On July 13, the International Swaps and Derivatives Association, Inc. (ISDA) published the ISDA EMIR Classification Letter (the Classification Letter), a form of letter that may be used by market participants managing their regulatory obligations under the European Market Infrastructure Regulation (EMIR). EMIR, the European Union’s (EU) derivatives reform regulation, classifies counterparties to derivatives trades as “financial counterparties” (FCs) or “non-financial counterparties” (NFCs), with the latter category further broken down into entities above a designated clearing threshold (NFC+) and those below it (NFC-). Among other requirements,1 EMIR mandates clearing of certain over-the-counter (OTC) derivatives transactions by FC and NFC+ entities. Clearing has not yet come into effect in the EU, though the rules have been proposed and are nearly finalized.2An entity’s characteristics and group aggregate month-end average of outstanding gross notional amount of all OTC derivatives will determine which clearing category3 and which compliance date apply to that entity.
The Classification Letter is one way to facilitate communication of classification status between counterparties to a derivatives transaction subject to EMIR. An entity providing the letter makes elections in Appendix I, “EMIR Clearing Categorization,” and/or Appendix II, “EMIR Counterparty Classification,” to provide the recipient(s) of the letter with status information. A party specifies in Appendix I its clearing classification (Category 1-4), whether it is an alternative investment fund or a pension scheme arrangement (and if so, whether an exemption for pension scheme arrangements provided under EMIR will be used).4 In Appendix II, a party specifies whether it is a third-country entity, whether it is out of scope for EMIR and, if so, in what capacity,5 its EMIR entity classification (FC or NFC), its clearing threshold, and whether it is a pension scheme arrangement availing itself of the exemption. Parties will make elections in one or both appendices depending on their specific circumstances.
Note that ISDA has published other vehicles for EMIR classification in the recent past, including the ISDA 2013 EMIR NFC Representation Protocol, the EMIR Counterparty Classification Tool and the EMIR Clearing Classification Tool.6Market participants continue to have these options at their disposal, and each is effective for purposes of communicating classification under EMIR. However, note that the NFC Representation Protocol does not get into specifics regarding a party’s clearing category. The Classification Letter purposefully was developed to allow parties that do not use ISDA Amend to have the option of communicating their classification efficiently to their derivatives counterparties. To the extent that ISDA Amend was previously used, the Classification Letter provides the ability to designate which set of EMIR classification representations should govern. In addition, footnotes to the Classification Letter make clear that market participants can elect to use the content of the letter to communicate with counterparties in other formats, such as inclusion in the body of an e-mail.
The Classification Letter can be accessed on ISDA’s website a thttp://www2.isda.org/emir/ by clicking on the “ISDA EMIR Classification Letter” link.