The European Market Infrastructure Regulation (EMIR) is a regulatory framework established by the European Union (EU) to regulate over-the-counter (OTC) derivatives markets and improve transparency, risk management, and stability within the European financial system. EMIR was introduced as a response to the global financial crisis of 2008 and the role played by derivatives in exacerbating systemic risk. It aims to mitigate these risks by imposing regulatory requirements on parties involved in derivative transactions. Here are the key components and objectives of EMIR:

1. Central Clearing: EMIR mandates that standardized OTC derivative contracts, such as interest rate swaps and credit default swaps, must be centrally cleared through central counterparties (CCPs). Clearing houses act as intermediaries, standing between the buyer and seller to guarantee the performance of the contract. This reduces counterparty risk and promotes market stability.

2. Reporting: EMIR requires both counterparties to derivative transactions to report details of these transactions to trade repositories, which are entities responsible for collecting and storing trade data. The reporting includes information about the derivative contract, the parties involved, and the terms and conditions.

3. Risk Mitigation Techniques: EMIR sets out risk mitigation techniques that counterparties must implement, including timely confirmation of trades, portfolio reconciliation, and dispute resolution procedures. These measures are designed to minimize operational and credit risks associated with derivative transactions.

4. Operational and Record-Keeping Requirements: EMIR imposes operational requirements on market participants to ensure the proper functioning of the derivatives market. This includes maintaining comprehensive records of all derivative contracts and relevant data.

5. Classification of Entities: EMIR classifies market participants into different categories, including financial counterparties (such as banks and investment firms) and non-financial counterparties (such as corporations). Different regulatory requirements apply to each category based on their risk profile and trading activities.

6. Risk Mitigation for Non-Financial Counterparties: Non-financial counterparties that exceed certain thresholds in their derivative trading activities may be subject to additional risk mitigation requirements, such as posting collateral for uncleared OTC derivative contracts.

7. Extraterritoriality: EMIR has extraterritorial reach, meaning that it applies not only to EU entities but also to non-EU entities trading with EU counterparties. Non-EU firms that conduct derivative trades with EU entities must comply with certain EMIR requirements.

8. Penalties and Enforcement: EMIR establishes penalties for non-compliance with its provisions, which may include fines and other regulatory actions. National competent authorities within EU member states oversee compliance and enforcement.

9. Reporting to Regulators: EMIR requires that relevant data, including information on risk exposure, be reported to regulators. This enables regulators to monitor systemic risk and take appropriate actions to safeguard the financial system.

10. Regulatory Oversight: The European Securities and Markets Authority (ESMA) plays a central role in the supervision and enforcement of EMIR across EU member states. It provides guidance, standards, and advice to national regulators.

EMIR has significantly improved transparency, reduced counterparty risk, and increased regulatory oversight in the OTC derivatives market within the EU. It aims to enhance the stability and safety of financial markets, protect investors, and reduce the risk of another financial crisis. EMIR has also influenced regulatory reforms in derivatives markets worldwide, as global regulators seek to harmonize rules and mitigate systemic risk.