European Union: EMIR Refit Update

Regulation (EU) No 648/2012 (“EMIR”)1 imposed a range of obligations which can apply to counterparties trading in derivatives, including a clearing obligation, risk mitigation obligations (including the exchange of collateral) and a reporting obligation. In 2017, following a review of the effectiveness of EMIR, the European Commission published a proposal for a new regulation to amend EMIR, with the aim of making the legislation operate in a more proportionate, efficient and effective manner. The new Regulation (“EMIR Refit”) has now been published in the Official Journal of the EU and the majority of its provisions will come into force on 17 June 2019.

The purpose of this note is to explain some of the key changes resulting from EMIR Refit.

Changes to the definition of financial counterparties

Perhaps the most important change under EMIR Refit is to the definition of a “financial counterparty” (“FC”). It brings into the definition all alternative investment funds (“AIFs”), that are either established in the EEA or whose investment manager is authorised/registered under Directive 2011/61/EU on Alternative Investment Fund Managers (“AIFMD”).2

Notably, the FC definition will effectively ensnare non-EU AIFs managed by non-EU managers when they are a counterparty to an EU FC. Previously, such funds were usually determined to be third country entities (“TCEs”) that would be non-financial counterparties (“NFCs”) if they were established in the EU, meaning that such funds would be out of scope of the clearing obligation and risk mitigation obligations (subject to the fund not exceeding the relevant clearing threshold for NFCs) when dealing with EU FCs. Under the amended definition of a FC in EMIR Refit, such funds will now be regarded as TCEs that would be FCs if they were established in the EU, meaning that EU FC will be required to ensure compliance with the clearing obligation and margin requirements for uncleared derivatives in respect of their trading with such funds.

An AIF is defined widely in the AIFMD, as:

collective investment undertaking, including investment compartments thereof, which raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors” . . . . (and is not an UCITS).

There are, however, two important exemptions from the amended FC definition, for employee share purchase schemes and for securitisation special purpose entities (“SSPEs”). SSPEs are defined in AIFMD as:

entities whose sole purpose is to carry on a securitisation or securitisations within the meaning of Article 1(2) of Regulation (EC) No 24/2009 of the European Central Bank of 19 December 2008 concerning statistics on the assets and liabilities of financial vehicle corporations engaged in securitisation transactions and other activities which are appropriate to accomplish that purpose

The classification of any AIF as an FC is significant as it determines the application of key EMIR obligations, such as clearing and margin and other risk mitigation requirements.

Non-EU fund managers can expect to be contacted by their EU broker-dealers to discuss how to deal with a possible change of classification. These changes will also have an immediate impact on AIFs with respect to new OTC derivatives transactions, as EU bank counterparties may need to put in place arrangements satisfy clearing or margin requirements under EMIR.

Clearing Threshold for FCs

Under EMIR, all FCs are subject to the clearing obligation regardless of the volume of derivatives trading they carry on. In recognition of the fact that some FCs have a volume of activity in OTC derivatives that is too low to pose a systemic risk, EMIR Refit introduces clearing thresholds for FCs. The levels of the thresholds are the same as the current NFC clearing thresholds.3 However, unlike in the clearing thresholds for NFCs, FCs cannot exclude their hedging transactions from the threshold calculations, and once the threshold under one asset class is exceeded, all OTC derivatives become clearable.

FCs can choose not to calculate whether they exceed the clearing thresholds (i.e., institutions with big books of derivatives can choose not to perform those calculations). Those FCs that choose to calculate whether they exceed the thresholds (i.e., entities that wish to be categorised as “small FCs”) have to perform such calculations every 12 months, to provide an aggregate month-end average for the previous 12 months. Should the relevant thresholds be exceeded, the FC will have to: (i) notify ESMA and the relevant competent authority, (ii) establish clearing arrangements within four months of the notification, and (iii) become subject to clearing for all its OTC derivative contracts entered into or novated more than four months after such notification.

The FC threshold calculations are to be performed at a group level, except that for UCITS and AIFs, the positions have to be calculated at the level of the fund.

A FC remains subject to the current clearing obligation until they demonstrate to the relevant competent authority that the calculation of the aggregate month-end position for the previous 12 months does not exceed the relevant clearing thresholds.

The new clearing thresholds are now effective and FCs that exceed the clearing threshold must, as of 17 June 2019, notify ESMA or the relevant competent authority of the result of their calculation of aggregate month-end notional positions in OTC derivatives for the previous 12 months.

Margin Requirements

The requirement to exchange margin in respect of uncleared OTC derivatives will apply to all FCs, regardless of whether the clearing threshold has been exceeded. As previously, margin requirements will also apply to NFCs which have exceeded the clearing threshold.

Reporting obligation

Under the original EMIR rules, both NFCs and FCs were under an obligation to report their trades to authorised trade repositories. Under EMIR Refit, the FC (or the manager, in the case of an EU AIF) will be solely responsible, and “legally liable” for such reporting, albeit NFCs will be under an obligation to provide to their FC counterparty those relevant details that the FC cannot be reasonably expected to hold.

A NFC which is below the clearing threshold does not have to report if:

  • it is facing a third country FC;
  • the legal regime or reporting to which that third country FC is subject has been declared equivalent;
  • the third country FC has reported to a repository that is subject to a legally valid and enforceable obligation to grant EU regulators access to data.

The new reporting provisions will apply from 18 June 2020.

FX forwards and swaps

Given that FX forwards and swaps are within the scope of variation margin, it is notable that recital 21 of the EMIR Refit speaks of the need to restrict mandatory exchange of variation margins on physically settled FX forwards and swaps to transactions between the most systemic counterparties. EMIR Refit does not contain a rule to that effect, but this recital flags potential regulatory forbearance in this regard.

CCP models; Clearing access

CCPs will have to provide clearing members (“CMs”) with tools to simulate their initial margin requirements and with an overview of the initial margin model used by the CCP. This rule will apply from 18 December 2019.

CMs will be obliged, under EMIR Refit, to provide clearing services under “fair, reasonable, non-discriminatory and transparent commercial terms”. The European Commission is empowered to adopt further secondary legislation to specify the requirements for these terms and conditions. CMs will not, however, be required to provide services to all clients on the same terms. These rules will apply from 18 June 2021.

FCA notification forms

In the UK, the following new or amended notifications relating to derivatives will have to be submitted to the FCA (as well as ESMA in some cases):

  • FC clearing obligation notification: a new notification which relates to FCs exceeding or ceasing to exceed the relevant clearing thresholds, as well as those choosing not to calculate their positions against those thresholds.
  • NFC clearing obligation notification: an amended notification which relates to NFCs exceeding or ceasing to exceed the relevant clearing thresholds.

Both this and the FC clearing notification above may be submitted using the FCA clearing obligation notification form, which can be used to submit notifications relating to both the NFC and FC clearing obligations.

  • Reporting exemption notification: a new notification which relates to a reporting exemption for certain intragroup OTC derivatives with an NFC. This notification may be submitted using a new standalone form.

The FCA-required notifications not changed by EMIR REFIT are those relating to:

  • disputes notifications;
  • intragroup exemptions from clearing; and
  • intragroup exemptions from bilateral margining.

In order to simplify the set of FCA systems that firms need to interact with in order to meet their various regulatory obligations, the FCA is moving the current EMIR Portal onto its universal platform, Connect.

Brexit

EMIR Refit will enter into force before the UK leaves the EU. UK entities will be subject to the new rules, but it remains to be seen how they will be treated after the UK leaves the EU. That is because - assuming the UK leaves with a deal - under the EU Withdrawal Agreement, EU laws will continue to apply in the UK until the end of 2020 (subject to possible extensions to the transition period). After that period (or on 31 October 2019 in the case of a “no-deal” Brexit), (i) UK entities will become TCEs for the purposes of amended EMIR, and (ii) UK laws will apply, while EU laws that have been “onshored” may be changed, subject to the outcome of any EU-UK negotiations and any new UK regulatory policy initiatives.

Next steps

Managers of AIFs should reassess their status and:

  • prepare to notify ESMA and the relevant national regulator of “small FC” status, if any,
  • assess their compliance with margin and other risk mitigation requirements under EMIR;
  • revisit their counterparty representations in derivatives documentation, especially if the AIF is a TCE; and
  • review any guidance or protocols produced by ISDA address the changes in EMIR Refit.

Footnote

1   https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32012R0648.

2   https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32011L0061.

3   Euro 1bn in gross notional value for each of OTC credit and equity derivatives and Euro 3bn in gross notional value for each of OTC interest rate, FX, commodity and other OTC derivatives.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions