EMIR – European Market Infrastructure Regulation

The European Union is introducing the European Market Infrastructure Regulation (EMIR) to enhance the efficiency and robustness of the derivatives market. The five main EMIR requirements for you as a derivatives trading corporate or institution are:

  1. Counterparty categorisation
  2. Risk mitigation techniques
  3. Trade repository (TR) reporting
  4. Central counterparty (CCP) clearing
  5. Margin requirements for non-cleared OTC derivatives

This page describes each of these requirements in brief and what Nordea and you as customer should do to comply with the requirements. This page also provides information about Nordea’s status in relation to EMIR for the benefit of our customers.

Nordea’s EMIR Status

 

Nordea Markets

Legal Entity

Legal Entity Name: Nordea Bank Abp

 

Legal Entity Identifiers (LEI)  – CICI code

LEI code:  529900ODI3047E2LIV03

 

EMIR counterparty categorisation

Financial Counterparty (FC+)

 

Adherence to ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol

Adhering entity Nordea Bank Abp
Adherence to protocol: Yes
Portfolio data Data sending entity
Local business days Copenhagen (CET)

 

Adherence to ISDA 2013 EMIR NFC Representation Protocol

Adhering entity: Nordea Bank Abp
Adherence to protocol: Yes

 

Emir Supervisors

EMIR supervisors

EMIR regulation

EMIR Requirements

Risk mitigation

Risk mitigation techniques (In effect)
EMIR requires the compliance with the following risk mitigation techniques:

  • Timely Confirmation
  • Portfolio Reconciliation & Dispute Resolution
  • Portfolio Compression

Each of these are described below together with Nordea’s approach to ensure compliance.

Timely Confirmation
The timely confirmation requirement came into effect on 15 March 2013 and effects all OTC derivatives counterparties. It requires that the terms of derivatives 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.

Portfolio Reconciliation & Dispute Resolution
The portfolio reconciliation and dispute resolution requirements came into effect on 15 September 2013 and affects all OTC derivatives counterparties. In order to be compliant with these requirements, certain procedures must be in place between Nordea and a customer. To ensure that these procedures are in place Nordea has approached all derivatives customers by sending out letters. The content of these letters depends on the type of agreement in place with Nordea. Customers with an ISDA agreement are asked to adhere to the “ISDA 2013 EMIR portfolio reconciliation, dispute resolution and disclosure protocol”. Customers with a Nordea Master agreement receive a letter with amendments to the existing agreement, which automatically take effect unless the customer contacts Nordea about this. To perform the actual reconciliation Nordea will typically send you as customer a reconciliation report, which you then check against your own records. Should you identify an error you will be required to inform Nordea within a certain period of time.

Portfolio compression
The portfolio compression requirement came into effect on 15 Septermber 2013 and affects counterparties with 500 or more OTC derivatives transactions outstanding between them. It requires the analysis twice a year of the possibility to compress derivatives portfolios. Nordea will contact customers with whom any Nordea legal entity has more than 500 outstanding OTC derivatives to agree the necessary procedures.

Please contact emir@nordea.com at your earliest convenience if you do not believe you have received a Risk mitigation requirements letter from Nordea.

 

Counterparty categorisation

EMIR requires the categorisation of counterparties as Financial Counterparty (FC), Non-Financial Counterparty below the clearing thresholds (NFC-) or Non-Financial Counterparty above the clearing threshold (NFC+). The table below outlines the clearing threshold per asset class, which is defined as gross notional amount of non-risk reducing OTC derivatives held. All but the very largest corporates with substantial trading activity will be labelled NFC-.
NFC clearing thresholds
Asset class Gross notional amount outstanding
Commodity € 3 billion
Credit € 1 billion
Equity € 1 billion
Foreign exchange € 3 billion
Interest rate € 3 billion

Trade Repository reporting

Trade Repository reporting (Live)

  • Reporting obligation
    All derivatives counterparties have a responsibility to ensure that information about their derivatives transactions are reported to a licensed trade repository, which is essentially a database that regulators use to monitor the derivatives market. The EMIR reporting obligation started on 12th February 2014, and applies to any trade that has been outstanding after 15th August 2012. As with all EMIR requirements private individuals are excluded from the reporting obligation.Both counterparties to a derivatives transaction are under a legal obligation to ensure that the transaction is reported, when entered into, modified or terminated, to a trade repository. The transaction has to be reported no later than the working day following such conclusion, modification or termination. The operational reporting (but not the legal responsibility) can be delegated to the transaction counterparty or to a third party, in which case the delegating counterparty is able to ensure that the reported trades and values are correct by getting a user-license to the specific trade repository.
  • LEI code
    When transactions are reported to a trade repository the counterparties to the transaction must be identified by a Legal Entity Identifier (LEI). LEI is a new identifier unique for each legal entity developed globally to identify counterparties to financial transactions as well as for other purposes.
    Obtaining a LEI is the responsibility of each counterparty to a derivatives transaction. If the customer has not obtained a LEI, Nordea cannot guarantee that the transactions Nordea report on behalf of the customer to the trade repository can be reconciled and sent further on to the regulators.Please visit the LEI section for more information.
  • Nordea’s offering
    To reduce the effort of customers and help ensure fulfilment of the reporting requirement, Nordea offers reporting to trade repositories on behalf of customers for all trades executed directly with Nordea. Nordea’s reporting is an operational service only and it is the responsibility of the customer that the reported information is correct and complete in compliance with the EMIR regulation (see above).
    Nordea reports to the following trade repositories


Nordea has sent out letters with information and conditions for the reporting service to most existing customers. If you don’t have access to such information and conditions for the service, please contact TradeRepositoryTeam@nordea.com. For new customers the reporting to a trade repository needs to be agreed before the first trade is executed.

Please contact TradeRepositoryTeam@nordea.com if you have any questions about Trade repository reporting or Nordea’s reporting service.

Bilateral margin requirements

Margin requirements for non-cleared OTC derivatives

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 application date for variation margin is 1 March 2017. The initial margin requirement is being phased-in from 1 September 2016 to September 2020 (1st wave of IM deadline was postponed to 3 February 2017).

Eligible forms of collateral that may be used as margin are generally broad, although certain rules require cash only. Some forms of collateral are also subject to a value “haircut”. Nordea will continue to have its own requirements and policies with regard to the collateral it can accept.

Exemptions

There are some product exemptions, as well as exemptions for certain inter-affiliate transactions, however, these exemptions may vary across jurisdiction. In the EU, the following products are exempted from the margin requirements:

  • There are no IM requirements for physically settled FX forwards and FX swaps, and for the exchange of principal in cross-currency swaps. However, IM is still required for the relatively small exposures created by the interest rate component of cross-currency swaps.
  • Physically settled FX forwards are exempted from VM requirements until the earlier of 31 Dec 2018 or the publication of the MiFID II technical definition, whichever date comes first.
  • FX spot is excluded from VM and IM requirements.

New credit support documentation

In order to continue trading after 1 March 2017, at least all new trades must be subject to an ISDA Credit Support Annex or a Nordea Master Credit Support Annex (CSA) which is compliant with the new variation margin requirements.

In addition, all old CSAs need to be amended at least with regard to new trades in order to fulfil the regulatory requirements. The amendment can be done for example as an amendment agreement to the old CSA or by entering into a completely new variation margin CSA. The selected method in each case is subject to Nordea’s and the counterparty’s preferences.

The date from when the CSA must be compliant with the initial margin requirements depends on if and when the counterparty to Nordea is above any of the set tresholds for non-cleared derivatives.

Please contact emir@nordea.com if you have questions about any of the above

CCP Clearing

When is Clearing mandatory?

The clearing obligation applies to all OTC derivatives of a class that is subject to the clearing obligation. Clearing of Interest Rate derivatives has started and Credit derivatives are to follow. Actual timelines for the clearing of certain foreign exchange, equity and commodity derivatives are not yet firm.

Counterparties in scope for clearing

Financial Counterparties (FC) and Non-Financial Counterparties above the clearing threshold (NFC+) will be required to clear standardised OTC derivatives.

A bilateral trade in an OTC derivative subject to the clearing obligation is mandatory if the bilateral trade is entered into between any combination of FC and NFC+ parties, given that one or more of the parties involved in the transaction is established in the EEA:

  • Two financial counterparties (FCs)
  • A FC and a non-financial counterparty which exceeds the clearing thresholds (NFC+)
  • Two NFC+s
  • A FC or NFC+ and a non-EEA entity that would be subject to the clearing obligation if it would be established in the EEA.

Pension funds have been granted an exemption until 15th August 2017. The exemption could be extended further.

Where is clearing done?

Clearing is performed at a central clearing counterparty (hereafter CCP).

What does clearing mean?

For the customers this means that instead of having a bilateral trade with Nordea, the customer will have a cleared trade with the CCP. The CCP becomes the seller to all buyers and buyer to all sellers and thereby becomes the legal counterparty to each of the original trading counterparties. Clearing involves the posting and receiving of collateral, both Initial Margin to protect the CCP from the default of the counterparty and Variation Margin to settle daily market value changes of the trades of the counterparty. Most large banks will become direct clearing members at a CCP, but smaller market participants will typically become clients of a clearing broker.

When does the clearing obligation start?

The timing and scope of these requirements depend on CCP clearing membership and, for non-clearing member financial counterparties, the size of non-cleared OTC derivatives gross notional amounts.

Interest rate swaps

Nordea is classified as a Category 1 counterparty and will CCP clear accordingly.

There is a phase-in period for the clearing obligation depending on the type of counterparty. There is also a frontloading obligation for Category 1 and Category 2 counterparties.
The frontloading obligation means there is the requirement to clear certain trades before the effective start date.

Interest Rate Derivatives in G4 currencies (EUR, GBP, JPY and USD)
Clearing categories Counterparties belonging to the clearing category Start date for clearing obligation Frontloading obligation Start date for frontloading
Category 1 Clearing members of CCPs 21 Jun 2016 YES 21 Feb 2016
Category 2 Non-clearing members which are either Financial counterparties or Alternative investment funds (non-financial counterparty) with a gross notional amount of non-cleared OTC derivatives exceeding €8 billion 21 Dec 2016 YES 21 May 2016
Category 3 Non-clearing members which are either Financial counterparties or Alternative investment funds (non-financial counterparty) with a gross notional amount of non-cleared OTC derivatives below €8 billion 21 Jun 2017 NO
Category 4 Non-clearing member non-financial counterparties above the clearing thresholds (NFC+) not included in category 1, 2 or 3. 21 Dec 2018 NO

Note: These products are Basis swaps, Fixed-to-float swaps, FRAs and OIS.

 

Interest Rate Derivatives in non-G4 European currencies (SEK, NOK and PLN)
Clearing categories Counterparties belonging to the clearing category Start date for clearing obligation Frontloading obligation Start date for frontloading
Category 1 Clearing members of CCPs 9 Feb 2017 YES 9 Oct 2016
Category 2 Non-clearing members with a gross notional amount of non-cleared OTC derivatives exceeding €8 billion 9 Aug 2017 YES 9 Oct 2016
Category 3 Non-clearing members with a gross notional amount of non-cleared OTC derivatives below €8 billion 9 Feb 2018 NO
Category 4 Non-clearing member, non-financial counterparties above the clearing thresholds; NFC+ 9 August 2019 NO

Note: These products are Fixed-to-float swaps and FRAs.

Credit Default Swaps

Nordea is classified as a Category 2 counterparty and will CCP clear accordingly.
 
There is a phase-in period for the clearing obligation depending on the type of counterparty. There is also a frontloading obligation for Category 1 and Category 2 counterparties.
The frontloading obligation means there is the requirement to clear certain trades before the effective start date.

Credit Default Swaps (Specific index credit swaps and single name CDS)
Clearing categories Counterparties belonging to the clearing category Start date for clearing obligation Frontloading obligation Start date for frontloading
Category 1 Clearing members of CCPs 9 Feb 2017 YES 9 Oct 2016
Category 2 Non-clearing members with a gross notional amount of non-cleared OTC derivatives exceeding €8 billion 9 Aug 2017 YES 9 Oct 2016
Category 3 Non-clearing members with a gross notional amount of non-cleared OTC derivatives below €8 billion 9 Feb 2018 NO
Category 4 Non-clearing member, non-financial counterparties above the clearing thresholds; NFC+ 9 May 2019 NO

Note: These products are Index CDS.

If the OTC derivatives transaction is entered into by counterparties in different clearing categories, the date from which the clearing obligation will apply is the latest date.

What does it require to trade and clear with Nordea?
To guarantee the ability to trade and clear with Nordea at a CCP the following must apply:

  • Inform Nordea about your Clearing Category via traderepositoryteam@nordea.com or your daily contact person.
  • Ensure that you have entered into a Clearing Execution Agreement with Nordea in order to be able to execute OTC derivative trades subject to the clearing obligation.
  • Ensure that you are connected to a Central Counterparty (CCP) directly or via a clearing broker in case you expect to trade OTC derivatives that are subject to the clearing obligation.

More information?
https://www.esma.europa.eu/regulation/post-trading/otc-derivatives-and-clearing-obligation (ESMA website)
https://www.esma.europa.eu/sites/default/files/library/public_register_for_the_clearing_obligation_under_emir.pdf (ESMA public register for the clearing obligation)
https://www.esma.europa.eu/databases-library/esma-library (ESMA Library)

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