Due to the collapse of Bearn Sterns (March 2008), the bankruptcy of Lehman Brothers and the subsequent rescue of AIG (September 2008) the OTC derivatives market was established as the main priority for the financial regulation and supervision reform that led the world's great leaders to hold various international summits in order to prevent and avoid future economic recessions similar to those that occurred during 2008.

In this context, in July 2012 the European Parliament (EP) and the Council published Regulation (EU) nº 648/2012 (EMIR) which establishes the requirements regarding clearing and bilateral risk management for over-the-counter (OTC) derivatives contracts, information requirements for these contracts, and uniform requirements for the activities of central counterparties (CCPs) and trade repositories.

This Technical Note summarises the main aspects of Regulation (EU) No 648/2012 (EMIR). 

Executive Summary

In July 2012, the EP and the Council published the Regulation (EU) nº 648/2012 (EMIR) that sets out a regulatory framework that strengthens financial services, the measures to reduce derivative’s risk, and analyses the role of derivatives during financial crises. This Regulation is based on the three main lines of action established by the European Securities and Markets Authority (ESMA): i) trade reporting & record keeping, ii) risk mitigation techniques, and iii) clearing.

Scope of application:

  • Institutions established in the EU.
  • Non-European institutions under the following criteria:
    • European institutions’ branches.
    • Equivalent third country, operating through a European institution. A country is considered equivalent when the regulation and supervision level in that country are similar to the one established in EMIR.
    • Two non-European institutions subject to clearing, when the contract could have impact in the EU or has a non-committal regulation objective. 

Main content

This document covers the following four main principles:

  • Increase transparency, through the requirement of market participants to submit information on their positions increasing the integrity and vigilance of the markets through their supervision.
  • Reduce counterparty credit risk (clear up the concept of "too big to fail") by requiring CCPs the approval of standardised derivative contracts, the establishment of common security and transaction’s rules, the increase of collateral’s provision and increase of capital’s fees.
  • Reduce operational risk enhancing the standardisation of the legal terms stipulated in derivatives’ contracts framework and in their processing.
  • All these measures aim to provide higher protection to taxpayers from bank’s rescues and abusive financial practices.

Download the technical note by clicking here (document available in spanish).