The EMIR Refit Regulation was published in the EU Official Journal on 28 May 2019. It is intended to amend EMIR to simplify certain requirements and reduce costs and burdens on corporates including amending clearing thresholds, reporting obligations and counterparty classification. The legislation will enter into force on 17 June 2019. While various aspects of EMIR Refit have phase-in periods, other elements of EMIR Refit will come into effect immediately. Clients are advised to act quickly to consider whether their obligations under EMIR have changed.
EMIR required the Commission to conduct a review of EMIR by 2015, and the Commission issued its report into EMIR in November 2016. The report found that many aspects of EMIR had been implemented successfully, but limited improvements could be made. Following this, in May 2017, the Commission published the first draft of the EMIR Refit Regulations, a legislative proposal to amend EMIR. This aimed to address the issues raised in the Commission's review which highlighted certain complex requirements and disproportionate burdens of EMIR on smaller firms. Following lengthy negotiations on the Refit text proposal, the European Commission, Council and Parliament reached agreement on the final text in February 2019. The Regulation was published in the Official Journal on 28 May 2019 and enters into force on 17 June 2019. On the day of publication in the Official Journal ESMA published updated EMIR Q&As.
2. Clearing obligations
Changes to clearing obligations for NFCs
Currently, if a non-financial counterparty ("NFC") exceeds the clearing obligation for one asset class, all other asset classes become subject to the clearing obligation ("NFC+"). Under EMIR Refit, NFC+s will only be subject to the clearing obligation for the asset class or classes which exceed the threshold. However, once the threshold is crossed for one asset class, the NFC+ remains subject to the other enhanced EMIR obligations for non-cleared trades, including margin obligations for all asset classes. Clients may need to review portfolios to confirm which asset classes remain subject to clearing obligations.
The method of calculating whether clearing thresholds has been crossed will also be simplified for NFC+s. The test will shift from the current rolling average positions over 30 working days, to an annual calculation based on annual average month end positions. As regards timing of the change, ESMA has stated that "financial and non-financial counterparties taking positions in OTC derivative contracts and choosing to calculate their aggregate month-end average position for the previous 12 months would need to determine the results of that calculation on the day the Refit text enters into force". As such, clients are encouraged to commence this process as soon as possible.
A new category of "small financial counterparties" has been created to reduce the clearing obligations on smaller FCs with low volumes of derivatives trading. Similar to NFCs, FCs (together with all other entities in their group) who do not exceed any of the clearing thresholds set for NFCs (based on average annual month end positions) will not be subject to the clearing obligation. However, once the clearing threshold is crossed for one asset class, all assets classes will be subject to the obligation.
Removal of the frontloading requirement
The requirement to clear trades entered into in the period between EMIR coming into effect and the clearing obligation commencing (known as "frontloading") has been removed, as it has been acknowledged that it created legal uncertainty and operational difficulties. Under EMIR Refit once a firm becomes subject to mandatory clearing for new asset classes, there will no longer be an obligation to clear pre-existing transactions.
FRANDT principle in clearing services
EMIR Refit introduces a requirement for clearing services to be provided on fair, reasonable, nondiscriminatory and transparent terms ("FRANDT"). Specific details on what this entails will be set out by the Commission in technical standards, and this obligation will come into effect once these are known. Clearing members and their clients will also be required to take reasonable steps to manage conflicts of interest, to avoid adversely affecting clearing services on FRANDT terms.
Suspension of clearing obligation
The Commission is granted powers under EMIR Refit to suspend the clearing obligation for specific classes of derivatives or counterparties for three months (extendable for up to a total 12 months). The request for suspension must come from ESMA and may also apply to the related trading obligation under MiFIR. The suspension power is limited to certain prescribed circumstances, including avoiding a serious threat to the financial stability of the EU
The statutory instrument ("SI") "on-shoring" EMIR into UK law was published before Refit, and so does not contain amendments to EMIR contemplated by Refit. It is therefore expected that a further SI will be published to reflect Refit in onshored UK EMIR.
3. Reporting obligations
FCs to report on behalf of NFC- counterparties
With effect from June 2020, for transactions between an FC and an NFC-, the FC will be responsible and legally liable for reporting the transaction on behalf of both parties. NFCs are required to provide accurate data to the FC for reporting purposes. This will be a welcome development for corporates. However, NFCs which have already established direct reporting arrangements may continue to report themselves.
NFC-s will also no longer have reporting obligations when the transaction is with a third country entity which would be an FC if established in the EU. This is conditional on the non-EU entity reporting the transaction under its home regime and that the regime is considered equivalent under EMIR.
Removal of backloading
The obligation to report transactions that were entered into before the EMIR reporting obligation commenced (known as "backloading") is removed. This is a welcome change, considering the challenges in obtaining data for historical transactions.
The requirement to report intragroup transactions is removed where at least one counterparty to the trade is an NFC, both counterparties are included within the same consolidation and the parent entity is an NFC. This exemption is likely to be a relief for NFCs.
4. Other amendments
Change to definition of FCs
EMIR Refit has clarified the definition of FC to include alternative investment funds ("AIFs") established in the EU or managed by an AIFM authorised or registered under AIFMD. Following concerns raised by the securitisation industry, securitisation special purpose entities ("SSPEs") have not been included in the definition of an FC. There are also exclusions for AIFs that serve share purchase plans.
Pension scheme clearing exemption
EMIR provided a temporary exemption from the clearing obligation for pension schemes. The exemption expired in August 2018, following which a period of regulatory forbearance (or non-enforcement) has applied. In a welcome development for the pension scheme industry, EMIR Refit extends the clearing exemption for pension schemes for two years (extendable by a further two years). However, the Commission is mandated to conduct detailed analysis of the limitations on clearing for the pensions industry during this period in an attempt to find solutions.
5. Next steps
EMIR Refit does not amount to wholesale revision of EMIR, however it does make a number of important changes. While various aspects of EMIR Refit have phase-in periods, other elements of EMIR Refit will come into effect immediately. Understanding the changed aspects of EMIR may require changed processes and consultation with counterparties, and we recommend clients commence this without delay.