EMIR
EMIR – European Market Infrastructure Regulation
The European Market Infrastructure Regulation (EMIR) was adopted during 2012 to increase the transparency and reduce counterparty credit risk and operational risk between market participants in the derivatives markets. EMIR applies to all legal entities using derivatives instruments, both OTC and exchange traded.
EMIR Refit – as of 29 April 2024 (UK on 30 September 2024)
The new EMIR Refit reporting rules go live in the EU on 29 April 2024 and in the UK on 30 September 2024 and are designed to further enhance the harmonisation and standardisation of reporting:
- New and modified data fields that were not required previously in the EMIR reporting
- Global standards harmonisation – EMIR aims to align reporting fields to global standards
- Notification of significant or material reporting issues to regulators
- Increased requirements on exchange of Unique Transaction Identifiers (UTIs)
Nordea´s EMIR Status
| Legal entity | Nordea Bank Abp |
|---|---|
| LEI code | 529900ODI3047E2LIV03 |
| Counterparty categorisation: | Financial Counterparty (FC+) |
| Corporate sector: | Credit Institution |
Counterparty categorisation
EMIR requires the categorisation of counterparties into one of three different categories*; Financial Counterparty (FC), Non-Financial Counterparty (NFC) and Exempted Entity. These categories can then be divided up in sub-groups:
| Financial Counterparty | Non-Financial Counterparty | Exempted Entity |
|---|---|---|
| FC+ | NFC+ | Wholly exempted e.g. Central Banks and public bodies managing public debt in EU and certain other countries |
| FC- | NFC- | Exempted from everything but reporting e.g. certain multilateral development banks |
| Private individuals (wholly exempted) |
- An insurance undertaking or reinsurance undertaking authorised in accordance with Directive 2009/138/EC;
- A credit institution authorised in accordance with Directive 2013/36/EU;
- An investment firm authorized in accordance with Directive 2014/65/EU;
- An institution for occupational retirement provision (IORP), as defined in point (1) of Article 6 of Directive (EU) 2016/2341;
- A UCITS and, where relevant, its management company, authorised in accordance with Directive 2009/65/EC, unless that UCITS is set up exclusively for the purpose of serving one or more employee share purchase plans;
- An alternative investment fund (AIF), as defined in point (a) of Article 4(1) of Directive 2011/61/EU, which is either established in the Union or managed by an alternative investment fund manager (AIFM) authorised or registered in accordance with that Directive, unless that AIF is set up exclusively for the purpose of serving one or more employee share purchase plans, or unless that AIF is a securitisation special purpose entity as referred to in point (g) of Article 2(3) of Directive 2011/61/EU, and, where relevant, its AIFM established in the Union;
- A central securities depository authorised in accordance with Regulation (EU) No 909/2014
Counterparties that are neither captured under the definitions of a Financial Counterparty or an Exempted Entity are to be considered an Non-Financial Counterparty.
*Note CCPs are another distinct category, and subject to specific CCP rules under EMIR.
The counterparty categorisation affects the application of all three main areas of EMIR:
- Clearing obligation for certain standardised OTC derivatives
- Transaction reporting to a trade repository
- Risk-mitigation techniques
Clearing obligation
The + or – suffix after the FC/NFC classification refers to whether an entity’s derivatives exposures are above or below the EMIR clearing threshold. Entities above the clearing threshold (FC+/NFC+) are subject to the clearing obligation, and if under the clearing threshold (FC-/NFC-) the clearing obligation does not apply.
Each counterparty is responsible for determining their status relative to the clearing threshold, based on calculations of their aggregate month-end average position in OTC derivatives over the past 12 months. FCs and NFCs need to inform ESMA and their relevant national competent authority if they exceed the clearing threshold.
If the clearing obligation applies to an entity, then trades in certain classes of OTC derivative contracts must be cleared through a central clearing counterparty (CCP). The OTC derivative asset classes subject to the clearing obligation can be found on ESMA’s public register for the clearing obligation: https://www.esma.europa.eu/sites/default/files/library/public_register_for_the_clearing_obligation_under_emir.pdf
If an FC exceeds the clearing threshold, they will become subject to the clearing obligation for all OTC derivative contracts pertaining to any class of OTC derivatives for which the clearing obligation is applicable, hedging transactions included (regardless of not exceeding the clearing threshold of each asset class).
Where an NFC calculates its positions and the result of that calculation exceeds the clearing thresholds, the NFC will become subject to the clearing obligation only for the OTC derivative contracts in asset classes for which the result of the calculation exceeds the clearing thresholds, hedging transactions carved out.
The clearing thresholds for the different asset classes and additional information on how the calculations should be performed can be found on ESMA’s website: https://www.esma.europa.eu/post-trading/clearing-thresholds
**Please note, where an FC or an NFC choose to not calculate its positions against the clearing thresholds, the counterparty will be subject to the clearing obligation for all OTC derivative contracts pertaining to any class of OTC derivatives for which the clearing obligation is applicable.
Transaction reporting
Under EMIR, transactions in derivatives must be reported to a registered trade repository - an entity that centrally collects and maintains the records of financial transactions to ensure transparency for market participants and regulators.
As a general rule the reporting obligation under EMIR is two-sided, i.e. both parties are required to report the same trade, and the two reports should match.
Mandatory delegated reporting (NFC-)
An exception to the two-sided reporting is where Financial Counterparties (FCs), such as Nordea, are solely responsible and legally liable for reporting OTC derivative contracts entered into with Non-Financial Counterparties that are not subject to the clearing threshold (NFC-).This automatic delegation is known as the “mandatory reporting”.
NFC- clients can choose to opt-out and report themselves, becoming responsible and legally liable for the reporting.
Voluntary delegated reporting (NFC+ and FC)
Non-Financial Counterparties subject to the clearing obligation (NFC+) and Financial Counterparties (FC+ or FC-) are responsible and legally liable to report their OTC derivatives, but the reporting can be delegated to Nordea (voluntary delegated reporting) if there is a reporting agreement in place.
In line with industry best practices, Nordea will monitor EMIR reporting metrics and notify delegated reporting counterparties if errors breach the notification limits as specified in ESMA’s guidelines for reporting.
For new customers the reporting to a trade repository needs to be agreed before the first trade is executed.
Legal Entity Identifier (LEI) code
As part of the transaction reporting, a unique reference number to identify each party to the transaction needs to be included. The unique identifier is called a Legal Entity Identifier (LEI).
Hence it is required for all legal entities (including individuals trading as entrepreneurs/sole traders) using derivative instruments to obtain a LEI code and maintain it throughout the lifetime of the derivative contract. Without a LEI code our clients will not be able to trade derivatives*.
It is the responsibility of the client to register for and obtain a LEI code. The registration is made with a Local Operating Unit (LOU) authorised by the Global Legal Entity Identifier Foundation (GLEIF).
Clients can find a LOU through the GLEIF webpage, or through https://www.nordea.com/en/our-services/lei
*Unless the client is wholly exempted from EMIR, or only trading products not in scope of EMIR (and not in scope of MiFID or other regulatory reporting to supervisory authorities which also requires a LEI code).
Please contact TradeRepositoryTeam [at] nordea.com (TradeRepositoryTeam[at]nordea[dot]com) if you have any questions about trade repository reporting or Nordea’s reporting service.
Risk-mitigation techniques
For non-cleared OTC derivative contracts, risk mitigation techniques should be established to manage the inherent counterparty credit risk and operational risks:
The timely confirmation requirement affects all OTC derivatives counterparties. It requires that the terms of derivative transactions are confirmed swiftly after the transaction is executed and effectively means that you as customer should sign confirmations and send them back to Nordea as soon as possible.
Procedures must be in place between Nordea and OTC derivative counterparties to reconcile open positions. Nordea will typically send customers a Market Valuation report, which are to be checked against the customer’s own records. Any errors identified should be informed to Nordea within an agreed period of time.
EMIR requires all Financial Counterparties to exchange Variation Margin (VM) for non-cleared OTC derivatives, regardless of the size of the derivatives portfolio. Non-Financial Counterparties that exceed the clearing threshold (NFC+) are also obliged to exchange Variation Margin (VM). The largest market participants will also need to exchange Initial Margin (IM).
The portfolio compression requirement affects counterparties with 500 or more OTC derivative transactions outstanding between them. It requires an analysis twice a year of the possibility to compress derivative portfolios. Nordea will contact customers with whom any Nordea legal entity has more than 500 outstanding OTC derivatives to agree the necessary procedures.
FAQ
Nordea uses DTCC Data Repository (Ireland) Plc ("DDRIE") for EU EMIR reporting.
If you are a delegated reporting client of Nordea, the reports Nordea submits to DTCC will be available for you in the DTCC portal free of charge.
You will need to onboard to the DTCC portal, and can do so by sending an email to gtr-onboarding [at] dtcc.com and informing them that you would like to onboard to the new free EMIR Refit service for delegated reporting.
Inform them your LEI code and that you are set up for delegated reporting with Nordea.
Then DTCC's onboarding team will send you a questionnaire link to start the on-boarding process.
Under EMIR the UTI generating counterparty is to provide the UTI to the receiving counterparty by 10:00am Coordinated Universal Time on T+1.
For FX derivatives the UTI is exchanged via the SWIFT message.
For OTC transactions that are not executed on a Trading Venue, Nordea will continue to generate the UTIs per agreement and share them via trade confirmations. The UTIs will also be available from DTCC’s intra-day Allege reports.
For EMIR delegated reporting, Nordea takes the role of UTI generator.
UPIs are allocated by the Derivatives Services Bureau and are a globally recognised ISO standard to identify the product involved in an OTC derivative transaction. When such transaction is reported to an authorised trade repository, the UPI allows authorities to aggregate transactions in the same product to understand market volumes.
The reporting entities to a transaction executed under EMIR are required to retrieve the UPI from ANNA DSB for inclusion in EMIR reports.
Pairing is where the reports from opposing sides of a derivative trade are linked together at the Trade Repository. 3 fields are used to pair both sides of a derivatives transaction:
- UTI – the unique trade identifier
- Counterparty 1 LEI code (the reporting counterparty)
- Counterparty 2 LEI code
Once paired, a large number of attributes from the 2 trade reports are matched. Matching allows counterparties to see what each has reported and to quickly understand where mismatches have occurred and reduce the likelihood of them recurring.