Shifting Obligations; Limited Time

EMIR Refit will enter into force on 17 June 2019 and will amend the existing EMIR legislation applicable to European counterparties trading derivatives, with the express aim of simplifying the EMIR regime to make the compliance burden more proportionate. We set out below the three key things that Irish special purpose vehicles (“SPVs”) need to know about EMIR Refit.

1. Imminent requirement to calculate aggregate notional against the clearing thresholds EMIR Refit introduces a new method for non-financial counterparties (“NFCs”) such as SPVs to calculate their aggregate gross notional of OTC uncleared derivatives positions to compare against the clearing thresholds. When determining whether the clearing thresholds have been exceeded, an NFC must calculate its aggregate month-end average notional position in OTC derivatives for the previous 12 months. This is understood to mean the sum of all positions (for the relevant class of derivatives) at the end of each month, divided by 12. In calculating the positions NFCs must include all OTC derivative contracts entered into by any non-financial entities within their worldwide group but excluding contracts which are objectively measurable as reducing risks. EMIR Refit also requires NFCs to be able to demonstrate to the relevant competent authority that their calculation of the average notional does not lead to a systematic underestimation of the position.

On 28 March 2019 ESMA issued a statement explaining that the new clearing threshold requirement will become effective immediately once EMIR Refit comes into force. Therefore, the results of the calculation must be available on 17 June 2019. ESMA stated that NFCs are “expected to collect all the necessary data and information for the calculation in the meantime, in order to be ready for the calculation…”.

This constitutes an onerous obligation for NFCs. NFCs now have a very short window of time to calculate the relevant group month-end position for the previous 12 months, ending on 31 May 2019. If, on 17 June 2019, an Irish SPV either (i) calculates its average notional and determines that it has exceeded one or more clearing thresholds, or (ii) does not perform the relevant calculation, then it must immediately notify ESMA and Central Bank of Ireland. It will become subject to the clearing obligation for the class or classes of OTC derivative contracts in which it has exceeded the threshold or failed to perform the calculation, starting four months following that notification.

2. Financial counterparty now legally liable for EMIR reporting EMIR Refit amends EMIR to provide that, from 18 June 2020, when an NFC- (meaning an NFC below the clearing thresholds) trades with a financial counterparty (such as a bank / broker dealer) the financial counterparty “shall be responsible, and legally liable” for reporting the details of OTC derivative contracts entered into. This will alter the current position, which is that both sides are responsible for reporting. The NFC- will remain responsible for providing the financial counterparty with the details which the financial counterparty cannot be reasonably expected to possess and for ensuring that those details are correct.

The Central Bank of Ireland has been focussing on the accuracy of EMIR reporting as indicated by the recent “Dear Director” letter sent to derivatives users, highlighting the potential sanctions which could apply for reporting failures. Against this background the sensible changes to an NFC’s liability for reporting within EMIR Refit are a welcome relief for the industry. We understand that ISDA, the global industry body representing the derivatives industry, is currently working on revised versions of its standard EMIR Delegated Reporting Agreement to reflect the change in legal liability in respect of the reporting obligation.

3. Clarification of EMIR classification applicable to SPVs EMIR Refit expands the scope of AIFs considered to be financial counterparties to include any EU AIF regardless of the location or status under AIFMD of its manager, with two exceptions. One of those exceptions relates to an AIF that is a securitisation special purpose entity (“SSPE”) as referred to in Article 2(3)(g) of AIFMD.

The reference to SSPEs as being explicitly excluded from the definition of “financial counterparty” under EMIR is helpful. An earlier draft of EMIR Refit had proposed including SSPEs within the definition of financial counterparty, but this was not adopted in the final text.