Managing liquidity risk under EMIR
The European Market Infrastructure Regulation (EMIR) aims to reform the derivatives market for the main purpose of reducing systemic risks as seen in the recent crisis.
It entails a large number of rules which can have significant impact on insurers. The rules intend to decrease counterparty risk in order to increase the stability of the financial system. The most important rules are:
- Reporting obligation applicable to all derivatives transactions to a trade repository.
- Central clearing for most Over-The-Counter (OTC) derivatives, especially interest rate derivatives like swapsand swaptions.
- Obligation to apply risk-mitigation techniques for derivatives that are not centrally cleared.
The implementation of these rules has an impact on the need for collateral and liquidity of parties trading derivatives. Moreover the rules have operational and legal implications.