European Market Infrastructure Regulation (EMIR)

European Market Infrastructure Regulation (EMIR)

Subject: Economy

Context:

The European Securities and Markets Authority (ESMA) proposes to derecognize six Indian counterparty clearing corporations CCPs due to non-compliance with certain provisions of the European Market Infrastructure Regulation.

Details:

• It  means that European banks will not be able to clear or settle trades in foreign exchange, gilts, currency and interest rate derivatives done on Indian exchanges.
• ESMA wants to revise the pact under EMIR 2.0, which includes additional conditions including supervisory powers to inspect Indian clearing corporations, which is not agreeable to Indian regulators.

European Market Infrastructure Regulation (EMIR)

• It was adopted by the EU in August 2012 as implementation of the G20 commitment to reduce systemic, counterparty and operational risk, and increase transparency in the OTC derivatives market.
• It was also designed as a preventative measure to avoid fallout during possible future financial crises similar to the collapse that followed the Lehman Brothers bankruptcy in 2008.
• Its focus is regulation of over-the-counter (OTC) derivatives, central counterparties and trade repositories. 
  • It provides guidance on reporting of derivative contracts, implementation of risk management standards and common rules for central counterparties and trade repositories.
  • It establishes common rules for central counterparties, which interpose themselves between involved parties in a contract to serve as the focal point of each trade, and trade repositories, which collect and maintain all records of trades.
• It also outlines three sets of obligations, including the clearing, reporting and risk mitigation of applicable products
  • It requires mandatory clearing obligations for specific OTC derivative contracts -The obligations require that over-the-counter derivatives trades are cleared through central counterparties.
  • EMIR requires that all entities entering into derivative contracts must submit reports to their corresponding trade repositories, outlining each over-the-counter trade.
    • EMIR covers entities that qualify for derivative contracts in regards to interest rate, equity, foreign exchange, or credit and commodity derivatives.
  • The risk mitigation standards outlined in EMIR’s Article 11 impose risk management regulation on bilateral derivatives, as these derivatives are not appropriate for standard central counterparty clearing
• Article 25 of EMIR requires CCPs in other global jurisdictions providing services to European banks to be approved by ESMA.
  • India signed the pact in 2017, which lapsed in March 2022.