The extraterritorial effect of the EU regulation  of OTC derivatives June 2014

1.     On 10 April 2014 some ofthe legislation that providesforthe extraterritorial effect ofthe European MarketsInfrastructure Regulation (“EMIR”) came into force.        The remaining legislationwill come into force on 10 October 2014.        Thislegal update considersthislegislation and the counterpartiestowhich it applies.        It also considerswhethersome counterparties might be able to avoid the extraterritorial effect as a result ofthe European Commission making an equivalence decision in respect ofthird country jurisdictions.        It considersthe European Securities and Market Authority (“ESMA”) advice to date on the equivalence ofthe regulatory regimesin the US, Japan, Australia, Canada,Hong Kong, India, Singapore, South Korea and Switzerland and notesthat even in the US ESMA did not find full equivalence.        Finally thislegal update also considersthe requirementsthatthird country central counterparties(“CCPs”) and trade repositories must meetin orderrespectively to provide clearing servicesto their EU clearing members and to provide reporting servicesto EU counterpartieswhich enable those counterpartiesto satisfy their clearing reporting requirements under EMIR. 2.     There are realrisksthatthe extraterritorial effect ofthe EU legislation, particularlywhen combinedwith the extraterritorial effects ofthird country legislation,will disrupt cross-bordertrades.        There is an urgent need forregulatorsto agree, in particular, on howcounterparties established in differentjurisdictions are expected to complywith duplicative clearing obligations.        Thislegal update,therefore, also considersthe consequences ofthe application of EMIR to cross-border transactions. 3.     We have soughtto address all pointsthat are relevant asregards non-EU counterparties.        The index belowwill assistthose readerswhowish to focus only on specific areas: Index The extraterritorial effect of EMIR in summary     para. 4 Scope of EMIR:     para. 6 Howdoes EMIR categorise non-EU counterparties?     para.10 General application of EMIR to different counterparties     para.17 Contracts between an EU counterparty and a non-EU counterparty     para.19 Contracts between non-EU counterparties     para. 25 Whatis an equivalence decision?     para.31 Third country CCPs and trade repositories     para.33 ESMA’s advice to the Commission on third country equivalence     para. 36 •     Australia para. 51 •     Canada     para. 57 •     Hong Kong     para.58 •     India     para.59 •     Japan para.48 •     Singapore     para.60 •     South Korea     para.62 •     Switzerland     para.63 •     US     para.43 ODRG Report para.65 Next steps para.682     mayer brown The extraterritorial effect of EMIR   4.     EMIRwas considered in ourlegal update entitled “A Quick Start Guide to EMIR” 1 .        Thislegal update focuses on the extraterritorialreach of EMIR.        EMIR explicitly statesthatit has extraterritorial effectin two situations: (a)     The clearing obligation appliesto contracts entered into by a ‘financial counterparty’ or a ‘non-financial counterparty      +’ in the EU and a third country entity provided thatthe third country entitywould be subjectto the clearing obligation      if itwere established in the EU 2 .        Only non-EU entitiesthatwould be categorised asfinancial counterparties or               qualifying non-financial counterpartieswere they established in the EUwould be subjectto the clearing obligation in      these circumstances. (b)     Both the clearing obligation and the risk mitigation requirements apply to contracts between third country      entitiesthatwould be subjectto the clearing obligation iftheywere established in the EU, provided thatthe contract      has a “direct,substantial and foreseeable effectwithin the EU” orwhere such an obligation is necessary or      appropriate to preventthe evasion of any provisions of EMIR 3 .        Again this provision only captures non-EU entitiesthat      would be categorised asfinancial counterparties or qualifying non-financial counterparties under EMIR. In addition, market developments are creating an indirect extraterritorial effect as EU counterparties already bound to complywith the reporting obligation and the EMIR risk mitigation requirementsthat apply to uncleared trades are encouraging their non-EU counterpartiesto comply also so asto facilitate their own compliance. 5.     These direct and indirect extraterritorial effects and their consequences are considered in detail at paragraphs 19 - 30 below.         The possibility of complyingwith third country regimesthat have been declared equivalentto the EU regime as opposed to complyingwith EMIR is considered at paragraphs 31- 65 below.        Before considering the extraterritorial effects and the concept of equivalence further, however, itis necessary to summarise the generalscope and application of EMIR so asto put into contextthe terms and concepts used in the EU legislation. Scope of EMIR: 6.     EMIR appliesto any legal or natural person established in the EU 4 thatis a legal counterparty to a derivative contract 5 , including interestrate, foreign exchange, equity, credit and commodity derivatives.        EMIR identifiestwo main categories of counterparty to a derivatives contract: (a)     ‘financial counterparties’(“FC”) 6 ,which includes EU authorised financial institutionssuch as banks, insurers, MiFID      investmentfirms, UCITS funds and,where appropriate,their management companies, occupational pension schemes      and alternative investmentfunds managed by a manager authorised orregistered under AIFMD; and (b)     ‘non-financial counterparties’(“NFC”),which means an undertaking established in the EUwhich is not classified as a      FC, including entities notinvolved in        financialservices 7 . 1     See our legal update of Januar y 2013 entitled “A Quick Start Guide to EMIR: What you need to do and when.” 2     See Article 4(1)(a)(iv) EMIR. 3     See Articles 4(1)(a)(v) and 11(12) EMIR.         4     While this note predominantly references the application of EMIR in the EU, EMIR will eventually apply across the entire European Economic Area (“EEA”) as well.        The EEA consists of the 28 Member States of the EU plus Iceland, Liechtenstein and Norway. All relevant EU legislation in the field of the Single Market is integrated into the EEA Agreement so that it applies in Iceland, Liechtenstein and Norway as well as the EU.            EMIR is currently under consideration for incorporation into the EEA Agreement but, until such incorporation has taken place, EMIR will not apply in Iceland, Liechtenstein and Norway. 5     Defined as a financial instrument set out in points (4) to (10) of Section C of Annex I to Directive 2004/39 (MiFID). 6     See Article 2(8) EMIR. 7     See Article 2(9) EMIR.mayer brown     3 7.     The Commission has made clearin its FAQ on EMIR 8 thatthe concept of ‘undertaking’ in the definition of aNFC covers any entity engaged in an economic activity,regardless ofthe legalstatus ofthe entity ortheway inwhich itis financed.        Case law ofthe European Court of Justice is consistentwith this approach and has made clearthat any activity consisting in offering goods and services on a marketis an economic activity.        Accordingly, individuals and non-profit entities carrying out an economic activity are considered to be undertakings and thus capable of beingNFCs, provided they offer goods and services in the market.        The concept does not extend to include public authorities. 8.     ANFCwhose positionsin OTC derivatives exceeds a clearing threshold is known as a ‘qualifying non-financial counterparty’ (“NFC+”).        In general,NFCs+are treated in the sameway as FCs.        Itisthe responsibility oftheNFC to determinewhether or notits positions exceed the clearing threshold and to notify ESMA and the relevant nationalregulatorifthisisthe case. 9.     In essence, forthe purpose of determiningwhether aNFC exceedsthe thresholdsso asto become aNFC+, hedging transactions are excluded from the calculation of positionsin OTC derivative contracts 9 . The calculation of positions must include all OTC derivative contracts entered into by theNFC itself or otherNFCswithin its groupwhich are not objectively measurable asreducing risks directly related to the commercial activity ortreasury financing activity ofthe counterparty or of its group 10 . The thresholds differ according to the type of derivative contract 11 and are determined by taking into account the systemic relevance ofthe sum ofthe net positions and exposures per counterparty and per class of OTC derivative.        The thresholds, and the criteria for establishingwhich contracts can be deemed to be for hedging purposes, are set outin the subordinate legislation adopted by the Commission on 19 December 2012 12 . How does EMIR categorise non-EU counterparties? 10.     Given the cross-reference to regulatory authorisation, itisstraight-forward to establishwhether an EU counterparty is a FC.        Itis also relatively easy to establishwhether a non-EU counterparty is a FC as ESMA’s Q & A 13 directsthat consideration should be given to the nature ofthe activitiesthe non-EU entity undertakes. Itisless easy to establishwhether any counterparty is aNFC+ and the appropriate categorisation of non-EUNFCs. 11.     Itis firstworth consideringwhen an entity is a non-EU entity.        Entitieswithout any physical presence in the EU are clearly nonEU entities butfurther consideration needsto be given to non-EU entitiesthat have EU subsidiaries and branches.        In its FAQ the Commission summarisesthatforthe purpose ofthe application of EMIR, aNFC refersto an undertaking established in the EU but points outthat‘undertaking’ and ‘established’ are notfurther defined. 12.     We have explained the concept of ‘undertaking’ at paragraph 7 above butthe concept of establishmentis crucialto the treatment of branches and subsidiariesin the EU.        This conceptis an EU constructthatis notset outin any one place in particular butisthe subject of legal definition based on EU primary legislation dealingwith the right of establishment (Articles 49 – 55 ofthe Treaty on the Functioning ofthe EU) and subsequent case law.        The concept does notinclude branches: establishmentrefersto the establishment ofsolo entitieswith individual legal identitywhich are incorporated (or are domiciled or have theirregistered office)in a Member State in the EU.        As a result,subsidiaries are includedwithin the concept but branches are not capable of being established in their own right. Thus a subsidiary of a non-EU entity can be established in the EU but a branch cannot.        To summarise, if bank A is a bank headquartered and regulated in the US and has a branch (“B”)in Dublin and a subsidiary (“S”)in London, A and B are non-EU entities but S is an EU entity. 8     “EMIR: Frequently Asked Questions”        Updated: 18 December 2013 9     See Article 10(3) EMIR. 10 See Ar ticle 10(1) – ( 3) EMIR. 11 A distinction is drawn between credit and equity derivatives on the one hand and interest rate, foreign exchange, commodity derivatives and all other derivatives on the other. 12 See Ar ticles 10 and 11 of the Commission Delegated Regulation No.149/2013 /EU with regard to regulator y technical standards on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, risk mitigation techniques for OTC derivative contracts not cleared by a CCP. 13 Questions and Answers: Implementation of the Regulation (EU) No. 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR).4     mayer brown 13.     We have already commented thatitisrelatively straight-forward to assesswhether a non-EU entitywould be regarded as an FC if itwere established in the EU.        In the example given in the above paragraph, as A isregulated as a bank in the US, itwould be a non-EU FC. Itis more difficultin the case of non-EUNFCs andNFCs+.        ESMA’s Q&A providesthat ifthe non-EU entity is part of a groupwhich also includesNFCs established in the EU, itsstatus as either anNFC+ orNFC should be assumed to be the same asthat ofthe EUNFCs. Ifthe non-EU entity is not part ofsuch a group, but benefitsfrom a similar butlimited exemption in its own jurisdiction, it can be assumed thatthe entitywould beNFCwere it established in the EU. 14.     If neither ofthe above applies, however,then there is only oneway to determine conclusivelywhether a non-EU entity is a NFC orNFC+: itwould have to calculate its group-level position againstthe EMIR clearing threshold. 15.     EU counterpartiesshould obtain representationsfrom their non-EU counterparties detailing theirstatus 14 . The EU counterparty is not expected to conduct verifications ofthe representations and may rely on such representations unless they are in possession of informationwhich clearly demonstratesthatthose representations are incorrect. If itis not possible to obtain such representations and assesswhatthe counterparty’sstatuswould be under EMIR, firmsshould assume thattheir counterparty statusisNFC+ and apply the EMIR requirements accordingly. 16.     Seemingly,when non-EU counterparties are themselves directly bound by EMIR,the onusis on them to establish their appropriate categorisation under EMIR. Application of EMIR to different counterparties 17.     The provisionsin EMIR apply differently toNFCs+ than toNFCs. In general,NFCs+ are treated in the sameway as FCs. The provisions applicable to the differenttypes of counterparty are asfollows: FC Clearing obligation Allriskmitigation techniques: •     timely confirmation; •     portfolio reconciliation and compression; •     dispute resolution; •     marking-to-market or marking-to-model;  •     the exchange of collateral to cover the exposures arising from OTC  derivatives not cleared by a CCP; •     increased capital requirements; and •     the reporting of unconfirmed trades. Reporting obligation NFC+ Clearing obligation Riskmitigation techniques as above for FC(save in relation to the increased capitalrequirements and the reporting of unconfirmed trades) Reporting obligation NFC Certain riskmitigation techniques(timely confirmation, portfolio reconciliation and compression, dispute resolution) Reporting obligation 18.     Non-EU counterparties are not, however,treated in the sameway astheir EU counterparties. 14 The ISDA 2013 EMIR NFC Representation Protocol enables parties to amend the terms of their ISDA Master Agreements to reflect certain know your counterparty requirements, and the consequences of transacting on the basis of an incorrect classification, imposed by EMIR.mayer brown     5 Contracts between an EU counterparty and a non-EU counterparty 19.     This extraterritorial effect,summarised in paragraph 4(a) above, only applieswhen an EU FC orNFC+ istransactingwith a non-EU FC orNFC+ (asthe EMIR clearing obligation does not applywhen aNFC is party to a transaction). The applicationwill not come into effect untilthe clearing obligation is operative and thatis unlikely to be until 2015 15 .        ESMA still needsto develop subordinate legislation known as Regulatory Technical Standards(“RTS”)to determine the classes of OTC derivativesthat will be subjectto the clearing obligation. A first notification that an EU CCP (Nasdaq OMX) had been authorised to clear certain classes of OTC interestrate swaps and equity derivativeswas made to ESMA on 18 March 2014 and thistriggered the clearing obligation procedure described in Article 5(2) EMIR underwhich ESMA considerswhetherthe class of derivatives currently cleared byNasdaq OMX should be subjectto the clearing obligation.        If it considersthatthe asset classes cleared byNasdaq OMX should be subjectto the clearing obligation, ESMA must draft RTS and submitthem to the Commission within 6 months ofthe authorisation ofthe CCP.        Thus ESMA has until18 September 2014 to submitthe firstset of draft RTS.         Different deadlineswill apply for each class of OTC derivatives cleared by authorised CCPs,the deadline being triggered by the date onwhich the CCPwas authorised. 20.     The first clearing obligationswere originally expected to take effectin summer 2014,subjectto phase-in periods, butthis timetable is nowclearly impossible.        Following the submission by ESMA ofthe draft RTS,the draft RTS must be endorsed by the European Commission (which has between one and 3 monthsto do so) and not be subjectto objection by the European Parliament and the Council(which also have between one and 3 monthsto considertheir position) before the legislation can be adopted.        The actual date of application of a clearing obligationwill depend on the date of entry into force ofthe RTS and the expected phase-in period pertype of counterparty,to be defined in the RTS.        In these circumstances,the first clearing obligation is unlikely to take effect before early 2015. 21.     As a result ofthe need to determine the clearing obligation as described above, EMIR does not currently expressly apply to a non-EU counterparty transacting (within the scope of EMIR)with an EU counterparty butthis does not mean that non-EU counterpartiesin such transactions are not affected by EMIR.        Article 11 EMIR prescribesthe risk mitigation requirementsthat apply to uncleared trades and already applieswhenever atleast one counterparty is establishedwithin the EU.        Accordingly,when an EU counterparty istransactingwith a non-EU entity,the EU counterparty must(by negotiating appropriate obligationsin the master agreement) ensure thatthe EMIR requirementsfor portfolio reconciliation, dispute resolution,timely confirmation and portfolio compression are metforthe relevant portfolio and/ortransactions even though the non-EU counterparty is notitselfsubjectto EMIR.        Itisforthese reasonsthat EU counterparties have been increasingly encouraging their non-EU counterpartiesto comply voluntarilywith the requirements of EMIR and to sign the relevantISDA protocols 16 . Although there is no legal obligation on the non-EU counterparty to comply, market pressures may give them little option.  22.     The EMIR reporting obligation does not(andwill not apply to non-EU counterparties) but EU counterpartiestransacting with non-EU counterparties are stillrequesting information from their counterpartiesin orderto complywith the reporting obligation themselves.        Article 9(5) EMIR providesthat atleastthe identities ofthe partiesto the derivative contractsshould be reported to trade repositories. Itisthisinformation that EU counterparties may seek from their non-EU counterparties but confidentiality and data protection legislation in third countries may preventsome non-EU counterparties providing this information.        This causes a problem forthe EU counterparty as, as ESMA points outin its Q & A,the Article 9(5)requirement 15 It ought to be noted that the concept of ‘front-loading’ creates a requirement to clear OTC derivative contracts entered into after a CCP has been authorised under EMIR and before the date of application of the clearing obligation if the remaining maturity of those contracts exceeds a limit defined by ESMA in the RTS.        ESMA wrote to the Commission on 8 May 2014 requesting that the extent of the front-loading period be limited to the period between the entry into force of the RTS and the date of application of the clearing obligation.        At present, however, the front-loading window is open due to the notification made to ESMA in respect of Nasdaq OMX on 18 March.        The extent of the front-loading period may, therefore, impact the date on which the clearing obligation comes into force. 16 The ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol enables parties to amend the terms of their Protocol Covered Agreements to reflect the portfolio reconciliation and dispute resolution requirements imposed by EMIR as well as to include a disclosure waiver to help ensure parties can meet the various reporting and record keeping requirements under EMIR without breaching confidentiality restrictions.6     mayer brown      cannot bewaived.        Accordingly, an EU counterparty dealingwith counterpartiesthat cannot be identified because of legal,regulatory or contractual impediments,would not be deemed compliantwith Article 9(5) of EMIR.        There is no legal obligation on the non-EU counterparty to supply the requested information, but EU counterparties may choose notto do businesswith non-EU counterpartieswhowill cause them to be non-compliantwith EMIR. 23.     Irrespective ofthe factthatthe EMIR risk mitigation requirements do not apply to contracts between EU and non-EU counterparties,these developments are causing counterparties dealing in cross-bordertransactionsto face conflicting and duplicative requirements.When the clearing obligation comesinto force, itisto be hoped thattherewill be clarity asto where cross-bordertransactionsshould be cleared asitwill not be possible to have duplicative requirementsthat mandate thatthe trade be cleared in more than one location.        Withoutthis clarity, if an EU and a US entity, for example, enterinto a trade thatissubjectto a clearing obligation under EMIR and Title VII of Dodd-Frank respectively both partieswill not be able to complywith theirrespective obligations.        This could discourage cross-bordertrades. 24.     In the future, ifthe non-EU entity is established in a jurisdictionwhich the Commission hasfound has an equivalentregime to thatin EMIR,the counterparties could complywith the equivalentrulesin the third country.        The concept of ‘equivalence’ is considered at paragraphs 31 to 65 below. Contracts between non-EU counterparties 25.     As described in paragraph 4(b) above,there are some circumstances underwhich EMIR obligationswill applywhen both counterparties are outside the EUand established in third countriesthat have not been declared equivalentto EMIR.        Both the clearing obligation and the riskmitigation requirements apply to contracts between non-EUentitiesthatwould be subjectto the clearing obligation iftheywere established in the EU, provided thatthe contract has a “direct, substantial and foreseeable  effectwithin the” EU“orwhere such an obligation is necessary or appropriate to preventthe evasion of any provisions of” EMIR.         This provisionmirrorssimilarlanguage inArticle 722(d) oftheUSDodd-FrankWall Street ReformandConsumer Protection Act 2010leaving globally active financialmarket participantsfacing the spectre of duplicative and even conflicting regulation. To some extentthis duplicationwasinevitable asG20nationsmade a joint decision in September 2009 to regulateOTCderivative transactions.        Accordingly, internationalregulators have been seeking to addressthe problem.         26.     On Friday 21 March 2014,the Official Journal ofthe EU published the RTS specifying the contractsthat are considered to have “direct,substantial and foreseeable” effectwithin the EU and the caseswhere itis necessary to preventthe evasion ofrules and obligationsforthe purposes of EMIR.        These RTS develop Article 4(4) and 11(14)(e) EMIR thatspecify the circumstances bywhich clearing and risk mitigation techniques        would apply to OTC derivatives contracts entered into between two counterparties established in third countries(provided thattheywould be subjectto the EMIR clearing requirementiftheywere established in the EU).        The clearing obligation in EMIR does not applywhen aNFC is party to a transaction. Thusthese RTS only applywhen any combination of non-EU FCs orNFCs+ are transacting. The RTS entered into force on 10 April 2014 but Article 2 (Contractswith a direct,substantial and foreseeable effectwithin the Union) does not apply until10 October 2014. 27.     The legislation statesthat a contract has a “direct,substantial and foreseeable effectwithin the” EUwhen eithersubparagraph (a) or(b) belowapplies: (a)     Atleast one ofthe counterparties benefitsfrom a legally enforceable guarantee provided by a FC established in the EU      and covering all or part of itsliability resulting from the OTC derivative contract,to the extentthatthe guarantee      meetsthe following conditions: (i)     Where itis a guaranteewhich covers allsuch liability, it covers OTC derivativestransactions entered into by      the third country counterparty for an aggregated notional amountthatis atleast 8 billion euro equivalent or      where itis a guaranteewhich covers only a percentage ofsuch liability, it covers OTC derivatives      transactions entered into by the third country counterparty for an aggregated notional amount of at      least 8 billion euro equivalent divided by the percentage ofthe liability covered; andmayer brown     7 (ii)     Itis atleast equalto 5% ofthe sum of current exposuresin OTC derivative contracts ofthe FC established in      the Union issuing the guarantee. 17 (b)     The two counterparties enterinto the OTC derivative contract via their branchesin the EU 18 .  28.     Additionally,the legislation providesthatitis necessary or appropriate to preventthe evasion of EMIRwhere OTC derivative contractswould have been subjectto the clearing obligation orthe risk mitigation techniques but have been concluded in awaywhich is contrived to evade application ofthe clearing obligation or ofthe risk mitigation techniques.        The legislation providesthat an OTC derivative contractshall be deemed to have been so contrived iftheway inwhich the OTC derivative contract has been concluded is considered, viewed as awhole and having regard to allthe circumstances,to have asits primary purpose the avoidance ofthe application of EMIR 19 . 29.     The legislation also makes clearthatitshall be considered that an OTC derivative contract has been contrived to circumvent EMIRwhen itis part of an arrangementwhich has been putinto place forthe essential purpose of avoidance of EMIR includingwhen itis part of an artificial arrangement.        The legislation states an arrangementis artificialwhere itlacks commercialsubstance orrelevant economic justification in itself. 20 30. As pointed out in paragraph 25 above,the RTS only apply if neither counterparty to a OTC derivative contractis established in a third countrywhose legal,supervisory and enforcementregime has been declared equivalentto EMIR.        Thisis because when one counterparty is established in an equivalentthird country, Article 13(3) EMIR providesthatthere shall be deemed compliancewith the clearing obligation,the reporting obligation,the rules onNFCs+ and the risk mitigation requirements for uncleared tradesset outin EMIR.        The following diagrams developed by ESMA make this point clear: DIAGRAM A  17 See Ar ticle 2(1)(a) and (b) RTS. 18 See Ar ticle 2(2) RTS. 19 See Ar ticle 3(1) RTS. 20 See Ar ticle 3 (2) RTS. 915023617.1 10  counterparty is established  in an equivalent third country, Article 13(3) EMIR  provides that there shall be deemed equivalence with the clearing obligation, the  reporting obligation, the rules on NFCs+ and the risk mitigation requirements for  uncleared trades set out in EMIR.  The following diagrams developed by ESMA make  this point clear:  Diagram A  Diagram B     Both counterparties are  established in a third  country A Third country A is  declared  equivalent for the  purpose of EMIR Counterparties are deemed to comply  with the clearing obligation/  reporting obligation/ rules on NFCs+/  risk mitigation requirements in EMIR Counterparty A established  in third country X Country X declared  equivalent Counterparty A is deemed to comply  with the clearing obligation/  reporting obligation/ rules on NFCs+/  risk mitigation requirements in EMIR Counterparty B established in  third country Y Country Y not  declared equivalent Counterparty B is  deemed to comply  with the clearing obligation/ reporting  obligation/ rules on NFCs+/ risk  mitigation requirements in EMIR for the  purpose of this transaction only8     mayer brown DIAGRAM B What is an equivalence decision? 31.     The purpose ofthe RTS isto set outwhen EMIR has extraterritorial effect but EMIR itself already foresawthe possibility of duplicative and conflicting requirements.        It, asreferenced above, contains a mechanism in Article 13which isintended to avoid duplicative or conflicting rules on clearing,reporting and risk mitigation requirements.        The mechanism involves the European Commission making an “equivalence decision”in respect of a third country jurisdiction.        This meansthatthe Commission issatisfied that: (a)     the rules on clearing,reporting,the clearing thresholds and risk mitigation in thatthird country are equivalentto      those in EMIR; (b)     the third country has equivalent provisions on professionalsecrecy; and (c)     the rules are effectively applied and enforced so asto ensure effective supervision and enforcement. 32.     Once (orif)the Commission has decided that a third country jurisdiction is equivalent, counterparties entering into transactionswithin the scope of EMIR shall be deemed to have compliedwith the provisions of EMIR if atleast one of the counterpartiesis established in thatthird country 21 .        The following tablesset outthe scope of application of EMIR to third country entities pursuantto the RTS and Article 13 of EMIR. In addition to the pointsraised in the tables(and as explained at paragraphs 28 and 29 above), EMIRwill also apply to OTC derivative contractsthat are entered into by specific counterpartieswith the primary purpose of avoiding the application ofthe clearing obligation or ofthe risk mitigation requirementsset outin EMIR. 21 See Ar ticle 13( 3) EMIR and recital 2 RTS. 915023617.1 10  counterparty is established  in an equivalent third country, Article 13(3) EMIR  provides that there shall be deemed equivalence with the clearing obligation, the  reporting obligation, the rules on NFCs+ and the risk mitigation requirements for  uncleared trades set out in EMIR.  The following diagrams developed by ESMA make  this point clear:  Diagram A  Diagram B     Both counterparties are  established in a third  country A Third country A is  declared  equivalent for the  purpose of EMIR Counterparties are deemed to comply  with the clearing obligation/  reporting obligation/ rules on NFCs+/  risk mitigation requirements in EMIR Counterparty A established  in third country X Country X declared  equivalent Counterparty A is deemed to comply  with the clearing obligation/  reporting obligation/ rules on NFCs+/  risk mitigation requirements in EMIR Counterparty B established in  third country Y Country Y not  declared equivalent Counterparty B is  deemed to comply  with the clearing obligation/ reporting  obligation/ rules on NFCs+/ risk  mitigation requirements in EMIR for the  purpose of this transaction only 915023617.1 10  counterparty is established  in an equivalent third country, Article 13(3) EMIR  provides that there shall be deemed equivalence with the clearing obligation, the  reporting obligation, the rules on NFCs+ and the risk mitigation requirements for  uncleared trades set out in EMIR.  The following diagrams developed by ESMA make  this point clear:  Diagram A  Diagram B     Both counterparties are  established in a third  country A Third country A is  declared  equivalent for the  purpose of EMIR Counterparties are deemed to comply  with the clearing obligation/  reporting obligation/ rules on NFCs+/  risk mitigation requirements in EMIR Counterparty A established  in third country X Country X declared  equivalent Counterparty A is deemed to comply  with the clearing obligation/  reporting obligation/ rules on NFCs+/  risk mitigation requirements in EMIR Counterparty B established in  third country Y Country Y not  declared equivalent Counterparty B is  deemed to comply  with the clearing obligation/ reporting  obligation/ rules on NFCs+/ risk  mitigation requirements in EMIR for the  purpose of this transaction onlymayer brown     9 EU Firm (including branches  established in Third Countries) Equivalent Third Country EU Branch Third Country Firm EU Firm (including branches  established in Third Countries) EMIR applies. EMIR appliesto EUfirm(and clearing obligationmay apply to both parties) but can be disapplied if parties complywith third country regime ratherthan EMIR. EMIR appliesto EUfirm(and clearing obligationmay apply to both parties)        but can be disapplied if parties complywith third country regime ratherthan EMIR. Non Equivalent  Third Country EUBranch EMIR appliesto EUfirm.        * Clearing obligationmay apply to both counterparties depending on their EMIR categorisation. Deemed compliancewith EMIR: EMIR does not apply. Deemed compliancewith EMIR: EMIR does not apply. Third Country Firm EMIR appliesto EUfirm.        * Clearing obligationmay apply to both counterparties depending on their EMIR categorisation. Deemed compliancewith EMIR: EMIR does not apply. Deemed compliancewith EMIR: EMIR does not apply. EU Firm (including branches  established in Third Countries) Non-Equivalent Third Country EU Branch Third Country Firm EU Firm (including branches  established in Third Countries) EMIR applies. EMIR appliesto EUfirm.* Clearing obligationmay apply to both counterparties depending on their EMIR categorisation. EMIR appliesto EUfirm.* Clearing obligationmay apply to both counterparties depending on their EMIR categorisation. Non Equivalent  Third Country EUBranch EMIR appliesto EUfirm.* Clearing obligationmay apply to both counterparties depending on their EMIR categorisation. EMIR applies – clearing obligation and riskmitigation requirements apply. EMIR appliesif atleast one counterparty has a substantial guarantee fromEUFC- clearing obligation and riskmitigation requirementswould apply. Third Country Firm EMIR appliesto EUfirm.* Clearing obligationmay apply to both counterparties depending on their EMIR categorisation. EMIR appliesif atleast one counterparty has a substantial guarantee fromEUFC- clearing obligation and riskmitigation requirementswould apply. EMIR appliesif atleast one counterparty has a substantial guarantee fromEUFC- clearing obligation and riskmitigation requirementswould apply. * May be pressure from EU counterparty on non-EU counterparty to complywith EMIR so asto facilitate its own compliance.10     mayer brown Third country CCPs and trade repositories 33.     An equivalence decision is also necessary before third country CCPs can provide clearing servicesto clearing members which are established in the EU 22 and before EU counterparties are able to satisfy theirreporting obligation under EMIR by reporting to a third country trade repository 23 .        ESMA must“recognise”the CCPs and trade repositories.        A CCPwill only be recognised if allthe following criteria are met: (a)     the CCP is authorised in the third country and subjectto effective supervision and enforcement; (b)     there is a cooperation agreementin place between ESMA and the relevantregulatorin the third country;         (c)     there are equivalentrules on anti-money laundering and financing ofterrorism in the third country; (d)     the Commission has made an equivalence decision; (i)     determining thatthe legal andsupervisory arrangementsforCCPsinthe thirdcountry are equivalentto        EMIR; (ii)     thatthe CCPs are subjectto effective supervision and enforcement; and (iii)     thatthe third country providesfor an effective equivalentsystem forthe recognition of CCPsin third      countries. 34.     There has been ongoing debate aboutwhetherthe EU equivalence processis as nuanced asthe SEC’ssubstituted compliance mechanism,which has been described as an outcomes-based approach.        The EU Commissionerfor financial services, Michel Barnier, has made clear a number oftimesthat, in his opinion,the equivalence mechanism also involves an outcomes-based approach and, in the context of EMIR,the Commission recently confirmed thatthe assessmentis outcomefocused andwill, as much as possible,take account ofthe specificities ofthe regulatory contextin the third country.        Yet the reciprocity provision in (d)(iii) above could prevent a recognition decision from being made and appearsto be a move away from an outcomes-based approach in the context ofthe recognition of CCPs atleast.        Such reciprocity provisions are becoming an increasing feature of EU equivalence decisions. 35.     Similarrequirements are imposed on trade repositories before they can be recognised by ESMA, although there is notthe same reciprocity provision.        Non-EU trade repositorieswillstill be permitted to provide servicesto EU members even ifthey are notrecognised under EMIR butimportantly those EU memberswill not be able to satisfy theirreporting obligation under EMIR by reporting to thattrade repository. What did ESMA advise the Commission? 36.     ESMA has compared certain third country ruleswith EMIR requirementsincluding those relating toNFCs central clearing, reporting, CCPs,trade repositories and clearing thresholds aswell asrisk mitigation techniquesfor uncleared trades.        It has not, however, considered allthese aspectsin respect of allthe third countrieswhose regimesit has assessed.         37.     On 3 September 2013 ESMA published its firstset of advice to the European Commission on the equivalence ofthe regulatory regimesfor OTC derivatives clearing, CCPS, and trade repositories of non-EU countrieswith EMIR.        ESMA assessed the equivalence ofthe regulatory regimes of Australia,Hong Kong, Japan, Singapore, Switzerland and the US but, somewhatsurprisingly, did not find complete equivalence even in the US. 38.     On 2October 2013 ESMAsupplemented itstechnical advicewith complete equivalence findings onAustralia,Canada,        Hong Kong, India, Singapore, South Korea and Switzerland.On 30January 2014 ESMAgave advice to the EuropeanCommission in respect ofthe equivalence between the Japanese regulatory regime for commodityCCPs and the regulatory regime forCCPs under EMIR. 22 See Ar ticle 25 EMIR. 23 See Ar ticle 7 7 EMIR.mayer brown     11 39.     The following table sets outwhat ESMA        has considered to date: CCPs TRs Conflicting/duplicative rules US 3 3 3 Japan 3 3 3 Australia 3 3 3 Canada 3 Hong Kong 3 3 3 India 3 TBD Singapore 3 3 TBD South Korea 3 TBD Switzerland 3 TBD 3 Rest of World 40.     ESMA found the regulatory regimes of Australia and Switzerland for CCPs equivalentto EU rules.        Ifthe Commission adopted ESMA’s advice in thisregard, only Australian 24 and Swiss CCPswould be able to satisfy ESMA’srequirementsforrecognition so thatthey could remain globally active and continue to provide servicesto their clearing members established in the EU.        ESMA also found the regime for Australian trade repositories equivalentto thatin the EU.        Ifthis advicewere accepted, EU counterparties could only satisfy theirreporting requirements under EMIR by reporting to EU and Australian trade repositories.   41.     ESMA’slack of equivalence findings,save as detailed above, issignificant and concerning, particularly in respect ofthe clearing obligation.        As noted at paragraph 23 above, iftwo counterparties established in differentjurisdictions enterinto a trade thatissubjectto a clearing obligation undertheirrespective legislation, itwill not be possible for both partiesto complywith their obligationswithout an equivalence decision in respect oftheirrespective CCPs: a trade cannot be cleared twice.        The lack of equivalence in respect of CCPs and the clearing obligation could,therefore, discourage cross-border trades.        ESMA’s findingsin respect ofthe other EMIR requirements are of lessimmediate concern as, for example, itwould be possible – if onerous,time-consuming, costly and potentially confusing – for a trade to be reported twice to differenttrade repositories and forthe partiesto complywith two sets ofrisk mitigation requirements. 42.     Itisworth noting that, atthe time ofthe last update on 29 April 2014, 33 CCPs have applied to ESMA forrecognition under Article 25 EMIR and agreed to have the fact oftheir application made public.        On the basis of ESMA’s advice to date, only the Australian and Swiss applicants are likely to satisfy ESMA’srequirementsforrecognitionwithout adopting additional legally binding internal policies, procedures,rules, models and methodologies.        Some applicant CCPs are established in jurisdictions,such as Mexico, Brazil, Dubai,NewZealand, Malaysia and South Africa,the equivalence ofwhich ESMA has not considered and so in relation towhich a recognition decision is not possible in the nearfuture.        Other applicant CCPs are established in countriessuch as Canada and Indiawhich ESMA has advisedwill not, at present,satisfy the requirements necessary forrecognition. 24 Although ESMA did not find equivalence in respect of the ASX listed equities market.12     mayer brown US 43.     Insummary,on1September 2013ESMAadvisedthatCCPs authorisedintheUSare subjecttoeffective supervisionand enforcementonanon-goingbasis.        Itwentontofind,however,thatUSlegal andsupervisory arrangementsthemselvesdonot ensure thatUSCCPs complywithlegallybinding requirementswhichare equivalenttothe requirementslaiddowninEMIRand ESMAwouldonly considerthose requirementstobemetifthoseCCPsthemselves adoptedadditional legallybinding internal policies,procedures,rules,models andmethodologieswhichare equivalent.        ThismeansthatUSCCPswillnot automaticallymeet the criteria thatESMArequiresbefore they canbe recognisedtoprovide servicestoEUcounterparties. 44.     ESMA seemed to find thatthe US satisfied the reciprocity requirement.        It advised the Commission to considerthatthe US does have an equivalentsystem forthe recognition ofthird country CCPs butit noted thatthe US authorities do not use the equivalentsystem on a long-term basis.        ESMA pointed outthatin practice the US authoritiesrequire that CCPs authorised outside ofthe US become subjectto the directjurisdiction ofthe SEC and CFTC and the application oftwo sets ofrules and noted thatthisrepresents a departure from the third country CCP regime prescribed in EMIR.        There isthus a possibility that the Commissionwill not find the reciprocity condition satisfied in respect ofthe US.         45.     ESMA made the same sort of conditional finding of equivalence regarding the US regime forthe regulation oftrade repositories,the clearing obligation,timely confirmations and portfolio reconciliation. For example, ESMA advised the Commission to find thatthe regime is equivalent only ifthe productsubjectto the clearing obligation in the EU is also subject to the clearing obligation in the US and the counterparty in the US is a non-exempted entity or, if exempted, itwould benefit from an equivalent exemption if established in the EU. ESMA placed similar conditions on an equivalence decision in respect oftimely confirmation and portfolio reconciliation. It did find equivalence regarding portfolio compression. 46.     There are, however, a number of areaswhere ESMA simply found thatthe US regime is not equivalent.        Itfound thatthe US legal,supervisory and enforcement arrangements are not equivalentto the requirementslaid down in EMIR in respect ofthe reporting obligation.        This finding, if adopted by the Commission,would not prevent EU counterpartiesfrom using US trade repositories butitwould mean thatthey could notsatisfy theirreporting obligation under EMIR by reporting to them. 47.     ESMAalso found thattheUS regime for dispute resolution is not equivalentto that of EMIR and so EUcounterparties transactingwithUS counterpartieswould notsatisfy allthe riskmitigation requirements of EMIR by complyingwithUS law. ItdidnotconsideritpossibletomakeanequivalencedecisionregardingNFCsgiventhedifferentapplicationoftheEUandUSregimes. Japan 48.     In its advice of1 September 2013 ESMA did not considerthe Japanese regime fortrade repositories because Japanese trade repositories do notintend to apply forrecognitionwhich meansthatthere is no possibility of EU counterparties being able to satisfy the reporting obligation in EMIR by using Japanese trade repositories.        Aswith the US, ESMA’s findingsin respect of CCPswere of ‘conditional equivalence’.        It also advised that Japan satisfied the reciprocity requirement.        It made a similar conditional finding to the US in respect ofthe Japanese regime in respect ofthe clearing obligation.         49.     In the absence of Japanese requirements equivalentto the risk mitigation obligationsin EMIR, ESMA advised the Commission thatitwas not possible to make an equivalence decision thatwould allowEU counterpartiesto satisfy the requirements of Article 11 EMIR by complyingwith Japanese law. 50.     InitsSeptember 2013 advice,ESMAadvisedonly inrespectofthe regulatory regime inJapanforCCPswhichclearderivatives transactions conductedonFinancial InstrumentsExchanges andOTCderivativestransactionsrelating tosecurities, currencies, interestrates, credit,weather,GDPandotherindices.        Subsequenttodelivering this advice,ESMAbecame aware thatthere is a separate regulatory regime inJapanforCCPswhichclear commoditiesderivativestransactions andOTCcommoditiesderivatives transactions.Thisregulatory regime is governedbydifferentlegislationandtheCCPs are subjecttosupervisionbydifferent regulatory authorities.        ThusESMAconsidereditnecessary todeliversupplemental advice totheCommissioninrespectof commoditiesCCPs.        ESMAdeliveredits adviceon30January 2014andmade the samefindingof conditional equivalence inrespect ofthe Japanese commoditiesCCPs asitdidinrespectoftheother JapaneseCCPsinSeptember 2013.mayer brown     13 Australia 51.     ESMA found thatthe regulation of CCPsin Australiawas equivalentto EMIR standards,save forthe ASX listed equities market, on 1 September 2013.        It also advised the Commission to considerthe reciprocity requirementsatisfied: Australia has an effective equivalentsystem forthe recognition ofthird country CCPsin respect ofthe Australian derivative markets (including both exchange-traded and OTC derivative markets),the Australian debt markets, and the Australian cash-equity markets but notthe ASX listed equities market.        This finding,should the Commission endorse it,would enable Australian CCPs,save in respect ofthe ASX listed equities market,to satisfy ESMA’srequirementsforrecognition and enable them to continue to remain globally active and service EU clearing members. 52.     On 2 October 2013 ESMA gave the Commission further advice in respect ofwhetherthe Australian regime is equivalent to the EMIR provisionsrelating to the clearing obligation,risk mitigation requirementsfor uncleared trades and trade repositories.  53     In relation to trade repositories, ESMA advised thatthe Commission decide thattrade repositories authorised in Australia do complywith legally binding requirementswhich are equivalentto those set outin EMIR. It also advised the Commission to considerthe Australian legal,supervisory and enforcement arrangementsfortrade repositories and the guarantees of professionalsecrecy in Australia equivalentto the EU regime.        Ifthe Commission agreeswith this advice,thiswould mean that EU counterparties can satisfy theirreporting requirements under EMIR by reporting to Australian trade repositories.         54.     ESMA’s findingsin relation towhetherthe Australian regime is equivalentto the EMIR clearing obligation and risk mitigation requirementsfor uncleared tradeswere less positive.         55.     Aswith Japan and the US, ESMA advised thatthe Commission only find the Australian regime equivalent asrespectsthe clearing obligation ifthe productsubjectto the clearing obligation in the EU is also subjectto the clearing obligation in Australia and the counterparty in Australia is a non-exempted entity or, if exempted, itwould benefitfrom an equivalent exemption if established in the EU. 56.     Due to the absence of legally binding requirements equivalentto the risk mitigation techniquesforeseen in EMIR in the Australian regime, ESMA did not considerit possible to make an equivalence decision thatwould permitthe EMIR risk mitigation requirementsfor uncleared tradesto be disapplied. Canada 57.     ESMA delivered a reportto the Commission on 2 October 2013 inwhich itsaid thatitwas notin a position to perform a conclusive analysis and deliver advice astowhetherthe Canadian regime is equivalentto the EU requirementsrelating to the clearing obligation,NFCs and risk mitigation techniquesfor uncleared trades as Canada isstill in the process of finalising its regulatory regime. ESMA isready to assessthe Canadian regime once further progress has been. Hong Kong 58.     ESMA considered the equivalence ofthe regulation of CCPsinHong Kong and made the same conditional finding asin the US and Japan in its advice of1 September 2013. It also found thatHong Kong satisfied the reciprocity requirement.        ESMA delivered a furtherreportto the European Commission on 2 October 2013.        It concluded thatitwas notin a position to perform a conclusive analysis and deliver advice in respect ofthe clearing obligation,NFCs,risk mitigation techniquesfor uncleared trades and trade repositories asHong Kong isstill in the process of finalising itsregulatory regime. ESMA said that itisready to receive a new mandate from the Commission to provide advice once further progress has been made towards the adoption ofthe relevantHong Kong regulatory regime.14     mayer brown India 59.     On 1 October 2013 ESMA made the same finding of conditional equivalence asregardsIndian CCPs asit did in respect of US and Japanese CCPs: ESMA advised thatitwould only grantrecognition to a CCP authorised in India if it had adopted legally binding internal policies, procedures,rules, models and methodologieswhich incorporate provisionsthat are broadly equivalentto the legally binding requirementsfor CCPs under EMIR.        ESMA, however, advised the Commission to considerthatIndia does not meetthe reciprocity requirement: it does not have a specific regime forthe recognition of CCPs authorised underthe legalregime of a third country.        Ifthe Commission agreeswith ESMA’s findingsin both respects, Indian CCPswould not be able to satisfy ESMA’srequirementsforrecognition and sowould not be able to provide clearing services to EU clearing members. Singapore 60.     In September 2013 ESMA considered the equivalence ofthe regulation of CCPsin Singapore and made the same conditional finding asin the US, Japan and India.        ESMA also concluded that Singapore satisfied the reciprocity requirement. 61.     ESMA delivered further advice to the Commission in relation to trade repositories on 2 October 2013 and made another finding of conditional equivalence.        ESMA advised the Commission to considerthattrade repositories authorised in Singapore are subjectto effective supervision and enforcement on an on-going basis. ESMA also advised the Commission to considerthatthe legal and supervisory arrangements of Singapore ensure thattrade repositories authorised in Singapore complywith legally binding requirementswhich are equivalentto the requirementslaid down in Title VII of EMIR but only in respect ofthose trade repositoriesthat have adopted additional legally binding internal policies, procedures and rulesthat equate to the EMIR requirementsfortrade repositories. South Korea 62.     In a report dated 1 October 2013 ESMA made another finding of conditional equivalence regarding South Korean CCPs.        It also advised the Commission to considerthat South Korea satisfied the reciprocity requirementin respect of CCPs providing clearing servicesto the OTC derivative markets of South Korea but notfor CCPs providing clearing servicesin respect of financial instrumentsthat are not OTC derivatives.        This meansthat, ifthe Commission accepts ESMA’s advice, South Korean CCPswhich adopt additional legally binding internal policies, procedures,rules, models or methodologywhich are equivalentto the requirementsset outin EMIR could satisfy ESMA’srequirementsforrecognition.        Theywould then be able to provide clearing servicesto EU counterparties. Switzerland 63.     On 1 September 2013 ESMA found thatthe regulation of CCPsin Switzerlandwas equivalentto EMIR standards.        It also found that Switzerland satisfied the reciprocity requirement.        Ifthe Commision endorsed these findings,thiswould enable Swiss CCPsto satisfy ESMA’srequirementsforrecognition and enable them to continue to remain globally active and service EU clearing members. 64.     In a supplementalreport dated 1 October 2013 ESMA concluded thatitwas notin a position to perform a conclusive analysis and deliver advice astowhetherthe Swissregime is equivalentto the requirementsin EMIR relating to the clearing obligation,NFCs and risk mitigation techniquesfor uncleared trades as Switzerland isstill in the process of finalising its regulatory regime in these areas.. ESMA said thatitisready to receive a new mandate from the Commission        to        advicewhen progress has been towardsthe adoption ofthe relevant Swissregulatory regime.mayer brown     15 ODRG Report 65.     On 12 September 2013 the OTC Derivatives Regulators Group (“ODRG”) published a report on “Agreed Understandings to Resolving Cross-Border Conflicts, Inconsistencies, Gaps and Duplicative Requirements”. The reportrepresentsthe understandings ofthe authoritieswith responsibility forthe regulation ofthe OTC derivatives marketsin Australia, Brazil,the European Union,Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland and the United States. 66.     The report’s conclusionsinclude the followingwhich are intended to improve the cross-borderimplementation of OTC derivativesreforms: (a)     Early and comprehensive consultation among the relevant authoritieswhen equivalence orsubstituted compliance      assessments are being undertaken is essential; (b)     A flexible, outcomes-based approach should form the basis of final assessmentsregarding equivalence orsubstituted      compliance; (c)     A stricterrule approachwould apply to address gapsin mandatory trading or clearing obligations; (d)     There is an IOSCO framework for consultation on mandatory clearing determinations 25 ; (e)     Jurisdictionsshould remove barriersto reporting to trade repositories by market participants and to accessto trade      repository data by authorities; and (f)     There should be appropriate intermediary measures and a reasonable butlimited transition period forforeign      entitiesto implement OTC derivativesreforms. 67.     Underthe reportthe authorities agreed to deal pragmatically through the ODRG, other multilateral groups, and/or on bilateral bases, as needed,with a viewto ensuring that G20 goals are metwhile also aiming to minimise disruption and legal uncertainty. ESMA’s findings on equivalence, however,suggestthatthe EU has not paid much heed to the reportto date, although it has certainly consultedwith the third country authorities, butitremainsto seewhetherthe Commissionwilltake a different approach. Next steps 68.     The extraterritorialreach of EMIR hassome logic to it:the focusis on transactions or counterpartieswhich have a degree of nexusto the EU.        The approach to equivalence is, however, concerning.        Itissurprising that ESMA has notfound that any jurisdiction, even those of other G20 countrieswhich are implementing the same 2009 G20 commitment asthe EU, iswholly equivalentto EMIR.        Perhaps, despite Barnier’s claimsto the contrary,the EU approach to equivalence is more rule-than outcome-based.        Such an approach failsto have regard to the factthat different approachestailored to different markets can still have, and meet,the same objective. 69.     ESMA’s advice to the Commission is not binding and so should not be regarded as definitive.        On the other hand, itis unlikely thatthe Commissionwouldwholly countermand ESMA’s advice asitwill not have undertaken the same detailed assessment as ESMA nor have the same experts uponwhich to rely.        The Commission could ask ESMA to reconsidersome of its findings orto investigate further.        Thiswould, however,take more time and increase the uncertainty that globally active financial market participants are already experiencing asthey face duplicative and conflicting ruleswhich ironically seek to implement the same supranational obligation. Actual coordination amongst globalregulatorsisstill urgently needed, particularly to addressthe realrisk that cross-bordertradessubjectto duplicative clearing obligationswill be discouragedwithout agreement on howthe counterpartiessubjectto those obligations are expected to comply. 25 IOSCO Report on Requirements for Mandatory Clearing (February 2012).16     mayer brown If you have any questions about any ofthe issuesraised in this update, please contact your usual contact or one ofthe lawyers listed below: LONDON:   Alexandria Carr Of Counsel(Employed Barrister) acarr@mayerbrown.com T: +44 20 3130 3398 Mark Compton Partner mcompton@mayerbrown.com T: +44 20 3130 3388 David Sahr Partner dsahr@mayerbrown.com T: +44 20 3130 3496 Chris Arnold Partner carnold@mayerbrown.com T: +44 20 3130 3610 Edmund “Ed” Parker Partner eparker@mayerbrown.com T: +44 20 3130 3922 Marcin Perzanowski Senior Associate mperzanowski@mayerbrown.com T: +44 20 3130 3306 GERMANY:  Andreas Lange Partner alange@mayerbrown.com T: +49 6979 411941 BELGIUM:  Charles-Albert Helleputte Counsel chelleputte@mayerbrown.com T: +32 2 551 5982 FRANCE:  François-Régis Gonon Partner fgonon@mayerbrown.com T: +33 1 53 53 43 43 US:  Joshua Cohn Partner jcohn@mayerbrown.com T: +1 212 506 2539 Curtis Doty Partner cdoty@mayerbrown.com T: +1 212 506 2224mayer brown     17 EMIR: Timeline for Implementation Date Event 16.08.2012 EMIR entered into force butmost provisions only apply at a later date. 16.08.12 Reporting obligation backdated to derivative contractswhichwere entered into before 16August 2012 and remained outstanding atthat date and to derivative contracts entered into on or after16August 2012. 15.03.2013 The following requirements apply: •     Non-financial counterpartymust notifyNCAand ESMAif exceeding (and no longer exceeding)the clearing threshold; •     Timely confirmations; •     Mark tomarket ormark tomodelrequirements; and •     Reporting of unconfirmed trades. In addition: •     Trade repositories can start applying forregistration to ESMA; •     Third country trade repositories can start applying forrecognition to ESMA. 15.09.2012 The following requirements apply: •     Portfolio reconciliation; •     Portfolio compression; and •     Dispute resolution. 15.09.2013 Previously existing EUCCPs authorisation and third countryCCPsrecognition application deadline. September 2013 Publication ofthe finalreport by IOSCOand BCBS defining common internationalrequirements onmargin requirementsfor non-centrally cleared derivatives. 07.11.2013 Adoption ofthe registration decision ofthe firsttrade repositories. 12.02.2014 Reporting start date for all asset classes. 18.03.2014 First EUCCP authorised (NASDAQ-OMX) – start ofthe frontloadingwindow. First notification forthe clearing obligation underArticle 5. 21.03.2014 The Regulatory Technical Standards(“extraterritorial RTS”)specifying the contractsthat are considered to have “direct,substantial and foreseeable” effectwithin the EUorwhich are necessary to preventto evasion ofrules and obligationsforthe purposes of EMIR are published. 10.04.2014 Extraterritorial RTS applies(save forArticle 2). 14.04.2014 EBA, ESMAand EIOPApublished consultation paper on requirementto exchangemargin on non-centrally clearedOTC derivatives.        Consultation closes on 14.07.2014. 18.09.2014 ESMAto submitfirst draft RTS on the clearing obligation. 10.10.2014 Article 2 of extraterritorial RTS (Contractswith a direct,substantial and foreseeable effectwithin theUnion) applies. Q4 2014 Possible date ESMAexpects        to submit draftlegislation onmargin requirementsfor non-centrally clearedOTCderivatives. ? before application of clearing obligation Applicationsfor exemptionsfromclearing forintragrouptransactions(Art4) andpensionscheme arrangements(Art 89(2)). Early 2015 Possible date Clearing obligation expected to come into force. 15.08.2015 Pension scheme arrangements exemption fromclearing obligation ends. 01.12.2015 –01.12.2019 Possible date Proposed thatmargin requirements on non-centrally clearedOTCderivativeswill come into force: •     phased-in over 4 years depending on counterparties’ aggregatemonth-end average notional amount of noncentrally cleared derivatives.About Mayer Brown  Mayer Brown is a global legal services organisation advising clients  across the Americas, Asia and Europe. Our presence in the world’s  leading markets enables us to offer clients access to local market  knowledge combined with global reach. We are noted for our commitment to client service and our ability  to assist clients with their most complex and demanding legal and  business challenges worldwide. We serve many of the world’s largest  companies, including a significant proportion of the Fortune 100,  FTSE 100, DAX and Hang Seng Index companies and more than  half of the world’s largest banks. We provide legal services in areas  such as banking and finance; corporate and securities; litigation and  dispute resolution; antitrust and competition; US Supreme Court and  appellate matters; employment and benefits; environmental; financial  services regulatory & enforcement; government and global trade;  intellectual property; real estate; tax; restructuring, bankruptcy and  insolvency; and wealth management. OFFICE LOCATIONS AMERICAS • Charlotte • Chicago • Houston • Los Angeles • New York • Palo Alto  • Washington DC ASIA • Bangkok • Beijing • Guangzhou • Hanoi • Ho Chi Minh City • Hong Kong • Shanghai • Singapore EUROPE • Brussels • Düsseldorf • Frankfurt • London • Paris TAUIL & CHEQUER ADVOGADOS in association with Mayer Brown LLP • São Paulo • Rio de Janeiro Please visit www.mayerbrown.com for comprehensive contact  information for all Mayer Brown offices. Mayer Brown is a global legal services provider comprising legal practices that are separate  entities (the “Mayer Brown Practices”).  The Mayer Brown Practices are: Mayer Brown LLP and  Mayer Brown Europe–Brussels LLP, both limited liability partnerships established in Illinois  USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and  Wales (authorised and regulated by the Solicitors Regulation Authority and registered in  England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer  Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer  Advogados, a Brazilian law partnership with which Mayer Brown is associated. “Mayer Brown”  and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective  jurisdictions. This publication provides information and comments on legal issues and developments of  interest to our clients and friends. The foregoing is not a comprehensive treatment of the  subject matter covered and is not intended to provide legal advice. Readers should seek legal  advice before taking any action with respect to the matters discussed herein. © 2014. The Mayer Brown Practices. All rights reserved.  0701fin June 2014