On 4 January 2017, the FCA opened its application process for the intra-group transaction ("IGT") exemption to the EU's new requirements to exchange margin for uncleared OTC derivative contracts (as set out in Commission Delegated Regulation 2016/2251, the "Margin RTS"). Firms must submit an application form attaching supporting documents.
This will require granular information on the relevant transaction types. It includes estimates of the anticipated size and type of trades, and requires various supporting documents (including historical trade data). All of this must be collated before an application is considered "complete": the FCA then has three months to consider it.
The variation margin ("VM") "big-bang" application date of 1 March 2017, may be on everyone's minds, but 4 July 2017, should be a close second for any financial counterparty ("FC") or non-financial counterparty above the EMIR clearing threshold ("NFC+") which conducts OTC derivative contracts with other companies in its group1.
A link to the FCA's webpage and copies of the intra-group exemption application forms and associated user guide are available on page 12 of the Client Alert PDF.
We have also included a summary of the key requirements of the Margin RTS with tables showing phase-in of the relevant requirements, potential exemptions, and the applicable process for obtaining the intra-group exemption, depending on the EMIR2 classification of group entities.
Is this relevant to me?
Yes, if you are an FC or NFC+ under EMIR and you enter into OTC derivative transactions with other companies in your group.
This could apply if, for example, you act as a group risk aggregator using derivatives to pass risk or benefit back to operating companies in your group.
What do I need to do now?
- Work out whether any of your group companies are FC or NFC+ under EMIR.
- If you have FC or NFC+ entities in your group, check whether they enter into intra-group OTC derivative contracts with group counterparties either inside or outside the EU.
- Map the pairs of in-scope entities trading in OTC derivative contracts with each other.
- Work out in which Member States you need to apply for intra-group exemptions.
- Work out whether the relevant pairs of entities satisfy the conditions to apply for the intra-group exemption, and collate the supporting documents.
- Apply for relevant intra-group exemptions by 4 April 2017, to give relevant national competent authorities ("NCAs") three months to consider applications before VM requirements apply to most intra-group transactions.
How can we help you?
We have included tables below showing the available intra-group transaction exemptions and how the application process differs depending on the status and home jurisdiction of the relevant entities within a group.
We can assist you in making an assessment whether the conditions for the intra-group transaction exemption are met (including verifying no legal impediments), reviewing or producing supporting documentation, and making required applications to relevant NCAs.
If initial margin ("IM") or VM requirements apply to any of your OTC derivative contracts, we can assist you to put in place required risk-management procedures, put in place required EMIR-compliant documentation, or explore other alternatives.
Click here to access a PDF copy of the entirety of this Client Alert.
1. There is a longer delay to the application of the IM requirement to intra-group trades where one party is established outside of the EU to give time for equivalence decisions to be made; but as drafted, this does not extend to the VM requirements. The delay is three years from 4 January 2017, where no equivalence decision has been adopted. Where an equivalence decision has been adopted, it is the later of four months after the date of entry into force of that decision and the date on which the requirements would apply to other in-scope entities in any event under the Margin RTS.
2. Regulation (EU) No 648/2012
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.