After almost a year of discussion, on 12 June 2018 the European Parliament approved a revised proposal put forward by the European Commission to amend the terms of EMIR1. The revised proposal, aimed at reducing costs and simplifying certain rules under EMIR, is likely to mean at least some good news for most market participants, although others may be disappointed that the proposal did not go further.

EXECUTIVE SUMMARY EMIR 2.1, as it has become known, is the first of two proposals to amend EMIR put forward by the European Commission in 2017 as part of the Commission's Regulatory Fitness and Performance programme. EMIR 2.1 is intended to reduce certain of the burdens and costs associated with complying with the requirements of EMIR. EMIR 2.2, a separate amendment not covered in this note, deals with amendments to the way in which central counterparties are supervised under EMIR.

On 11 June 2018, EMIR 2.1 was debated in plenary by the European Parliament which voted the next day to adopt the proposed regulation. The next stage of the legislative procedure will see EMIR 2.1 debated in trilogue between the European Parliament, the Council and the Commission, with discussions planned to start in July 2018.

Most entities will welcome that the mandatory exchange of collateral as variation margin in respect of physicallysettled foreign exchange rate (FX) forwards and physically-settled FX swaps, will only apply to transactions between the most systemically important counterparties (such as banks and investment firms). This formally brings the variation margin requirements of EMIR in respect of these transactions in line with their treatment in other major jurisdictions, such as the US.

Managers of alternative investment funds will need to assess whether the broadening of the definition of financial counterparty (to include all alternative investment funds (AIFs) established in the European Economic Area (EEA) will result in funds managed by them becoming subject to the EMIR clearing and margining requirements where they were not before.

Pension schemes will not be required to clear their over-the-counter (OTC) derivatives transactions for at least a further two years. However, they should note that the European Parliament has made clear that the extension of the exemption for pension schemes from complying with the clearing obligation will not be permanent. A best efforts obligation will be imposed on industry stakeholders to find a workable solution to the difficulties that pension schemes face in centrally clearing OTC derivatives transactions. These difficulties stem from pension schemes' limited holdings of cash and the high cost, and risk of inefficiencies, resulting from converting assets into cash for use as collateral.

As we near the end of the legislative process, this note tracks the changes to the initial proposals summarised in our EMIR 1.5 note (the "July 2017 Note"), which can be viewed here, and considers the implications entities will face when EMIR 2.1 comes into effect.


1 The European Market Infrastructure Regulation on OTC derivative transactions, central counterparties and trade repositories (Regulation EU 648/2012).

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