The EU proposals to amend technical aspects of the European Market Infrastructure Regulation (EMIR), known colloquially as ‘EMIR 2.1’ or ‘EMIR Refit’, have been politically agreed. The final text is likely to be published in the Official Journal of the European Union in April or May this year. Subject to a few exceptions, the changes will apply directly in all EU member states 20 days from that publication date.

Among the more controversial amendments is the change to the term “financial counterparty.” This is recast to include some new categories. It will also mean changes to the way in which alternative investment funds (AIFs) fall into the scope of EU derivatives rules—by categorizing all of them as financial counterparties (FCs), or, for non-EU funds, as third-country entities equivalent to FCs. This differs from the existing position where most AIFs treat themselves as non-financial counterparties (NFCs) or equivalent third-country entities. However, the introduction of a clearing threshold for all FCs will mean that smaller AIFs will not have to comply with all of the obligations that the new FC definition would otherwise have imposed on them. AIFs, their managers and counterparties affected by the new FC definition will need to implement enhanced conduct requirements and amend their ISDA documentation, taking into account whether they will become an FC+ or FC-. Non-EU funds may be asked to make changes by their EU bank counterparties. 

Previous iterations of the text allowed time for repapering and implementing revised processes. However, the final text significantly shortens that and the new definition (and corresponding obligations) will apply 20 days after publication of EMIR Refit in the Official Journal.

This note discusses the key impacts of the revised FC definition for funds, their managers and their counterparties. We also discuss the implications of Brexit and the U.K.’s onshoring of EU “in flight” legislation. This note is based on the agreed version of EMIR Refit.1

The Original Position

The existing definition of “financial counterparty” in EMIR2 refers to an “alternative investment fund managed by AIFMs authorised or registered in accordance with Directive 2011/61/EU” (i.e. the Alternative Investment Fund Managers Directive).

The European Securities and Markets Authority (ESMA) has stated that EU or non-EU AIFs managed by non-EU managers without any authorization or registration within the EU should not be considered FCs, even if such funds are permitted to be marketed in the EU.3 It follows from the existing text of EMIR that unregulated fund structures are also out-of-scope of the FC definition.

The Revised Position

The Commission’s proposed new FC definition proved controversial4 and was a topic of a previous client note.5 It has changed as EMIR Refit has progressed through the legislative process. The revised text limits the extraterritorial impact of the Commission’s proposals, which would have meant that all AIFs, including all third-country funds, would be considered FCs (or third-country entities equivalent to FCs), regardless of the regulatory regime applicable at fund or manager level.

The FC definition in relation to AIFs is changing to:

“an alternative investment fund as defined in Article 4(1)(a) of Directive 2011/61/EU which is either established in the Union or managed by an alternative investment fund manager (AIFM) authorised or registered in accordance with Directive 2011/61/EU, except if that AIF is set up exclusively for the purpose of serving one or more employee share purchase plans, or if the AIF is an SSPE as referred to in Article 2(3)(g) of Directive 2011/61/EU, and, where relevant, its AIFM established in the Union.”6

Under the new text, EU funds (and their managers) currently classed as NFCs will become FCs. However, crucially, non-EU AIFMs managing non-EU AIFs will remain “third-country entities” for EMIR purposes. This means that, when entering transactions with EU FCs under the new definition, they will be treated as equivalent to FCs instead of NFCs. However, the full gamut of EMIR will not apply directly to third-country entities.

AIFs that are securitization special purpose entities or established solely for employee share purchase plans are excluded from the new FC definition.

The categorization of a fund as an FC or NFC or as a third-country equivalent entity is important since it determines whether certain key legal requirements in EMIR apply either directly (in the case of EU AIFs) or indirectly (in the case of non-EU AIFs trading with EU counterparties)—such as mandatory clearing, collateral rules and the reporting obligation. It is also important for persons that are dealing with funds to know the classification of their counterparties, since this determines the timeframe for confirmations, the frequency of portfolio reconciliation and compression and whether clearing and collateral obligations will apply.

The FC Clearing Threshold

EMIR Refit also introduces a clearing threshold for FCs. FCs will be required to clear OTC derivatives subject to the clearing obligation if they either: (i) do not calculate their average position to determine if they are over the clearing threshold;7 or (ii) do the calculation and determine that they are over the clearing threshold.8 ESMA has introduced its first guidance under EMIR REFIT on how the thresholds are to be calculated.9 The FC clearing threshold will be the same as the existing NFC clearing thresholds. These are:

  • €1 billion in gross notional value for OTC credit derivatives and OTC equity derivatives; and
  • €3 billion in gross notional value for OTC interest rate derivatives, OTC FX derivatives, OTC commodity derivatives and other OTC derivatives.9

The clearing obligation will apply to trades between:

  • two FC+; 
  • an FC+ and an NFC+, 
  • two NFC+, 
  • an FC+ or an NFC+ and a third-country counterparty that is equivalent to an FC+ or NFC+;10 or
  • two third-country entities established in a third country that would be subject to the clearing obligation if they were established in the EU, provided that the contract has a direct, substantial and foreseeable effect in the EU or where such an obligation is necessary or appropriate to prevent the evasion of any provisions of EMIR.

Smaller AIFs may benefit from the new FC clearing threshold (and will be considered Small FCs or SFCs). On January 31, 2019, ESMA issued a statement on the impending clearing obligation for Category 3 counterparties, which includes AIFs that are NFCs. The Category 3 clearing obligation is due to apply from June 21, 2019, for IRS and CDS subject to the clearing obligation. To avoid a situation where Category 3 counterparties would need to prepare for or comply with the June clearing deadline for a short time until EMIR Refit applies, ESMA called for national regulators to “apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner.”11 However, smaller funds will still need to conduct the calculation to avoid being automatically subject to the clearing obligation. Unlike the NFC threshold calculation the FC calculation does not include the exemption for hedging transactions.

Effects of a Fund Moving from NFC to FC Status

Certain AIFs will move from the NFC (or third-country equivalent) classification to the FC (or third-country equivalent) classification, including EU AIFs managed by a non-EU AIFM and, when transacting with EU counterparties, non-EU AIFs managed by non-EU AIFMs. These funds will need to update their ISDA-protocol-based documentation and “NFC representations” accordingly. They may also need to implement revised processes, depending on the change to the obligations that apply to them. Set out below are details of the new obligations, depending on whether an AIF is based in the EU or not.

EU-based AIFs

This section sets out the change in obligations for:

  • EU AIFs managed by a non-EU AIFM; 
  • Close-ended EU AIFs managed by an EU AIFM that is exempt under AIFMD; and
  • The managers of the above EU AIFs.

These EU AIFs are currently classified as NFCs and will become FCs when the revised FC definition in EMIR Refit applies.

Clearing Obligation

EU AIFs that become FCs will need to clear OTC derivatives subject to the clearing obligation when trading with another relevant entity. See the discussion above on the FC clearing threshold. An EU AIF that determines that it is over the clearing threshold must immediately notify ESMA and the relevant national regulator and establish clearing arrangements within four months of the notification. To calculate the clearing threshold, an FC must include all OTC derivative contracts that it entered into or that are entered into by other entities within its groups. For EU AIFs, the positions are to be calculated at the level of the fund.12 An AIFM managing more than one AIF must be able to demonstrate to the relevant national regulator that the calculation of positons at the fund level does not lead to: (i) a systemic underestimation of the positions of any of the funds they manage or the positions of the AIFM; and (ii) a circumvention of the clearing obligation.13

Reporting Obligation

Funds classed as NFCs under EMIR are already subject to the reporting obligation and those that become FCs will also be required to report their derivatives trades. However, responsibility for reporting has changed under EMIR Refit. FCs will be “solely responsible and legally liable” for reporting on behalf of both counterparties the trades entered into with NFC+. The FC must also ensure the accuracy of the reported details.14 A new obligation is imposed on NFCs to provide their FC with details of the OTC derivative trade that the FC cannot reasonably be expected to hold and the NFC will be responsible for ensuring those details are accurate. Where the FC is an EU AIF, the fund’s manager, regardless of their location or regulation, will be solely responsible and legally liable for reporting the OTC derivative contract.15 Unlike the short timeframe available for implementation of the other changes discussed in this note, these provisions will apply 12 months after EMIR Refit is published in the Official Journal, providing counterparties with time to implement necessary changes to ensure their compliance.

Margin Requirements

For any uncleared derivatives, the requirement to exchange margin will apply to EU AIFs that are re-classified as FCs, regardless of whether the clearing threshold has been crossed or not. This is different to the NFC requirement, which only applies once the clearing threshold is exceeded.16 In addition, re-classified EU AIFs will need to comply with other related obligations, such as ensuring that they hold appropriate capital to manage any risk not covered by the exchange of collateral.17 It is notable that the existing Regulatory Technical Standards that set out the detail of the margin requirements18 treat all funds equally. In that sense, it appears that EMIR itself is being brought into line with these RTS.


This section sets out the potential change for:

  • Non-EU AIFs managed by a non-EU AIFM; 
  • Close-ended non-EU AIFs managed by an EU AIFM exempt under AIFMD; and
  • The managers of the above funds.

These non-EU AIFs are currently treated as if they are third-country equivalents to NFCs and are indirectly caught by some of the EMIR requirements when trading with EU counterparties. Once EMIR Refit applies, they will be treated as if they are third-country equivalents to FCs and the related provisions will indirectly apply to them in this new classification. However, third-country entities will still not be directly subject to all of the EMIR requirements.

Clearing Obligation

When trading with an EU FC+ or NFC+, non-EU AIFs will become indirectly subject to the clearing obligation, but only to the extent that they also meet the clearing threshold.

Margin Requirements

Third-country counterparties (e.g. non-EU AIFs) trading with an EU FC or NFC+ may indirectly be required to comply with the margin requirements. In particular, non-EU AIFs previously categorized as third-country equivalent to NFC-s, will now be indirectly required to comply with margin requirements when facing an EU FC (or EU NFC+). Under the existing EMIR provisions, such non-EU AIFs would not be required indirectly to comply with margin requirements. Third-country entities trading with funds that will now be FCs may find that this is a new requirement as the clearing threshold no longer plays a part in whether the fund must exchange margin.

Short Deadline

Critically, the politically agreed version of EMIR Refit does not provide funds and their managers much time to comply with the new classification and the new obligations apply 20 days after EMIR Refit is published in the Official Journal of the European Union. Industry associations, such as AIMA and ISDA, have raised the short timeframe with the EU legislative bodies, but it seems unlikely that such a change would be possible at this stage.


We set out here a brief synopsis of the interaction of the different Brexit scenarios with the implementation of EMIR Refit. Regardless of the scenario, when the U.K. leaves the EU, the U.K. will be treated, for EU law purposes, as a third country. This means that U.K. entities that are currently classified as EU counterparties will become third-country entities for the purposes of EMIR.

A No-Deal Brexit

The U.K. Government has prepared legislation giving HM Treasury powers to onshore EU financial services legislation not within scope of the European Union (Withdrawal) Act 2018. The Financial Services (Implementation of Legislation) bill gives HM Treasury powers to implement and make amendments to a specified list of financial services “in flight” legislation. This refers to EU financial services legislation that is out of scope of the EU Withdrawal Act because it was not “operative” before exit day. Only legislation with an implementation date falling in the two years after the U.K.’s exit is covered. EMIR Refit is within scope and is covered. The Act gives HM Treasury powers to change the EMIR Refit provisions to “reflect, or facilitate the transition to, the United Kingdom’s new position outside the EU, but does not include changes that result in provision whose effect is different in a major way from that of the legislation.”19 Draft U.K. legislation onshoring EMIR Refit has not yet been published. However, it is likely that most of the provisions will reflect the EMIR Refit provisions with minimal changes. HM Treasury confirmed in February this year, for example, that the exemption from the clearing obligation for Pension Scheme Arrangements would be carried over into U.K. laws, for both U.K. and EEA pension funds.20

A Brexit Extension

If the date on which the U.K. is scheduled to leave the EU is further extended,21 EMIR Refit may enter into force and apply directly across the EU before the U.K. leaves the EU. To avoid a situation where a U.K. entity trading with EU27 entities would only be subject to the EMIR Refit provisions as an EU FC or NFC until the U.K. leaves the EU, U.K. market participants are reliant on the Commission or individual EU Member States passing legislation providing a transitional period. This would allow both U.K. and their counterparties globally, including those in the EU27, time to adjust to the new classification of the U.K. entities as third-country counterparties, instead of as EU counterparties.

A Brexit Deal

The terms of the EU Withdrawal Agreement provide for EU laws to continue to apply in the U.K. until December 31, 2020 (i.e. the end of the transitional period). This means that EU laws, including EMIR Refit, will apply in the U.K. as if the U.K. were still a fully EU member state, until the end of the transitional period. At the end of that period, EU laws will cease to apply in the U.K. and instead, the U.K.’s laws will apply. The U.K. government has been publishing U.K. secondary legislation onshoring and amending EU regulations for Brexit. This is being done under the EU Withdrawal Act, so as to ensure a workable U.K. statute book after Brexit. This “onshoring” legislation is not intended to introduce policy changes unrelated to technically implementing the U.K.’s EU withdrawal. The purpose is to correct a limited range of deficiencies (as defined in the EU Withdrawal Act) in the directly applicable EU Regulations that will be retained on exit and in the existing U.K. law that implements the EU Directives. However, necessarily, there are various decision points that U.K. legislators have needed to take in relation to third-country issues and relationships.22 It is unclear at this time whether the government would change that onshored legislation before the end of the transitional period, if a deal is agreed. If changes are to be made, the extent of them will likely depend on the outcome of the EU-U.K. discussions on the future EU-U.K. relationship. At the end of the transition period, the U.K. will be treated, for EU law purposes, as a third country. This means that U.K. entities will become third-country entities and EU laws will not apply to them in the same way as they do until the end of the transitional period.


1 See the Council’s compromise text, dated March 1, 2019, which the Council confirmed as the agreed text in a footnote to its press release announcing the political agreement, dated February 5, 2019. There may be minor drafting changes as the text is vetted by technicians and translated prior to its publication, but the legal position should be unaffected by this.

2 See the current version of EMIR, in consolidated form.

3 See ESMA’s Q&A on EMIR.

4 The below shows a comparison between the existing definition compared to the Commission’s proposal:

financial counterparty’ means an investment firm authorised in accordance with Directive 2014/65/EC of the European Parliament and of the Council, a credit institution authorised in accordance with Regulation (EU) 575/2013, an insurance of reinsurance undertaking authorised in accordance with Directive C2009/138/EC of the European Parliament and of the Council, a UCITS authorised in accordance with Directive 2009/65/EC, an institution for occupational retirement provision within the meaning of Article 6(a) of Directive 2003/41/EC, an AIF as defined in Article 4(1)(a) of Directive 2011/61/EU, a central securities depository authorised in accordance with Regulation (EU) No 909/2014 of the European Parliament and of the Council and a securitisation special purpose entity as defined in Article 4(1)(66) of Regulation (EU) No 575/2013 of the European Parliament and of the Council.”

The Commission’s Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories, COM(2017) 208 final.

5 You may like to see our client note, “EMIR Review: A New Extraterritorial Expansion To Third-Country Funds?”, dated May 10, 2017.

6 Article 1(1), EMIR Refit, amending Article 2(8), EMIR, which sets out the fully revised FC definition.

7 A similar change is being made to the NFC clearing threshold provisions. See Article (1)(8), EMIR Refit, amending Article 10, EMIR. The NFC clearing provisions have also been changed so that an NFC+ will only be required to clear the asset class for which it has exceeded the clearing threshold. The existing provisions require a NFC that exceeds the clearing threshold for any asset class to clear all of its derivatives. This change to the NFC clearing provisions has not been replicated for FCs, and so once an FC exceeds the clearing threshold for one asset class, it will need to clear all asset classes subject to the clearing obligation.

8 Article 1(3), EMIR Refit, inserting Article 4a into EMIR.

9 See ESMA's statement, Refit Implementation of clearing obligation for FCs and NFCs, March 28, 2019.

10 Article 11, Commission Delegated Regulation (EU) No 149/2013, December 19, 2012 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory technical standards on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, and risk mitigation techniques for OTC derivatives contracts not cleared by a CCP.

11 Article 1(2), EMIR Refit, amending Article 4(1)(i)-(iv), EMIR.

12 See ESMA’s statement, “EMIR implementation considerations regarding the clearing and trading obligations for small financial counterparties and the backloading requirement with respect to the reporting obligation”, dated January 31, 2019.

13 Article (1)(3), EMIR Refit, inserting Article 4a(3) into EMIR.

14 Article (1)(3), EMIR Refit, inserting Article 4a(3) into EMIR.

15 Article 1(7)(b), EMIR Refit, inserting Article 1a into EMIR.

16 Article 1(7)(b), EMIR Refit, inserting Article 1a into EMIR. The text uses the term “manager” instead of referring to an EU or third-country AIFM.

17 Article 11(3), EMIR.

18 Article 11(4), EMIR.

19 Commission Delegated Regulation (EU) 2016/2251, October 4, 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty.

20 Section 1(2)(b), the Financial Services (Implementation of Legislation) bill, as at February 26, 2019.

21 You may like to see details of HM Treasury’s statement, available on our Financial Regulatory Developments Focus website, at HM Treasury Publishes Guidance on Pension Scheme Arrangements and the EMIR Clearing Obligation in a No Deal Brexit Scenario.

22 The U.K. was originally due to leave the EU on March 29, 2019. That date has been changed to April 12, 2019.

23 You may like to see consolidated versions of the U.K. onshored legislation, including U.K. EMIR, available on our Brexit Resource Center.

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.