What the EU is doing and why
Role of derivatives
Derivatives play an important role in the economy, but they also bring certain risks. We saw this clearly during the 2008 financial crisis, when significant weaknesses in the OTC derivatives markets became evident.
In 2012 the EU adopted the European market infrastructure regulation (EMIR).
Objectives of EMIR
EMIR introduces reporting requirements to make derivatives markets more transparent. Under the regulation
- detailed information on each derivative contract has to be reported to trade repositories and made available to supervisory authorities
- trade repositories have to publish aggregate positions by class of derivatives, for both OTC and listed derivatives
- the European Securities and Markets Authority (ESMA) is responsible for surveillance of trade repositories and for granting and withdrawing accreditation
EMIR introduces rules to reduce the counterparty credit risk of derivatives contracts. In particular
- all standardised OTC derivatives contracts must be centrally cleared through CCPs
- if a contract is not cleared by a CCP, risk mitigation techniques must be applied
- CCPs must comply with stringent prudential, organisational and conduct of business requirements
The regulation also requires market participants to monitor and mitigate the operational risks associated with trade in derivatives such as fraud and human error – for example by using electronic means to promptly confirm the terms of OTC derivatives contracts.
EMIR provides a mechanism for recognising CCPs and trade repositories based outside of the EU. Once recognised, EU and non-EU counterparties may use a non EU-based CCP to meet their clearing obligations and a non EU-based trade repository to report their transactions to.
The recognition is based on equivalence decisions adopted by the Commission. These decisions confirm that the legal and supervisory framework for CCPs or trade repositories of a certain country is equivalent to the EU regime.
A CCP or trade repository established in this country can then apply to obtain EU recognition from ESMA. Once recognition has been granted, that CCP or trade repository can be used by market participants to clear OTC derivatives or report transactions as required by EMIR.
In addition to the equivalence of CCPs and trade repositories, the Commission can also develop equivalence decisions for other areas of EMIR, such as reporting, margins for uncleared derivatives and risk mitigation techniques, and non-EU trading venues.
A derivative is a financial contract linked to the fluctuation in the price of an underlying asset or a basket of assets. Common examples of assets on which a derivative contract can be written are interest rates instruments, equities or commodities.
An over-the-counter (OTC) derivative is one that is privately negotiated and not traded on an exchange.
OTC derivatives account for almost 95% of the derivatives markets. They have a significant impact on the real economy, from mortgages to food prices.
CCPs interpose themselves between counterparties to a derivative contract, becoming the buyer to every seller and the seller to every buyer. In doing so, CCPs become the focal point for derivative transactions increasing market transparency and reducing the risks inherent in derivatives markets.
Every day, CCPs clear thousands of financial transactions in a range of financial instruments including
- equities
- bonds
- commodities
- derivatives
- repos
Before the financial crisis, derivatives traded outside regulated markets were usually not cleared through CCPs.
Trade repositories (TRs) are central data centres that collect and maintain the records of derivatives. They play a key role in enhancing the transparency of derivative markets and reducing risks to financial stability.
Policy making timeline
- 31 January 2025Legislation
Adoption of a decision to extend the equivalence for UK central counterparties (CCPs) for a period of three years until 30 June 2028
- 7 February 2024Legislation - Capital markets union
- 18 October 2022Legislation
As highlighted in the 2022 State of the Union address, energy companies nowadays are facing severe problems with liquidity in electricity futures markets, which is putting the proper functioning of our energy system at risk. In this context, the Commission has adopted a measure on the clearing threshold and adopted in principle a measure on the eligibility of collateral.
- 8 February 2022Equivalence decision - United Kingdom
- 8 February 2022Consultation
Targeted consultation on the review of the central clearing framework in the EU
End date: 22 March 2022
- 10 November 2021Statement
- 14 July 2020Legislation
Adoption of
- Commission Delegated Regulation (EU) 2020/1303 with regard to the criteria that ESMA should take into account to determine whether a central counterparty established in a third-country is systemically important or likely to become systemically important for the financial stability of the Union or of one or more of its Member States
- Commission Delegated Regulation (EU) 2020/1304 with regard to the minimum elements to be assessed by ESMA when assessing third-country CCPs’ requests for comparable compliance and the modalities and conditions of that assessment
- Commission Delegated Regulation (EU) 2020/1302 with regard to fees charged by the European Securities and Markets Authority to central counterparties established in third countries
- Commission Delegated Regulation (EU) 2020/1303 with regard to the criteria that ESMA should take into account to determine whether a central counterparty established in a third-country is systemically important or likely to become systemically important for the financial stability of the Union or of one or more of its Member States
- 13 October 2017Equivalence decision - United States
Basic information
Delegated and implementing acts
Legislative history
Basic information
Delegated and implementing acts
Legislative history
Basic information
- Text of the EMIR (648/2012/EU)
- Summary of the legislation: EU rules on over-the-counter derivatives contracts, central counterparties and trade repositories
Delegated and implementing acts
Implementation and enforcement
- Frequently asked questions on the EMIR published by the Commission
- European Securities and Markets Authority's (ESMA) guidelines on EMIR
- ESMA's questions and answers on EMIR