Ireland: EMIR Refit – Are You Clear On Its Clearing (And Other) Implications?

Last Updated: 10 May 2019
Article by Phil Cody, Aiden Small, Brendan Wallace and Barry Sexton
Most Read Contributor in Ireland, May 2019

EMIR is being amended, and the changes (known as EMIR Refit) could be in force as early as the end of May 2019.

This briefing considers the impact of EMIR Refit on over-the-counter derivative contracts, from the perspective of both financial counterparties and non-financial counterparties. In particular, it sets out the calculation and notification obligations that will go live on the date that EMIR Refit comes into force.

EMIR IS BEING AMENDED

The European Market Infrastructure Regulation (EMIR) is being amended, and the changes (known as EMIR Refit) could be in force as early as the end of May 2019.

EMIR Refit is generally regarded as a positive development for smaller derivatives users and relaxes some of the current EMIR obligations. However, market participants (including infrequent users of derivatives) will need to be ready to calculate their volumes of over-the-counter (OTC) derivatives contracts and, if necessary, prepare for regulatory notifications and clearing, from the date that EMIR Refit comes into force.

AMENDED DEFINITION OF FINANCIAL COUNTERPARTIES

EMIR Refit will widen the definition of "financial counterparty" to include:

  • all alternative investment funds (AIFs) established in the EU (EMIR currently categorises, as financial counterparties (FCs), only those AIFs managed by an alternative investment fund manager (AIFM) authorised or registered under the Alternative Investment Fund Managers Directive); and
  • all central securities depositaries authorised under the Central Securities Depositaries Regulation.

EMIR Refit will specifically exclude the following from the definition of "financial counterparty":

  • UCITS and AIFs set up exclusively to service employee share purchase plans; and
  • an AIF that is a securitisation special purpose entity (if, where relevant, its AIFM is established in the EU).

FINANCIAL COUNTERPARTIES AND CLEARING UNDER EMIR REFIT

The current position under EMIR

Under EMIR, an FC is subject to the clearing obligation in respect of all OTC derivative contracts, irrespective of their aggregate value.

The clearing obligation is already live for 'Category 1' and 'Category 2' FCs.

The clearing obligation for 'Category 3' FCs takes effect on 21 June 2019. 'Category 3' FCs are those whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives is equal to or below €8 billion, subject to certain conditions.

The position under EMIR Refit – clearing exemption for "small financial counterparties"

Under EMIR Refit, a specific type of FC, commonly referred to as a "small financial counterparty" (referred to in this briefing as an SFC) will be exempt from the clearing obligation.

The clearing thresholds for the SFC exemption under EMIR Refit to apply are:

  • €1 billion in gross notional value for credit derivatives contracts;
  • €1 billion in gross notional value for equity derivatives contracts;
  • €3 billion in gross notional value for interest rate derivative contracts;
  • €3 billion in gross notional value for foreign exchange derivative contracts;
  • €3 billion in gross notional value for commodity and other OTC derivative contracts.

FC may carry out annual calculation

Under EMIR Refit, an FC that has taken positions in OTC derivative contracts may calculate, every 12 months, its aggregate month-end average position for the previous 12 months.

That calculation must include all OTC derivative contracts (speculative or hedging):

  • entered into by that FC; or
  • entered into by any member of the group to which the FC belongs.

For UCITS and AIFs, the calculation is at fund level and where the UCITS management company manages more than one UCITS, or where the AIFM manages more than one AIF, they must be able to show that the calculation at fund level doesn't result in:

  • a systematic underestimate of the positions of the funds that they manage, or the positions of the manager; and
  • the clearing obligation being circumvented.

If, once an FC makes this calculation, none of the above clearing thresholds are exceeded, that FC will be an SFC and will be exempt from clearing. It will, however, still be subject to EMIR's variation margin requirements.

Regulatory Forbearance for SFCs

ESMA previously acknowledged the potential difficulties that SFCs would face if EMIR Refit, which will exempt them from the clearing obligation, is not in force by 21 June 2019 (the deadline for certain SFCs (i.e. 'Category 3' FCs) to start clearing and trading some of their OTC derivative contracts on trading venues). In a recent statement, it encouraged regulatory forbearance.

(Read our recent briefing for further information: EMIR Update: Small financial counterparties – ESMA statement regarding clearing and trading obligations.)

Notification and Clearing

If an FC:

  • does not make the above calculation on time or at all, or
  • makes the calculation and any clearing threshold is exceeded,

that FC (an FC+) must immediately notify the Central Bank of Ireland (CBI) and ESMA and make arrangements to clear (within 4 months) all OTC derivative contracts entered into with either another FC+, or with an NFC+ (see below in relation to NFC+).

Timing for Calculation and Notification

ESMA recently clarified that the date on which the above calculation should first be made is the date that EMIR Refit enters into force (and every 12 months thereafter). If an FC elects not to make the calculation, or makes the calculation and any clearing threshold is exceeded, it must notify the CBI and ESMA on the date that EMIR Refit enters into force.

An FC+ can subsequently become an SFC (and thereby become exempt from the clearing obligation) if it can demonstrate that its aggregate month-end average position for the previous 12 months does not exceed any clearing threshold.

Action Required

FCs will need to be in a position to make the above calculation on the date that EMIR Refit enters into force and, if required, to make the necessary notifications to the CBI and ESMA.

Other notable points

  • Pension Schemes

The temporary exemption from the clearing obligation for pension scheme arrangements (PSAs) will be extended for a further 2 years. It should be noted that some PSAs may be SFCs, and may benefit from the SFC exemption from clearing.

  • Frontloading

EMIR Refit will remove the 'frontloading' obligation i.e. the requirement to clear OTC derivative contracts entered into before the related clearing obligation takes effect.

  • Margining for Foreign Exchange (FX)

EMIR Refit will include a recital acknowledging that the need for international convergence means that mandatory exchange of variation margin on FX forwards and FX swaps should (for physically-settled FX) be limited to transactions between the most systemic counterparties (i.e. credit institutions and investment firms).

FCs – ADDITIONAL POINTS TO NOTE ON REPORTING

  • Backloading

The 'backloading' obligation will be removed by EMIR Refit. (Read our recent briefing for further information: EMIR Update: Small financial counterparties – ESMA statement regarding clearing and trading obligations.)

  • Responsibility for Reporting
    • Where an FC transacts with an NFC-, EMIR Refit provides the FC will be responsible and liable for reporting (for an NFC+, or an NFC- that chooses to report, the NFC will continue to be responsible and liable).
    • EMIR Refit clarifies that for:
      • OTC derivative contracts entered into by a UCITS, the management company will be solely responsible and liable for reporting.
      • OTC derivative contracts entered into by an AIF, the AIFM will be solely responsible and liable for reporting.
      • OTC derivative contracts entered into by an institution for occupational retirement provision (IORP) without legal personality, the authorised entity responsible for its management will be responsible and liable for reporting.

NON-FINANCIAL COUNTERPARTIES AND CLEARING UNDER EMIR REFIT

The current position under EMIR

Under EMIR, non-financial counterparties (NFCs) must, where any clearing threshold has been exceeded (the clearing thresholds are set out earlier in this briefing), clear all OTC derivative contracts, irrespective of whether or not they belong to a class for which the clearing threshold has been exceeded.

The position under EMIR Refit

EMIR Refit will allow NFCs to clear only those OTC derivative contracts which relate to the asset class for which the clearing threshold is exceeded. NFCs above a clearing threshold will still be required to exchange margin for OTC derivative contracts for which the clearing obligation is not exceeded.

Calculation

Under EMIR Refit, NFCs, like FCs, that have taken positions in speculative OTC derivative contracts may calculate, every 12 months, their aggregate month-end average position for the previous 12 months. If:

  • the calculation is made on time, and no clearing threshold is exceeded, the NFC (an NFC-) is not required to clear its OTC derivative contracts (and is also exempt from mandatory margin rules);
  • the calculation is made and one or more clearing thresholds are exceeded, the NFC (an NFC+) must notify the CBI and ESMA and make arrangements to clear (within 4 months) all OTC derivative contracts relating to the asset class(es) for which the clearing threshold is exceeded;
  • the calculation is not made on time or at all, the NFC (an NFC+) must notify the CBI and ESMA and make arrangements to clear (within 4 months) all OTC derivative contracts.

Timing

As mentioned above, ESMA recently clarified that the date on which the above calculation should first be made is the date that EMIR Refit enters into force (and every 12 months thereafter). If an NFC elects not to make the calculation, or makes the calculation and any clearing threshold is exceeded, it must notify the CBI and ESMA on the date that EMIR Refit enters into force.

An NFC+ can subsequently become exempt from the clearing obligation if it can demonstrate that its aggregate month-end average position for the previous 12 months does not exceed a clearing threshold.

Action Required

NFCs will need to be in a position to make the above calculation on the date that EMIR Refit enters into force and, if required, to make the necessary notifications to the CBI and ESMA.

NFCS – ADDITIONAL POINTS TO NOTE ON REPORTING

  • Backloading

The 'backloading' obligation will be removed by EMIR Refit. (Read our recent briefing for further information: EMIR Update: Small financial counterparties – ESMA statement regarding clearing and trading obligations.)

  • Intra-Group Exemption

An exemption from the reporting obligation is available for intra-group transactions where:

  • at least one counterparty is an NFC;
  • both counterparties are fully consolidated;
  • both counterparties are subject to appropriate centralised risk evaluation, measurement and control procedures; and
  • the parent undertaking is not an FC.

Counterparties must notify the CBI of their intention to apply this exemption.

  • Responsibility for Reporting

Where an FC transacts with an NFC-, EMIR Refit provides the FC will be responsible and liable for reporting (for an NFC+, or an NFC- that chooses to report, the NFC will be responsible and liable).

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.

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
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
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