On October 31, 2018, the European Securities and Markets Authority issued a statement on the impending clearing obligation under the European Market Infrastructure Regulation. The statement is also relevant to the trading obligation under the Markets in Financial Instruments Regulation which is triggered by the EMIR clearing obligation.
EMIR provides an exemption from the clearing obligation for intragroup transactions with a third-country group entity where one of the counterparties is a third-country group entity and there is an equivalence decision in respect of the third country in which it is situated. An equivalence decision would enable parties that are subject to both the EU and a third country's clearing obligation to comply only with one jurisdiction's requirements, but no equivalence decisions have been made to date for these purposes.
December 21, 2018 is the expiry date for the exemption from the clearing obligation for interest rate derivative classes denominated in the G4 currencies subject to the clearing obligation. In addition, December 21, 2018 is the clearing obligation start date for non-financial counterparties that exceed the clearing threshold for this class of derivatives. When an NFC exceeds the clearing threshold in one asset class, it must clear all derivative classes that are subject to mandatory clearing. Proposed EMIR Refit amendments would amend this so that an NFC would only have to clear the asset class or classes where the clearing threshold has been exceeded. However, these changes are unlikely to be in force this year.
ESMA has submitted to the European Commission proposed amendments to the relevant secondary legislation relating to the intragroup transactions with a third-country group entity. ESMA's proposal is to extend the expiration date to December 21, 2020 for IRS derivatives denominated in G4 currencies and other currencies and credit derivatives.
Absent the required equivalence decisions and changes to the EU legislation, ESMA's statement clarifies that ESMA does not expect national regulators to focus on any non-compliance by groups or NFCs exceeding the clearing threshold. National regulators should apply a risk-based approach to supervising and enforcing the applicable legislation in a proportionate manner. ESMA confirms that neither it nor national regulators have the power to formally dis-apply the directly applicable EU legislation.
The U.K. FCA has issued a release supporting ESMA's statement. The FCA confirms that it will not require groups and NFCs that exceed the clearing threshold to put processes in place to comply with the IRS clearing obligation and the related trading obligation.
ESMA's statement is available at: https://www.esma.europa.eu/press-news/esma-news/esma-issues-clarifications-clearing-and-trading-obligations-ahead-21-december, details of ESMA's proposed amendments are available at: https://finreg.shearman.com/eu-final-report-to-extend-exemption-from-the-clea, details of the MiFIR trading obligation are available at: https://finreg.shearman.com/eu-derivatives-trading-obligation-enters-into-for and the FCA's release is available at: https://www.fca.org.uk/firms/european-market-infrastructure-regulation-emir/news.
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.
