Legal briefing | Finance, Derivatives & Structured Products |

EMIR 2.1 – June 2020 update

Overview

This week will bring new developments in respect of EMIR 2.1. Certain firms will need to re-calculate their positions in over-the-counter (OTC) derivatives to reassess their classification under EMIR. Amendments to the EMIR reporting obligations will also take effect.

For further background, please see our briefing note outlining the European Parliament's approval of a revised proposal to amend EMIR (also known as "EMIR 2.1", which can be found here). In April 2019 and again in May 2019, we provided updates on EMIR 2.1's progress, which can be found here and here.

Clearing Thresholds: calculations under EMIR 2.1

Under EMIR 2.1, every 12 months (as of 17 June of each year beginning 17 June 2019) financial counterparties (FCs) and non-financial counterparties (NFCs) taking positions in OTC derivatives transactions should calculate their aggregate month-end average notional position of outstanding OTC derivatives transactions over the previous 12 months. This enables them to determine whether they are above or below the EMIR 'clearing thresholds' and, thus, whether they would be subject to the clearing obligation under EMIR.  Details of the clearing thresholds and their calculation can be found in the following table.

BROAD OVERVIEW OF THE CALCULATION TO BE CONDUCTED UNDER EMIR 2.1

Scope: each NFC and FC to calculate the aggregate month-end average notional position of outstanding OTC derivatives for the previous 12 months. This calculation is generally to be conducted on a group-wide basis. However, where the FC is an AIF or a UCITS, the calculation should be conducted at fund level.1

When conducting the calculation, an NFC will only look at non risk-reducing OTC derivatives transactions entered into by that NFC (and all other NFCs within its group), whereas an FC must include all OTC derivatives transactions (regardless of whether they are risk-reducing transactions) entered into by that FC (and all other entities within its group where applicable, noting the exception for an AIF or a UCITS outlined above).

Clearing thresholds (in each case gross notional value):

  • OTC credit derivatives: €1 billion
  • OTC equity derivatives: €1 billion
  • OTC interest rate derivatives: €3 billion
  • OTC foreign exchange derivatives: €3 billion
  • OTC commodity derivatives and other OTC derivatives not listed above: €3 billion

NFCs

Broadly, to the extent an NFC's calculation exceeds any of the above clearing thresholds, it will be treated as an "NFC+" in respect of that asset class and will therefore be subject to the clearing requirement for transactions of that asset class only. However, it is important to highlight that, where an NFC+ exceeds the clearing threshold in respect of one asset class, the requirement for that NFC+ to post margin will thereafter apply in respect of transactions in all asset classes and not just its transactions of that specific asset class.

FCs

Exceeding the clearing threshold for at least one asset class by an FC will trigger the clearing obligation in respect of all asset classes entered into by that FC.

Only where an FC's calculation is below all the clearing thresholds, will it be treated as small FC (SFC) and will therefore be exempt from the clearing requirement (but not the margin requirement).

 

1  However, an AIFM or UCITS Management Company which manages more than one AIF or UCITS, as applicable, must "be able to demonstrate to the relevant competent authority that the calculation of positions at the fund level does not lead to: (i) a systematic underestimation of the positions of any of the funds they manage or the positions of the manager; and (ii) a circumvention of the clearing obligation"

As this requirement first came into effect in June last year, many firms will need to re-calculate their positions and reassess their classification under EMIR on 17 June. Under EMIR 2.1, should a firm exceed any of the clearing thresholds, it must notify its relevant national competent authority (NCA), such as the FCA, and the European Securities and Markets Authority (ESMA). Firms will not need to notify ESMA and the relevant NCA again if their EMIR classification has not changed since last year.

Should an NFC or FC choose not to conduct the calculations, it must notify its NCA and ESMA and will be treated as if it has exceeded the clearing thresholds and this will result in the entity being subject to the clearing obligation in respect of all asset classes of OTC derivatives transactions.

For the time being, the EMIR clearing obligation only applies to certain types of interest rate and credit derivatives.

Updates to the trade reporting obligations under EMIR 2.1

In line with EMIR 2.1's objective to ensure a proportionate compliance burden across all counterparties (and particularly for NFCs), from 18 June 2020:

  • FCs transacting with NFC-s: For OTC derivatives transactions entered into between FCs and NFCs that are below the clearing thresholds (NFC-s), the FC will be solely liable for reporting on behalf of both parties and must report a single data set. It is worth noting that this responsibility does not extend beyond OTC derivatives transactions and so, for example, exchange-traded derivatives are not caught within this obligation.

    The NFC- will be required to provide to the FC (and will be legally liable for) any details that the FC cannot reasonably be expected to possess.  NFC-s may, however, choose to take on the reporting obligation themselves, in which case they must inform the FCs and the NFC-s will remain liable under EMIR.

    ESMA updated its Q&A on the implementation of EMIR on 28 May 2020 to provide guidance on how this change to the reporting obligations will affect FCs and NFC-s. It has clarified (i) the details that should be provided by the NFC- to the FC to facilitate the reporting of the OTC derivatives transactions, (ii) how to approach the reporting obligations where the FC and NFC- each report to separate trade repositories, (iii) what an FC should do where an NFC- on whose behalf it should report does not renew its LEI, and (iv) how an FC should proceed if an NFC that is above the clearing thresholds (NFC+) changes its status to NFC- but fails to inform the FC in time for reporting to occur.
  • AIFs and UCITS: In respect of an alternative investment fund (AIF) or an undertaking for collective investment in transferable securities (UCITS), its alternative investment manager (AIFM) or management company respectively will become responsible and legally liable for reporting the details of OTC derivatives transactions to which the relevant AIF or UCITS is a counterparty. Previously the reporting obligations fell on the funds themselves. Managers should note this change as the consequence of a breach may be more serious if it occurs at the level of the manager, rather than the fund vehicle level.

  • IORPs with no legal personality: In respect of an institution for occupational retirement provision (IORP) that under national law does not have legal personality (e.g. a typical UK pension scheme structure), the authorised entity responsible for managing and acting on its behalf (such as its trustee and delegated authorised investment manager) will become responsible and legally liable for reporting on behalf of that IORP.

  • NFC-s transacting with TCEs: Where an NFC- is transacting with a third-country entity (TCE) that would be an FC if it were incorporated in the EEA (i.e. a deemed FC), the NFC- will not be legally liable for reporting where: (i) the TCE is in a jurisdiction with a legal regime for reporting that has been declared equivalent pursuant to EMIR; and (ii) the TCE has reported such information pursuant to that third-country legal regime.

In view of the upcoming changes to the reporting obligations, FCs and NFCs should consider potential amendments to their operational processes and documentation to ensure that they are in line with the revised obligations.

When documenting the revised reporting arrangements, we expect market participants increasingly to avail themselves of the Master Regulatory Reporting Agreement (MRRA). The MRRA goes beyond the obligations applicable under EMIR and extends to cover the reporting obligations under certain other regulatory regimes such as the Securities Financing Transactions Regulation (SFTR).

 

Should you have any questions in relation to this note, please contact one of the Derivatives & Structured Products team, or your usual Travers Smith contact.