European Market Infrastructure Regulation (“EMIR”)

EMIR: “Too Big To Fail”, Again?

“…just to give you an idea of the actual impact of Lehman Brothers, we can consider the figures published by one of the Lehman’s counterparties: Merrill Lynch, which in the third quarter of 2008 disclosed a US$2 billion pre-tax trading loss, which was mainly due to the unwinding of trades for which Lehman Brothers was a counterparty. Merrill Lynch was only one of the hundreds of counterparties of Lehman, so the aggregate impact on counterparties’ losses of Lehman’s default was much bigger than the one generally used.[1]

This telling quote is from a speech given by Steven Maijoor on March 27, 2013, the then chair of the European Securities and Markets Authority (“ESMA”), in which he is describing the violent aftermath of the Lehman collapse whose financial tremors nearly brought down the West’s financial system.

This alert focuses on the European Market Infrastructure Regulation (or “EMIR” as it is better known[2]) which was introduced as the equivalent of the Dodd-Frank Act of 2010, to address a wide range of issues, many of which were said to be linked to the problems identified in the over the counter (“OTC”) derivatives market[3] following the collapse of Lehman. However, as we set out below, there are serious questions which arise as to the effectiveness of EMIR and the implications of the seismic changes in the OTC market.