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
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.
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"