The European Market Infrastructure Regulation (EMIR) sets out the requirements for the central clearing of standardised OTC derivatives, the exchange of collateral, post-trade reporting to trade repositories and risk mitigation procedures for non-cleared derivatives. The requirements apply to many stakeholders in the OTC derivatives market in the EU and, prior to Brexit and the expiry of the Brexit transition period, applied to stakeholders in the UK.
Now that the Brexit transition period has passed, EMIR has effectively been 'on-shored' into UK law by a number of statutory instruments, including the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019/335, and has come to be referred to as UK EMIR in the derivatives market.
Consequently, the regime implemented by EMIR vis à vis OTC derivatives (broadly outlined below) continues in the UK under UK EMIR, with certain differences. UK EMIR substantially adopts the provisions of EMIR, save for (among other things) references to terms defined by reference to EU (rather than UK) legislation and transferring functions and supervisory roles currently undertaken by EU authorities to equivalent UK authorities. For example, certain matters that under EMIR are within the European Securities and Markets Authority's remit will, under UK EMIR, fall under the remit of the relevant UK regulator. Depending on the obligation, this may be the Bank of England, the Prudential Regulatory Authority or the Financial Conduct Authority.
UK EMIR operates in parallel with EMIR to ensure that the OTC derivatives regime used by market participants in the UK continues to operate effectively now that we have emerged out of the Brexit transition period.
EMIR / UK EMIR – key requirements
Under EMIR and UK EMIR, occupational pension schemes are classified as 'financial counterparties' and required to comply with the margin requirements and the obligation to report transactions.
Trustees considering entering into OTC derivatives which are not cleared by a central counterparty (CCP) – also known as a clearing house- will need to provide collateral or 'margin' in respect of those transactions. The key requirements are initial margin and variation margin, each of which are subject to certain exemptions and thresholds which may affect whether a trustee is obliged to exchange margin for particular OTC derivatives contracts.
Variation margin: collateral regularly exchanged and calculated on a daily basis with counterparties to reflect changes to the market value of outstanding (i.e. continuing) OTC derivatives transactions.
Initial margin: collateral posted by each counterparty as an additional buffer to cover the risk of a default in the period between the last collateral exchange and the liquidation of the relevant transactions.