14. Challenges Key Actions
OTC derivatives valuation
1. How do I set up an effective
valuation approach with the right
information at the right time?
2. Can I outsource the valuations
process?
3. How do I maintain good
integration between the trade,
pricing, valuation and collateral
engines?
•Define your approach for the best OTC
derivatives valuation (counter-check CCP prices,
using robust valuation process and independent
sources)
•Organize daily reliable and verifiable
monitoring of risk on the derivatives’
positions and their contribution to the overall
risk profile of your portfolio
•For complex instruments, possibly delegate
to 3rd party middle office providers
Collateral and liquidity management
1. What are the expected additional
funding needs?
2. Do I have the right tools to
efficiently monitor and manage
the collateral requirements?
•Assess the impact on your products and
portfolio (cleared versus not cleared)
•Implement a portfolio reconciliation process
•Adapt collateral management infrastructure
and organization (e.g. increase STP level)
•Assess your additional daily funding needs
(capital and margin)
•Choose a set-up with fewer clearers than
executing brokers so as to maximize the
netting effect

15. Challenges Key Actions
Business Model
1. Which part of my
business could I
outsource?
2. How do I select the right
clearing member and/or
CCP?
3. What do I have to do to
become a clearing
member?
4. How do I need to
organize my accounts?
•Understand the regulations and the global
value chain issues
•Sign a new set of documentation for cleared
OTCs with a clearing broker
•Sign a collateral agreement
•Define strategic options:
•Select your service provider model (CCPs
or clearing members),
•Define your counterparty risk level with
your providers (accounts segregation &
protection level, operational efficiency, etc.)
•Seamless integration between trade, post
trade and collateral activities
•Evaluate whether you have the skills/mass
to perform collateral management in-house
or through outsourcing

16. Challenges Key Actions
Reporting
1. What will the impact be
on my database?
2. Do I have all the
information available in
my system?
3. Can I outsource this
business and to whom?
Update your processes and IT applications in
order to:
•Identify and provide required information
•Identify transactions to report
•Build and send your daily reporting file

17.  Technical standards yet to be finalised:
◦ Arrangements for the establishment and
functioning of CCP colleges (ESMA)
◦ Risk mitigation techniques for OTC derivatives that
are not centrally cleared (joint ESA’s)
◦ Contracts that are considered to have a direct
substantial and foreseeable effect in the Union or
to prevent the evasion of EMIR (ESMA)
 The EU Commission will set a new deadline for
delivery of ii. and iii.