United States: ESMA Consults On The Extra-Territorial Application Of EMIR

Last Updated: August 15 2013
Article by Assia Damianova and Nick Shiren

Most Read Contributor in United States, September 2017

On 17 July 2013, the European Securities and Markets Authority ("ESMA") published a consultation paper (the "Consultation Paper")1 on draft regulatory technical standards ("RTS") aimed at implementing certain provisions of the European Markets Infrastructure Regulation2 ("EMIR") relating to (a) the extraterritorial application of EMIR, and (b) preventing the evasion of EMIR's provisions.


EMIR was adopted on 4 July 2012 and entered into force on 16 August 2012. EMIR introduces provisions to improve transparency, establish common rules for central counterparties and for trade repositories and to reduce the risks associated with the OTC derivatives market. In particular, EMIR provides for obligations to centrally clear OTC derivative contracts and to apply risk mitigation techniques to uncleared swaps such as the exchange of collateral. These obligations apply in a variety of circumstances including in respect of certain OTC derivative contracts between two entities established in one or more third countries that would be subject to the clearing obligation if they were established in the EU, provided that the contract has "a direct, substantial and foreseeable effect within the [EU]" or where "such an obligation is necessary or appropriate to prevent the evasion of any provisions of [EMIR]"3. Article 4(4) of EMIR requires ESMA to develop draft RTS specifying the contracts that are considered to have a direct, substantial and foreseeable effect within the EU and the cases where it is necessary or appropriate to prevent the evasion of any provision of EMIR. The draft RTS have been developed against the backdrop of the ongoing process of recognition of "equivalence"4 under which the requirements of EMIR can be dis-applied where at least one of the counterparties is located in a third country where the legal, supervisory and enforcement arrangements of that third country are declared equivalent.

Direct, substantial and foreseeable effect within the EU


ESMA has taken the view that where an OTC derivative contract is entered into by a third country counterparty benefiting from a guarantee issued by an EU guarantor, the OTC derivative contract would have a direct effect in the EU – that is, where the guarantor is established.

However, ESMA proposes limiting the scope of guarantee arrangements which would have a direct effect in the EU to those:

  • issued by EU-established financial counterparties5;
  • that both:
  • reach or exceed a significant monetary value (in this regard, ESMA has proposed a threshold of €8bn of gross notional amount of OTC derivatives); and
  • are considered significant in the context of the overall activity of the EU established guarantor (in this regard, ESMA has proposed a threshold of 5% of the OTC derivatives exposures of the EU established financial counterparty).

EU branches of third country entities

The Consultation Paper also considers whether transactions between EU branches of third country entities would have a direct effect on European markets. In this regard, ESMA proposes that6:

  • transactions between two EU branches of two non-EU entities should be said to have a direct, substantial and foreseeable effect within the EU and should therefore be subject to the requirements of EMIR; but
  • transactions between the EU branch of a non-EU entity and a non-EU branch of a non-EU counterparty should not be said to have a direct, substantial and foreseeable effect within the EU and should therefore not be subject to the requirements of EMIR.


The Consultation Paper also considers whether OTC derivative contracts entered into by third country subsidiaries of an EU parent could have an effect on the EU parent and therefore be said to have a direct, substantial and foreseeable effect within the EU. ESMA considers that any effect on the EU parent cannot be said to be "direct and foreseeable" noting that the parent would not be legally bound by the OTC derivative contracts of its subsidiaries, unless it has issued guarantees in this respect (case already covered above).

Factors that will not be taken into consideration

ESMA considered whether a counterparty established in a third country listing an entity established in the EU for the purpose of acceleration or cross-default in their ISDA Master Agreement may have an effect within the EU. For example, a counterparty established in a third country may designate an entity established in the EU as a Specified Entity pursuant to an ISDA Master Agreement. However, ESMA noted that the effect of default by the Specified Entity does not impact the parties to the obligation or the obligation itself but only the timing of the obligation and that the transaction and resulting liabilities remain between the counterparties. ESMA concluded that it would be disproportionate to include in the scope of EMIR transactions where the only nexus with the EU was a Specified Entity established in the EU.

In addition, ESMA considered whether the currency of the underlying OTC derivative contract would be relevant in determining whether a contract has a "direct, substantial and foreseeable effect within the EU" and concluded that it would not.

Prevention of evasion

ESMA proposes developing a set of criteria to look to the substance or economic effect of a transaction as opposed to its legal form to determine whether a particular OTC derivative contract should be captured by EMIR. In particular, ESMA proposes to adopt an approach which is similar to the approach taken in tax evasion legislation, taking into account (i) whether the legal characterisation of the individual steps is inconsistent with the legal substance of the arrangement as a whole, (ii) whether the arrangement is carried out in a manner which would not ordinarily be employed in what is expected to be reasonable business conduct; (iii) whether there are elements which have the effect of offsetting or cancelling the economic meaning of each other and (iv) whether the transactions concluded are circular in nature.

ESMA proposes that if a global arrangement has a business, commercial or economic justification, it would be legitimate. As un-exhaustive examples of avoidance, ESMA has listed (i) where an entity in a group, B, incurs the risk, but the hedging is done by another entity, A, that is not involved in the business to which the derivative relates, or (ii) an entity, B, incurs the risk but agrees with a non-related party, A, that a party, D, which is not subject to EMIR, will enter into a derivative contract.


The clearing obligation and risk mitigation techniques under EMIR apply to certain transactions entered into by third-country counterparties. The draft RTS bring some clarity to determining what would constitute a "direct, substantial and foreseeable effect". However, it should be noted that there is no common methodology to calculate the thresholds used to determine whether an OTC derivative contract entered into by third country counterparties benefiting from a guarantee issued by an EU guarantor would be subject to EMIR7. It should also be noted that ESMA intends to capture other arrangements that operate "in a substantially similar way" to guarantees. Therefore care should be taken when other instruments, such as monoline protection (financial guarantees), letters of credit or performance bonds are used.

ESMA will consider comments on the Consultation Paper received by 16 September 2013.


1 http://www.esma.europa.eu/system/files/2013-892_draft_rts_of_emir.pdf

2 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:201:0001:0059:EN:PDF

3 See Article 4(1)(a)(v) and Article 11(12) of EMIR

4 See Article 13 of EMIR

5 ESMA is of the view that (a) guarantees issued by entities other than financial counterparties are not expected to be substantial; (b) competent authorities have less information on guarantees issued by entities other than financial counterparties; and (c) competent authorities should have the appropriate powers to enforce the provisions of the RTS and these powers are well developed for financial counterparties

6 ESMA also notes that transactions between the EU branch of a non-EU entity and an EU counterparty are dealt with under other provisions of EMIR and are outside the scope of the Consultation Paper

7 ESMA has proposed using the definition of current exposure provided in Art. 272(17) of the Capital Requirements Regulation: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32013R0575:EN:NOT

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.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.