Background

EMIR 3 introduces a new option for Financial Counterparties (FCs) to analyse their rolling 12-month positions in uncleared OTC derivative contracts, as well as aggregate month-end average positions in both cleared and uncleared OTC derivative contracts for the previous 12 months. EMIR 3 also amends the requirements for Non-Financial Counterparties (NFCs). Whereas currently an NFC may calculate its aggregate month-end average position in OTC derivative contracts for the previous 12 months, from the date of entry into force of the Delegated Regulation an NFC will only have to consider calculating its uncleared positions in OTC derivative contracts every 12 months. In doing so, EMIR 3 moves the clearing thresholds framework away from an exchange traded versus OTC distinction to a framework based primarily on the level of OTC uncleared transactions, better recognising the benefits of clearing. The changes introduced by EMIR 3 resulted in a new mandate for ESMA to review and set the relevant clearing thresholds. Furthermore, ESMA was mandated to draft RTS specifying the mechanisms that would trigger a review of the values of the clearing thresholds. These mandates have now been reflected in the Delegated Regulation.

Where a FC or NFC exceeds a relevant threshold on making the relevant calculation, the same pre-existing requirements apply; the FC / NFC must (i) notify ESMA and its national competent authority, and (ii) in the case of an FC, establish clearing arrangements for all classes of OTC derivative contracts that it is party to and which are subject to the clearing obligation within 4 months, and in the case of an NFC, establish clearing arrangements for just the class(es) of OTC derivative contracts that it is party to and for which the relevant threshold has been exceeded within 4 months. Similar requirements apply where a FC / NFC does not carry out the relevant calculations. An FC / NFC will remain subject to the clearing obligation until it can demonstrate that the relevant position(s) no longer exceed the clearing thresholds.

Also of note:

• Clearing threshold categories: For clearing-threshold calculation purposes, five categories are retained. The existing category covering commodity derivatives and “other” OTC derivatives not otherwise covered is replaced by a combined category for commodity and emission-allowance derivatives.
• Group versus entity level calculations: under EMIR 3, the calculation for NFCs will become an entity level calculation when the new methodology applies, irrespective of whether the NFC is part of a group. Generally, calculations for FCs will continue to be carried out on a group basis.

Clearing Thresholds

Summarised below are the current clearing thresholds and each of the upcoming changes:

Action points

Counterparties should ensure that they are prepared for the changes due to be brought in by the Delegated Regulation, including by:

• assessing if any updates are required to EMIR policies and procedures
• checking their clearing status and assessing for any potential changes, whether they re-calculate now or on their next annual calculation date
• if a change in status is likely, assessing what regulatory notifications, counterparty notifications and operational steps will need to be taken

If you require further information or assistance, please contact a member of our Structured Finance and Securitisation group or your usual Arthur Cox contact.