Emir, or the European Market Infrastructure Regulation, is
aimed at creating a safe market for over-the-counter (OTC)
Emir’s technical standards were signed off by
the European Commission in 2012, and a year later were rolled
out by member states of the European Economic Area –
with a scope that extends far further.
For a primer on Emir 2.2, which concerns central clearing
counterparties, click here.
The goal of the regulation is to reduce systemic risk with
Europe’s financial market and, as with many pieces
of regulation since 2008, to help prevent a future financial
A few years after Emir was first implemented, the Commission
carried out a review of the regulation to assess where it could
reduce the burden put on counterparties costs and reporting
obligations. Hence, amendments were undertaken and the Refit
(otherwise known as Emir 2.1) was rolled out.
While Emir is a piece of EU regulation,
the FCA has made clear that rules will continue to apply
for UK firms following the withdrawal from the trading
What has changed?
As the refit indicates, Emir "should cover all financial
counterparties that might pose an important systemic risk for
the financial system," therefore amending the definition of
what a financial counterparty is and bringing investment
managers into scope, regardless of where they are based
– so within the EU or elsewhere.
According to Macfarlanes partner William Sykes, this has
been biggest change for funds.
"Previously we had a whole section of the private funds
industry where both the fund and manager would be in the Cayman
Islands or Guernsey," he says.
These parties would still be considered non-financial
counterparties (NFCs), as would a European fund whose manager
has remained elsewhere – but since the refit, they are
now in-scope as financial counterparties.
Another significant change is the introduction of a small
financial counterparty category. The review has pointed out
that certain financial counterparties’ activity is
minimal enough that it will not pose an "important systemic
risk" to the financial system.
These firms are exempted from the clearing obligation but
are still required to exchange collateral to mitigate any
potential systemic risk.
"In theory, this has been a good idea," Sykes says.
Previously, a small Ucits fund managing a billion or so would
be in the same category as a much larger organisation such as
HSBC – which many would agree is far from
New reporting obligations
Buyside firms have new reporting obligations. As indicated
by the regulation, "the reporting of historic contracts has
proven to be difficult because certain details which are now
required to be reported were not required to be reported before
the entry into force".
In article nine of Emir, reporting obligations are indicated
as applying to derivative contracts that were entered into
before August 16 2012 and remained outstanding on that
As the review indicates, this requirement in the original
regulation resulted in a high reporting failure rate, with poor
quality data being submitted and a massive burden on firms.
"The fact that non-financial counterparties will no longer
have to report when trading with financial counterparties later
this year is very helpful for private equity funds and
corporates because it lowers their reporting burden," says
Sykes, adding that this move is welcomed, as the industry has
long felt it does not pose a systemic risk.
How has the market reacted?
With legislation as vast and ambitious as Emir, it makes
sense that it is reviewed, with appropriate proposals added, to
ensure it is proportionate and does not create unnecessary
obstacles for market participants. However, as often with
regulation, it is another story as to whether the
clarifications are helpful.
"From a reporting standpoint, the Emir Refit has been a damp
squib," says David Nowell, senior regulatory reporting
specialist at Kaizen Reporting. "While the whole idea was to
make it more proportionate and less burdensome for market
participants I think the industry has been quite disappointed
with the outcome, as not a lot has actually changed."
In short, firms were expecting far more from the refit, with
some believing that certain elements of the regulation would be
removed altogether. One in particular is article two: the
requirement to report exchange-traded derivatives (ETDs).
Article two amendments were notably missing from the refit.
"I’m not sure it makes sense to report exchange
traded derivatives (ETDs) at trade level," says Nowell. "What
Esma [European Securities and Markets Authority] has done is
mandate that they need to be reporting at a position level, and
here we are talking about what could be thousands of trades
conducted by banks every day. Is it really necessary that all
these trades are reported? Report the position, sure, but why
still report the trades? Unfortunately, nothing has changed
Allen & Overy partner Emma Dywer says that it is still
too early to tell if this refit will lead to a reduced workload
for smaller financial counterparties, though some encouraging
mechanisms have been put in place. "These changes have
represented such an uplift in what life was like before and
after Emir was implemented. If the overall ambition to increase
market stability and increase transparency is ultimately
recognised, then I think that this will be welcomed by market
Considering the size of the regulation, the refit is,
objectively, not particularly far-reaching.
"An improvement has been the simplification and reduction in
reporting, notably removing backloading, which has come with
the refit," adds Dentons partner Michael Huertas. "I
don’t think firms were that surprised by the
changes as, in practice, many financial counterparties were
reporting on behalf of non-financial counterparties, as well as
many other types of clients already."
He continues that beforehand, there was too much on
firms’ desks to be able to focus on getting
bilateral reporting agreements in place, let alone updating
them to reflect the refit’s changes.
Sykes says that the refit has been "irritating" for some
funds who have been deliberately avoiding Emir by using an
offshore manager. "Now that advantage has now gone away
– but I wouldn’t say it’s
annoying enough to do anything about."
What are the problems with it?
According to Sykes, the idea that both parties have to
report remains a weakness for firms who come into the
"In theory I can see why it exists, as you get tested
information," he says. "However, parties reporting differently
presents a process issue. There are so many mismatches in
reporting due to the fact that it is detailed, and double
reporting simply produces mismatched trades."
Nowell adds that financial counterparties need to ascertain
whether the non-financial counterparties will continue to
report or not – as they cannot simply assume they
won’t exercise their rights to continue
In addition, there is nothing in the refit that says that
financial counterparties must report the ETDs they conclude
with non-financial counterparties on behalf of the
"I think it all revolves around the mandatory reporting
element, and the biggest part of that will be the liaison
between trade repositories that are used by the financial
counterparties," says Nowell. "This will all come with
additional nuances as formats are supposed to be the same, but
this isn’t quite the case."
As part of their reporting, financial counterparties must
report to trade repositories that are
recognised by Esma. This includes New York-based DTCC, as
well as London repositories such as CME and Unavista.
Not to mention the issue of how clear the regulation and
technical standards (RTS) actually are. According to Nowell,
Esma’s RTS are causing concerns.
"What I think is really missing is a guidelines document,"
he says, acknowledging that
the Q&A is helpful, but the answers supplied
aren’t quite as beneficial for the industry as
the Mifir transaction reporting guidelines, whereby Esma
put together a document to analyse different scenarios.
In comparison, there isn’t really an equivalent
"This makes it really quite difficult for firms –
lots are baffled by the RTS," he says, adding that the majority
of reports he sees – that have been previously
validated – are still incorrect in some way.
"We could of course blame this on the firms, but considering
so many are struggling, perhaps the requirements are overly
complex and lack clarity," he says.
"It’s not that people do not want to comply,
rather that they are struggling to clarify the meaning of the
rules they’re required to follow," says Dwyer, who
evidenced article 31 of
the margin RTS. This section covers the treatment of
derivatives with counterparties in third countries where legal
enforceability of netting agreements or collateral protection
cannot be ensured.
"These can be extremely challenging when interpreting what
it means and what regulators expect of market participants,"
As time goes on, the full extent of the Emir
refit’s strengths and weaknesses will be realised
by market participants and regulators.
What else do we need to know?
Soon market participants will have to get to grips with
another piece of similar regulation, the Securities Financing
Transaction Regulation (SFTR). This is intended to increase the
transparency of the securities financing markets by requiring
those who enter into SFTs to report it to a trade
Read Practice Insight's latest analysis of
SFTR guidelines here
"While queries remain about Emir, my clients are more
concerned about SFTR’s requirements and how these
affect reporting," says Huertas, pointing out that while there
are some common concepts between Emir and the latter, there are
also fundamental differences, particularly in the type of data
and how it is presented.
"With most firms having centralised regulatory reporting
processes, accounting for Emir’s 129 data fields,
capturing counterparty, collateral and common information is
one process, and SFTR’s 153 data fields of margin,
transaction, reuse and counterparty data has further fields and
action types," he says, adding that this drives operational and
compliance costs. "That’s even before you get to
the Mifid II/Mifir review changes in the pipeline."