On 17 June 2019 EMIR REFIT partly entered into force. EMIR REFIT includes amendments with respect to the clearing requirement, the reporting requirement and requirements with respect to risk mitigation concerning non-cleared OTC derivatives.
Regulation (EU) 2019/834 (EMIR REFIT) amends Regulation (EU) 648/2012, the European Market Infrastructure Regulation (EMIR) providing rules for over-the-counter (OTC) derivative contracts and the parties that conclude OTC contracts. These rules pertain to the mandatory clearing of OTC derivative transactions via central counterparties (CCPs) (the clearing requirement), the risk-mitigation measures parties must implement (including the margin requirement) and the obligation to report derivative transactions to regulated trade repositories (the reporting requirement).
The majority of the provisions under EMIR REFIT entered into force on 17 June 2019. ESMA has also updated its EMIR Q&A further to EMIR REFIT, click here.
In our Annotated of last April, you can find an overview of certain changes as they were initially proposed on 4 May 2017 (the Proposal). However, the final text of EMIR REFIT as published in the official journal on 28 May 2019 included noteworthy changes compared to the Proposal, a few of which we have highlighted below.
The definition of ‘financial counterparty’
Central securities depositories are added to the definition of financial counterparty. In addition, the definition of ‘financial counterparties’ includes (i) an exemption for UCITS set up exclusively for the purpose of serving one or more employee share purchase plans and (ii) an exemption for alternative investment funds (AIFs) that are set up exclusively for the purpose of serving one or more employee share purchase plans or that is a securitisation special purpose entity, and, where relevant, its alternative investment manager is established in the EU. In contrast to the Proposal, SPVs for securitisation purposes are not added to the definition of financial counterparty.
Calculation of threshold values for the clearing requirement
The scope of application of the threshold values for the clearing requirement is expanded and applies to financial counterparties and non-financial counterparties. The consequence thereof is that certain small financial counterparties are released from the clearing requirement. A financial counterparty does have to include all OTC derivative contracts concluded by that financial party or by other entities within the group in the calculation and therefore – in contrast to non-financial counterparties - not just the speculative OTC derivative contracts. An exemption has been included for UCITS and AIFs and the calculation of their positions may, subject to certain conditions being met, be made at fund level.
Every 12 months, a financial counterparty taking positions in OTC derivative contracts may calculate its aggregate month-end average position for the previous 12 months in accordance with the conditions of the EMIR REFIT. A similar calculation method applies for a non-financial counterparty in respect of its positions in speculative OTC derivative contracts.
Where a financial counterparty or a non-financial counterparty does not calculate its positions in its (speculative) OTC derivative contracts, such financial counterparty or non-financial counterparty becomes subject to the clearing obligation irrespective of actual exceeding the relevant clearing threshold until it demonstrates to the relevant competent authority that its aggregate month-end average position for the previous 12 months does not exceed the relevant clearing threshold.
Effects of the above on margin requirement
The amendment of the definition of ‘financial counterparty’ also has an impact on the margin requirements of counterparties, as financial counterparties and non-financial counterparties, which positions in speculative OTC derivative contracts exceeds the relevant thresholds, are obliged under EMIR REFIT to claim a variation and an initial margin from those new financial counterparties. Also, where a non-financial counterparty does not calculate its positions in speculative OTC derivative contracts, it falls within the scope of the margin requirements that are applicable to non-financial counterparties, which positions in speculative OTC derivative contracts exceeds the relevant thresholds.
Power to suspend clearing obligations
The ESMA has the power to request the European Commission to suspend the clearing requirement of a certain class of OTC derivative contracts or for a specific type of counterparty for a period of no more than three months (with the option of extending this period each time by no more of three months with a total period of the suspension of no more than twelve months), provided that one of the three conditions set forth in the EMIR REFIT is met. These conditions include that a specific class of OTC derivative contracts is no longer suitable for central clearing, a CCP is likely to cease clearing a specific class of OTC derivative contracts and no other CCP is able to clear such specific class without interruption or a suspension for a specific class or specific type of counterparty is necessary to avoid or address a serious threat to financial stability or to the orderly functioning of financial markets in the EU and suspension is proportionate to those aims.
Competent authorities responsible for the supervision of clearing members may also request that ESMA submits a request for a suspension of the clearing obligation to the European Commission.
A request may, under certain circumstances, also include a request to suspend the trading obligation for the same specific classes of OTC derivatives that are subject to the request to suspend the clearing obligation.
Extension of clearing exemption pension funds
The EMIR REFIT includes a temporary exemption from the clearing requirement for OTC derivative contracts concluded by pension funds for the purpose of mitigating certain investment risks until 18 June 2021 and the European Commission may in certain circumstances extend this two-year period twice, each time by one year.
Reporting of data
Financial counterparties shall be solely responsible, and legally liable, for reporting the data with respect to OTC derivative contracts concluded with a non-financial counterparty, which positions in speculative OTC derivative contracts does not exceed the relevant thresholds, as well as for ensuring the correctness of the details reported.
To ensure that the financial counterparty has all the data it needs to fulfil the reporting obligation, the non-financial counterparty shall provide the financial counterparty with the details of the OTC derivative contracts concluded between them, which the financial counterparty cannot be reasonably expected to possess, in which case, the non-financial counterparty shall be responsible for ensuring that those details are correct.
Non-financial counterparties who have already invested in a reporting system may decide to report the details of their OTC derivative contracts with financial counterparties to a trade repository. In that case, the non-financial counterparties shall inform the financial counterparties with which they have concluded OTC derivative contracts of their decision prior to reporting those details and the non-financial counterparties shall be responsible, and legally liable, for reporting those details and for ensuring their correctness.
A reporting exemption is included for a non-financial counterparty, which positions in speculative OTC derivative contracts does not exceed the relevant thresholds, that concludes an OTC derivative contract with an entity established in a third country provided that certain requirements are met.
International Swaps and Derivatives Association (ISDA) has developed the ISDA Master Regulatory Disclosure Letter in which parties confirm towards each other the status as financial counterparty and non-financial counterparty and report about the intentions to calculate internally whether or not the counterparty exceeds the clearing thresholds. Absent such reciprocal confirmations, the counterparty refraining from making such internal calculations shall be become automatically subject to the clearing obligation. The template as developed by ISDA caters for the reconfirmation of certain information that has been exchanged based on the ISDA NFC Protocol in the past and contains certain additional confirmations necessary to comply with the new exemption regulations as enacted pursuant to EMIR REFIT. We recommend parties to utilise this ISDA template in the confirmation routines or otherwise ensure that proper written confirmations are exchanged in this respect in order to remain eligible for the exemptions applicable pursuant to EMIR REFIT.