The “EMIR” Regulation (European Market Infrastructure Regulation) on Over The Counter (“OTC”) Derivatives, Central Counterparties (“CCPs”) and Trade Repositories came into force on the 16 August 2012. The obligations for insurers under EMIR are extensive and generally fall into three categories:
- Implementation of risk mitigation measures
- Clearing obligations
- Trade reporting
The reporting requirement under EMIR commenced on 12 February 2014. The scope of the reporting requirement is broad. It applies to all counterparties and CCPs to derivative contracts, regardless of whether counterparty is classified under EMIR as a financial counterparty or a non-financial counterparty and whether the derivative is OTC or exchange traded. Counterparties and CCPs to a derivative contract must ensure that the details of any derivative contract that they have concluded, modified or terminated are reported to one of the trade repositories registered by ESMA. Currently, there are six trade repositories registered by ESMA.
The extent to which the obligations arising under EMIR apply to a company depends on whether the company is a financial counterparty or non-financial counterparty. Insurance and reinsurance companies fall within the definition of a financial counterparty. Insurers that use OTC derivatives will have to comply with clearing obligations, collateral requirements (though see the comments below in relation to inter-group transactions) and margin requirements. Insurers should establish appropriate and adequate reporting mechanisms to ensure compliance with the obligation to report trades to trade repositories from 12 February 2014.
Exemptions for Intra-group Transactions
EMIR provides exemptions in relation to intra-group transactions and pension scheme arrangements.
OTC derivative contracts that are intra-group are not subject to the clearing obligation or the collateral requirement once the parties have notified their competent authorities in writing in advance and there has been no objection. Importantly, EMIR does not exempt intra-group transactions from the reporting obligation and the risk mitigation obligations.
In relation to pension scheme arrangements, EMIR provides a temporary exemption from the clearing obligation until August 2014. There may be a further extension of the exemption period pending consultation between the European Commission, EIOPA and ESMA. The other EMIR obligations, regarding reporting and risk mitigation, continue to apply to pension funds.