The 2008 financial crisis revealed how the misuse of speculative over-the-counter (OTC) derivatives had played a significant role in the worst economic disaster since 1929. The answer of the EU Commission consisted in a legislative proposal for a regulation aiming at increasing market transparency and addressing financial stability concerns, the European Market Infrastructure Regulation, namely EMIR, entered into force on 16 August 2012.

EMIR provisions included clearing of OTC derivative contracts, reporting on derivative transactions and risk-mitigation techniques for OTC derivative contracts not cleared by a CCP.

While these rules were intended to target mainly financial counterparties (FCs) as credit institutions including UCITS and alternative investment funds (AIFs), non-financial counterparties (NFCs) were also subject to obligations applicable in a reduced manner in case of low OTC derivatives exposures.

In Luxembourg, the demand for assistance by IFMs has notably increased since the publication, in August 2018, of the new CSSF Circular 18/698, providing for clear requirements as regards the role of IFMs under EMIR in respect to OTC derivative transactions concluded for own purpose or on behalf of their investment funds. The Circular focused on the need to strengthen IFM’s written procedures, contractual arrangements and oversight measures, especially when delegating EMIR activities to third parties, as IFMs further had to disclose in the mandatory CSSF EMIR Questionnaire.

Several EU consultation papers revealed that, what was initially seen as an effective way to counter systemic risk, turned out to be too complex and burdensome for many EU market participants.

Amendments to EMIR introduced in June 2019, the ‘EMIR Refit’, aim at eliminating disproportionate costs and reducing regulatory and administrative burdens on smaller firms such as FCs with very low volumes (SFCs). While SFCs may benefit from clearing exemptions limited to NFCs so far, EMIR Refit does not relieve IFMs from their legal responsibility to ensure their funds’ compliance with these rules.

ESMA just published its 2nd Annual Report on EMIR penalties and supervisory measures imposed by national competent authorities (NCAs). The report confirmed that during 2018 the CSSF sent warnings to market participants not complying with EMIR risk-mitigation techniques or those ‘with a high rate of rejected reports by trade repositories’.

Overall, ESMA confirmed that fines and penalties issued by NCAs ranged from very low amounts up to very large numbers (e.g. ‘€ 1.5 millions’ in Luxembourg).

As a consequence of EMIR Refit, many market participants requested the assistance of Arendt Regulatory & Consulting to perform an impact assessment of EMIR Refit changes on their operating model, as supervisory trends seem to give a clear indication that NCAs (including the CSSF and ESMA indirectly) will continue enhancing their EMIR supervision going forward.

Nicola Losito

Senior Manager

Arendt Regulatory & Consulting

+352 26 09 10 1