What is European Market Infrastructure Regulation?
European Market Infrastructure Regulation was created to improve transparency and reduce the risks associated with the derivatives market. The regulation was introduced by the EU in 2012 and is specifically designed to control over-the-counter (OTC) derivatives, which are private trades conducted between two parties without the supervision of an exchange.
Where have you heard about European Market Infrastructure Regulation?
While you may not have heard of European Market Infrastructure Regulation directly, you may be aware that operational and counterparty risks in the over-the-counter derivatives market were identified as a contributing factor to the global financial crisis of 2008.
What you need to know about European Market Infrastructure Regulation.
European Market Infrastructure Regulation is relevant to any party that trades derivatives, no matter what their size or location. It applies to regulated and non-regulated parties and can be applied to any form of derivative contract including interest rate, foreign exchange, equity, credit and commodity derivatives.
It requires that all parties entering into a derivative contract perform the following actions:
- Report every derivative contract to a trade repository
- Implement new risk management standards for all over-the-counter derivatives not subject to mandatory clearing
- Where clearing is mandatory, clear through a central counterparty clearing house (CCP), which assumes the majority of the risk for both parties.
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