It is now possible to apply for an intragroup exemption from EMIR reporting with the Luxembourg regulator.
- There is a newly introduced possibility to apply for an intergroup exemption from EMIR reporting with the Luxembourg regulator.
- Clients dealing with over-the-counter derivatives contracts have the opportunity to benefit from such intragroup exemption in order to avoid ongoing burdensome reporting and to save costs.
- Clients should assess whether they are meeting the requirements to apply for and benefit from the intragroup exemption.
What is EMIR?
Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR) applies to, among others, financial counterparties (FC) and non-financial counterparties (NFC) laying down clearing and bilateral risk-management requirements for over-the-counter (OTC) derivatives contracts, reporting requirements for derivative contracts and uniform requirements for the performance of activities of central counterparties and trade repositories. Entities obliged to comply with the EMIR reporting obligations are aware of the related burdensome processes and the costs and responsibilities involved.
What is the EMIR intragroup exemption?
Regulation (EU) 2019/834 of the European Parliament and of the Council of 20 May 2019 (Regulation 2019/834) entered into force on 17 June 2019 and amended EMIR by, among other things, introducing the intragroup exemption for the reporting obligation. Pursuant to Article 9 (1), the reporting obligation no longer applies to derivative contracts within the same group where at least one of the counterparties is an NFC or would be qualified as an NFC if it were established in the EU, if:
- both counterparties are included in the same consolidated group on a full basis;
- both counterparties are subject to appropriate centralised risk evaluation, measurement and control procedures; and
- clients should assess whether they are meeting the requirements to apply for and profit from the intragroup exemption.
What to consider when applying?
From a practical point of view, it is necessary to note that the Luxembourg regulator (CSSF) has three months to approve or refuse the submitted application for the intragroup exemption. As a consequence, the applying entity is still obliged to comply with its reporting obligations for three months. This should be borne in mind by entities that are contemplating entering into derivatives contracts for the first time and as such would become subject to the EMIR reporting obligations as of the moment of its entry into the said contracts, as an application for the intragroup exemption does not imply that no EMIR reporting has to be performed during the review period of the CSSF.
A further advantage of the intragroup exemption is the fact that entities considering entering into future intragroup derivative contracts would benefit from the exemption for any such future contracts automatically once the exemption has been accepted by the CSSF.
What requirements need to be fulfilled?
Entities interested in applying for the intragroup exemption have to ensure that the three previously mentioned conditions are fulfilled.
1. Both counterparties are included in the same consolidated group on a full basis;
Please note that counterparties shall be considered for inclusion in the same consolidated group when they are both either:
- included in a consolidated group in accordance with Directive 83/349/EEC or International Financial Reporting Standards (IFRS) adopted pursuant to Regulation (EC) No 1606/2002 or, in relation to a group, the parent undertaking of which has its head office in a third country, in accordance with generally accepted accounting principles of a third country determined to be equivalent to IFRS in accordance with Regulation (EC) No 1569/2007 (or accounting standards of a third country the use of which is permitted in accordance with Article 4 of that Regulation); or In brief… It is now possible to apply for an intragroup exemption from EMIR reporting with the Luxembourg regulator.
- covered by the same consolidated supervision in accordance with Directive 2006/48/EC or Directive 2006/49/EC or, in relation to a group the parent undertaking of which has its head office in a third country, the same consolidated supervision by a third-country competent authority verified as equivalent to that governed by the principles laid down in Article 143 of Directive 2006/48/EC or in Article 2 of Directive 2006/49/EC.
2. Both counterparties are subject to appropriate centralised risk evaluation, measurement and control procedures;
Please note that in order to provide information on the appropriate centralized risk evaluation, measurement and control procedures, the following information is expected:
- description of the risk management policies and controls and how they are centrally defined and applied;
- demonstration that senior management is responsible for risk management and that risk measurement is regularly reviewed;
- demonstration that internal procedures and information systems are consistent throughout the institution and reliable so that all sources of relevant risks can be identified, measured and monitored on an aggregated basis and also, to the extent necessary, by entity, business line, and portfolio;
- demonstration that the key risk information is regularly reported to the central risk management function to enable appropriate centralized evaluation, measurement and control risk across the relevant group entities.
3. Clients should assess whether they are meeting the requirements to apply for and benefit from the intragroup exemption.
Please note that entities whose application is finally accepted by the CSSF for an intergroup exemption do not need to continue the EMIR reporting performed for existing and future OTC derivative contracts. This can be a huge advantage considering the cost, time and responsibility that is invested into EMIR reporting.
What is the procedure when applying?
If all conditions are fulfilled, and an entity plans to inform the CSSF of its intention to apply for the intragroup exemption from the EMIR reporting obligation, a form prepared by the CSSF will need to be completed and submitted to the CSSF. If the CSSF does not come back within three months after the submission of such notification, the application is assumed to be accepted. If the circumstances change, the CSSF will need to be informed.
Please note that within these three months, the NFC needs to continue to report to the trade repository; however, it is possible that the CSSF would revert back earlier with its decision on the application than three months, then the reporting can stop as of the date of the CSSF's positive confirmation on the acceptance of such application.