Background to the regulation
The European Market Infrastructure Regulation on derivatives, central counterparties and trade repositories (EMIR) formed a key element of the EU’s response to the credit crisis in 2007/08.
Financial system in turmoil
During the credit crisis, AIG had written derivative exposures on credit default swaps to the tune of $US440bn. That means they insured $US440bn of subprime debt which, if it suddenly lost its value, would mean a huge bill for AIG. As we know the music did stop and AIG amongst others put the entire financial system into jeopardy.
When the music stopped, no one knew what was going on, who owed who, who was solvent and who wasn’t. Even within AIG it was impossible to know what the real position was. This meant that securing funding or even a fire-sale of assets was virtually impossible.
G20 intervention and action
The financial system was on its knees and without governmental intervention at a massive cost to the taxpayer, the financial system would have collapsed.
In September 2009 in the wake of the crisis, finance ministers and central bank governors from 20 of the major economies known as the G20 met in Pittsburgh and agreed to take coordinated action to reduce the likelihood and the impact of future financial crises.
Tougher regulatory bodies
Within Europe, a revised system of financial supervision was initiated with the formation of the European Supervisory Authorities (ESAs). These new centralised regulatory bodies replaced the Committees of Supervisors, with the members drawn from national regulatory authorities. Responsibility for elements of regulatory supervision were therefore transferred from national authorities such as the Financial Services Authority (FSA) in the UK to the new European supervisory bodies:
- European Banking Authority (EBA, taking over from the former Committee of European Banking Supervisors);
- European Insurance and Occupational Pensions Authority (EIOPA, succeeding the Committee of European Insurance and Occupational Pensions Supervisors);
- European Securities and Markets Authority (ESMA, succeeding the Committee of European Securities Regulators), and
- European Systemic Risk Board (ESRB), under the responsibility of the European Central Bank.
Within this context of restructured regulatory architecture, the European Commission implemented a new piece of legislation, EMIR, which was to be supported by binding technical and regulatory standards to be published by ESMA.
These changes formed the basis of the EU’s response to the financial crisis whilst the Dodd-Frank regulatory reforms were enacted in the US.