The European Market Infrastructure Regulation1 (EMIR) came into force on 16 August 2012 and was the European response to the G20 commitment to implement measures to increase transparency and reduce both counterparty credit risk and operational risk in the derivatives market. Because it is in the form of a regulation, EMIR is directly applicable in all EU member states and does not require any further national implementation. Over the past six and a half years, the provisions of EMIR have been coming into effect on a rolling basis; "Level 2" delegated regulations adopted by the European Commission (EC) have provided much of the substantive detail required. Although EMIR is not yet fully effective, the majority of the Level 2 legislation has now been passed into law and provides timeframes for the rest of the phasing in.
EMIR generally applies to all standardised overthe-counter (OTC) derivatives2 , including interest rate, credit, equity, commodity and certain foreign exchange transactions. In order to achieve its objectives, it imposes certain obligations upon central counterparties, trade repositories and the counterparties to OTC derivatives contracts, which are categorised as financial counterparties (FCs) or non-financial counterparties (NFCs). In this article, we will particularly focus on some new changes to EMIR that impact the categorisation of FCs and NFCs and their clearing and margining obligations.
EMIR Refit legislative journey
As with most European legislation, a review mechanism was built into EMIR3 . Accordingly, three years after EMIR came into force, the EC launched a study to consider how the regulation was performing compared to its objectives, taking into account cost and burden to market participants. The EC published a report on 23 November 2016 and a legislative proposal, which took the form of a new regulation to modify EMIR, on 4 May 2017 (EMIR Refit) 4. Many of the proposed changes were hotly debated and so it took nearly a further two years, until early February of this year, for the three main EU legislative bodies to reach political agreement. The result was the publication of a revised compromise text of the proposed regulation on 1 March 2019. Since then the European Parliament and the European Council formally adopted EMIR Refit and the agreed legislation was published in the Official Journal on 28 May 2019 and entry into force will be on 17 June 2019.
What does EMIR Refit do?
EMIR Refit effects a broad range of changes, which include:
- Expanding the definition of FC to include additional market participants;
- Creating a new sub-categorisation of "small FCs";
- Introducing a new EC power to suspend the clearing obligation in respect of an asset class or counterparty type in certain circumstances;
- Modifying rules for NFCs in relation to (a) monitoring of notional amounts and (b)the type of trades that need to be cleared once clearing thresholds are exceeded;
- Removing the front-loading obligation, i.e. the requirement to clear contracts entered into before the clearing obligation takes effect;
- Establishing rules for clearing members to provide their clearing services on fair, reasonable and non-discriminatory terms (FRAND);
- Revising responsibility for reporting (e.g. FCs will need to report for NFC-s), narrowing the reporting requirements (e.g. certain intragroup exemptions now apply to reporting as well as clearing and margining) and removing the "backloading" obligation for historical trades to be reported;
- Extending the exemption for pension funds by two years (until 18 June 2021), with the possibility to extend twice more for a year each time;
- Bridging the gap for pension funds between 16 August 2018, when their original exemption lapsed, and entry into force of EMIR Refit, in order to confirm that no breach will be considered to have occurred;
- Clarifying rules on exchange of margin in relation to physically settled FX swaps and forwards; and
- Increasing the upper limits for the fines that can be imposed in relation to an EMIR infringement.
When do the obligations under EMIR Refit apply?
The key obligations discussed above generally apply from the date EMIR Refit enters into force. Two exceptions to this are the requirement for FCs to report on behalf of NFC-s, which applies one year later, and the FRAND requirements, which apply two years later5 .
Expansion of the definition of Financial Counterparty
Under the original EMIR rules, an FC was, in summary, established and regulated in the EU and one of the following:
- an investment firm (MiFID6 definition);
- a credit institution;
- an insurance, assurance or reinsurance undertaking;
- undertakings for collective investments in transferable securities (UCITS) fund;
- a pension scheme; or
- an alternative investment fund
(AIF) (which would capture both an EU AIF and a
non-EU AIF) that was managed by an alternative investment fund
manager (AIFM), which is authorised or registered
in accordance with the EU Alternative Investment Fund Managers
EMIR Refit expands the definition to include the following entities:
- investment firms falling within the MiFID II7 definition (which was expanded from that for MiFID);
- all EU AIFs (this expands category (f) above such that it is no longer relevant where the AIFMs are based) and, where relevant, AIFMs established in the EU8; and
- central securities depositories (i.e. entities that offer infrastructure for the settlement of securities transactions, for example, Euroclear and Clearstream).
An NFC is defined by reference to what is not covered, i.e. any entity established in the EU that is not an FC.
New sub-categorisation of Financial Counterparties
Under the EMIR rules, NFCs are further broken down into two sub-categories, i.e. "NFC+" and "NFC-", and different rules apply to each. An NFC is considered an "NFC+" if the aggregate notional amount of outstanding derivatives entered into by it, together with those of all other NFCs within its group on a worldwide basis, exceeds one of the specified clearing thresholds. If no threshold is met, the NFC will be an "NFC-" and the obligations applicable to it are lighter.
1 Regulation (EU) No. 648/2012 of the European Parliament and of the European Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories
2 For the purposes of clearing and margining under EMIR, an "OTC derivative" is a derivative contract that is not executed on a regulated market, with each term taking the meaning as defined in the Markets in Financial Instruments Directive.
3 Article 85(1) of EMIR requires the EC to review and prepare a general report on EMIR and to submit the report to the European Parliament and the European Council, together with any appropriate proposals
4 "EMIR Refit" derives from the EC's 2016 Regulatory Fitness and Performance programme (REFIT).
5 There is a further exception in relation to a new requirement for central counterparties to provide a simulation tool in relation to the calculation of margin
6 For these purposes, MiFID means Directive 2004/39/EC.
7 For these purposes, MiFID II means Directive 2014/65/EU.
8 This is also relevant to non-EU AIFs because the change will impact the equivalent categorisation of non-EU AIFs that are not directly caught by EMIR.
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