On 17 July 2013, the European Securities and Markets Authority (“ESMA”) issued a consultation paper on draft regulatory technical standards (“RTS”) on contracts having a direct, substantial and foreseeable effect within the European Union (“EU”) and aimed at implementing the provisions of the European Markets Infrastructure Regulation (“EMIR”)(the “Consultation Paper”).

While EMIR entered into force on 16 August 2012, some of its provisions will take effect when the relevant RTS enter into force.

The Consultation Paper considers over-the-counter (“OTC”) derivative contracts in the context of those that are entered into by two counterparties in third countries outside the EU with jurisdictional rules that are not deemed equivalent to EMIR, and where one of the following conditions is met:

  • “one of the two non-EU counterparties is guaranteed by an EU financial counterparty for at least €8bn of the gross notional amount of OTC derivatives entered into and for an amount of at least 5% of the OTC derivatives exposures of the EU financial counterparty;

or

  • the two non-EU counterparties execute their transactions via their EU branches.”

The Consultation Paper also examines the need for certainty in relation to contracts which are considered to have a direct, substantial and foreseeable effect within the EU.

The RTS address the need for certainty by providing a framework for determining whether EMIR rules are applicable to the OTC derivative contracts entered into by two counterparties in third countries outside the EU.

Equivalent third country legislation

Article 13 of EMIR provides for the disapplication of EMIR’s provisions where an OTC contract is entered into between an EU counterparty and a counterparty in an equivalent jurisdiction.

The Consultation Paper also examines the scope of the RTS and how evasion of EMIR can be prevented in third countries.

ESMA will update the draft RTS based on the responses received to the Consultation Paper and will send the amended RTS to the European Commission for approval.

For a link to the Consultation Paper please click here.