The European Market Infrastructure Regulation (EMIR) on Over The Counter (OTC) Derivatives (agreed by the Council of the European Union on 4 October) is Europe’s response to the perceived role that OTC Derivatives had in the financial crisis. Concerns about the lack of transparency in that market and fears over its inherent systemic risk underpin the proposals set out in EMIR. These are the same concerns that gave rise to aspects of the Dodd-Frank Act which was enacted last year in the USA.

EMIR applies to “financial counterparties” (which includes not just banks and insurers but also fund managers caught by the AIFM Directive) and certain “non-financial counterparties” (subject to certain thresholds being met). Those caught by EMIR will be required to clear trades in “standardised” OTC derivatives through a central counterparty (or CCP) and report them to trade repositories. Of most concern is that trades in such standardised contracts will need to have highly liquid collateral posted against them (which would not include real estate). Simple interest rate hedging swaps that are routinely entered into by real estate fund managers are likely to be considered standardised OTC Derivatives for these purposes.

Transactions in non-standardised OTC Derivatives have similar requirements imposed on them, although clearing through a CCP will not be mandatory. Moreover, collateral for such contracts could, arguably, be made up of the underlying real estate asset.