Which regulatory approach does EMIR employ to mitigate financial risks?

The correct answer highlights the essence of the European Market Infrastructure Regulation (EMIR), which is focused on mitigating financial risks primarily associated with derivatives trading. EMIR specifically implements measures to manage systemic counterparty risks, which are risks that could affect the entire financial system due to interconnectedness among financial entities.

One of EMIR's main goals is to reduce the risk of default by requiring that counterparties to over-the-counter derivatives trades use central clearinghouses. These clearinghouses act as intermediaries that manage and mitigate the risks involved in these trades, thus providing a safety net for the financial system. Additionally, EMIR mandates transparency through trade reporting to improve the oversight and monitoring of these transactions, which further helps to manage risks in the market.

The other approaches mentioned in the options do not accurately reflect the regulatory focus of EMIR. For instance, creating risk-free trading environments is an unrealistic goal within financial markets, as all investments entail some level of risk. Regulating only stock market investments limits the scope of EMIR, which primarily targets the derivatives market and not just equities. Lastly, while there are indeed regulations in place, EMIR does not position itself as a hierarchical structure of regulations but rather as a comprehensive framework aimed directly at counterparty risk in the context