EMIR Refit

The European Market Infrastructure Regulation (EMIR) was amended recently, with the changes (known as EMIR Refit) entering into force on 17 June 2019. As discussed in our briefing on the implications of EMIR Refit, the changes included a widening of the definition of “financial counterparty” (FC) to include all alternative investment funds (AIFs) established in the EU and all central securities depositaries authorised under the Central Securities Depositaries Regulation.

EMIR Refit also introduced an exemption from the clearing obligation for a specific type of FC, commonly referred to as a “small financial counterparty” (referred to in this briefing as an SFC).

The clearing thresholds which must not be exceeded for the SFC exemption under EMIR Refit to apply are:

  • €1 billion in gross notional value for credit derivatives contracts;
  • €1 billion in gross notional value for equity derivatives contracts;
  • €3 billion in gross notional value for interest rate derivative contracts;
  • €3 billion in gross notional value for foreign exchange derivative contracts;
  • €3 billion in gross notional value for commodity and other OTC derivative contracts.

Annual Calculations

Since EMIR Refit became effective, FCs that have taken positions in OTC derivatives contracts may calculate (every 12 months) their average month-end average positions for the previous 12 months. That calculation must include all OTC derivative contracts (speculative or hedging):

  • entered into by that FC; or
  • entered into by any member of the group to which the FC belongs.

Based on this calculation, an FC can determine whether it exceeds any of the thresholds above. If none of the clearing thresholds are met, the FC will be an SFC and exempt from clearing. If the FC has exceeded any of the thresholds it will need to notify ESMA and its respective National Competent Authority (i.e. the Central Bank of Ireland for Irish FCs).

If no calculation is performed, the entity will be considered an FC (and not an SFC) by default.

On 17 June 2019 (the date EMIR Refit entered into force) there was a requirement for all FCs that had previously taken positions in OTC derivatives contracts to perform the necessary calculations to determine if any of the clearing thresholds had been met. As the calculations are to be done annually, FCs should repeat such calculations on the same date in 2020.

Newly in-scope financial counterparties

Up until now, it has been unclear when FCs who had not taken a position in OTC derivatives contracts before 17 June 2019 (or FCs that have come into existence since that date) should perform the clearing threshold calculations. On 2 October, ESMA published a revised Questions and Answers on the practical questions regarding EMIR. ESMA has clarified that these FCs would need to determine the results of the aggregate month-end average position for the previous 12 months on the 12 month anniversary of the date on which they started taking positions in OTC derivatives contracts. FCs who exceed the clearing thresholds on the date that they perform such calculations will need to notify ESMA and the relevant National Competent Authority immediately.

Accordingly, FCs who have started to take positions in OTC derivatives contracts since 17 June 2019 will need to determine the date that the first of these positions was taken and prepare to make the above calculations one year from that date.