What Is An NFC-?

By entering into derivative transactions, you become a ‘counterparty’.

Under EMIR (both EU EMIR and UK EMIR are covered in this article), there are two types of counterparties:

1. Financial Counterparties (FC) which include banks, investment managers, insurance companies and brokers.
2. Non-Financial Counterparties (NFC) which include all entities that are not Financial Counterparties, nor central counterparties.
   
   

EMIR further distinguishes two sub-categories of Non-Financial Counterparties (NFC) according to whether their over-the-counter (OTC) derivative positions are above or below designated clearing thresholds in notional value, these being NFC+ or NFC-.

EMIR obligations apply differently based upon the counterparty’s classification:

In order to determine this status, Financial Counterparties and Non-Financial Counterparties trading OTC derivative contracts are obliged to annually:

• calculate the average of their end of month positions over the last 12 months, aggregated at the group level; and
• compare the result to the applicable clearing thresholds set out below:
  
  

The commodity and other derivatives threshold differs between the two regimes. Under UK EMIR, the commodity derivatives threshold is €3 billion gross notional value. The EU EMIR threshold for this asset class is currently €4 billion. EMIR 3 proposes to reduce this to €3 billion, which would bring the two regimes into alignment – however, his change has deferred application and will only take effect once the amended RTSs enter into force. Until then, the existing EU EMIR thresholds and calculation methodologies continue to apply.

NFC- Classification

When a Non-Financial Counterparty determines that its average end-of-month positions do not exceed any of the above asset class clearing thresholds, it is classified as a ‘Non-Financial Counterparty below the clearing thresholds’ or NFC-. This means that it is exempt from the clearing obligation, but remains subject to transaction reporting requirements.

NFC+ Classification

Conversely, where the result of such calculation with respect to one or more of the OTC derivative classes above exceeds the clearing threshold (or when an NFC does not calculate its positions), it is considered an NFC+ and therefore:

• Under EU EMIR: Must immediately notify ESMA and the relevant national competent authority (NCA) of the Member State in which it is established. Notification to ESMA must be made using ESMA’s prescribed Excel notification template submitted to EMIR-notifications@esma.europa.eu. Notification to the NCA must be made via the relevant NCA’s prescribed channel, which varies by Member State.
• Under UK EMIR: Must immediately notify the Financial Conduct Authority (FCA) only. Notification must be submitted using the clearing threshold notification form on the FCA’s Connect system.
• Under both regimes: Must establish clearing arrangements within 4 months of the date of notification.
• Under both regimes: Is subject to transaction reporting requirements and collateral exchange requirements.
  
  

The notification obligation applies in reverse where an NFC+ subsequently falls back below all clearing thresholds.

Representations from Counterparties

A counterparty subject to the clearing obligation must obtain representations from its counterparties detailing their threshold status. However, counterparties that are not subject to the clearing obligation (an EMIR requirement for which they would need to know the status of their counterparties) do not need to obtain representations from their counterparties. The table below summarises this, with the categorisation of counterparties under EMIR:

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.