11 May 2017

European Commission Proposes EMIR Reform that will Minimise the Clearing Obligation for NFC and Certain FC

On 4 May 2017, the European Commission published its proposal for an amendment of the European Market Infrastructure Regulation (EMIR). The Commission calls the proposed amendment a good example of "better regulation in practice" which is "essential to the creation of the Capital Markets Union (CMU)".

The proposal follows a report adopted by the European Commission in November 2016. The EMIR was introduced in 2012 and aimed at more transparency in the over-the-counter (OTC) derivatives market while providing for a clearing obligation with respect to OTC derivatives, thereby aiming to reduce risks to the financial system.

At present the amended rules are going through the legislative process and are expected to be adopted by the end of next year, with a few provisions entering into force only 18 months later.

The key proposals for the amendment of the EMIR can be summarised as follows:

  • The clearing threshold for non-financial counterparties (NFC) shall be calculated on an asset class basis. Where an NFC exceeds the threshold for a specific asset class, the clearing obligation will apply only for derivatives of that class. Fewer NFC are thus expected to be subject to the clearing obligation. Hedging transactions continue not to count towards the threshold. 
  • A new clearing threshold shall apply to financial counterparties (FC) and shall follow the threshold applicable to NFC. This will allow FC with low volumes of OTC derivatives to be exempt from the clearing obligation. Unlike NFC, however, where an FC reaches the threshold for one asset class, the clearing obligation shall apply to all classes of OTC derivatives. Hedging transactions of an FC shall count towards the threshold.
  • The calculation of the clearing thresholds shall be amended. A clearing obligation shall apply when the FC or NFC reach an aggregate month-end average position for the months of March, April and May exceeding the clearing threshold. Hence, the clearing obligation shall only be tested annually. The current basis for calculating whether the clearing threshold has been reached is the rolling average over a 30-day working period. 
  • Changes to the reporting obligation 
    • The financial counterparty shall be responsible and liable for reporting transactions with NFC that are not subject to the clearing obligation.
    • Intra-group transactions where one of the counterparties is an NFC shall be exempt from the reporting obligation.
    • Exchange traded derivatives (ETDs) shall only be reported by the central counterparty (CCP) on behalf of both counterparties.
  • Insolvency protection shall be increased by clarifying that assets covering the position recorded in a CCP account shall not form part of the insolvency estate of a CCP. This clarification shall incentivise central clearing. 
  • Expansion of FC to cover alternative investment funds (AIFs), securitisation special-purpose entities (SSPEs) and central security depositories (CSDs). 
  • Suspension of the clearing obligation by the European Commission following the request by the ESMA on a temporary basis (three months with extensions of up to 12 months) shall be possible inter alia in situations where the financial stability of the EU is in jeopardy or where other severe reasons justify such a suspension. 
  • Easier access to clearing shall be achieved by requiring clearing members and their clients providing clearing services to offer their services under fair, reasonable and non-discriminatory (FRAND) commercial terms. 
  • Risk management procedures could become subject to prior (and ongoing) regulatory approval. 
  • The frontloading requirement of Art 4(1)(ii)(b) EMIR shall be abolished.
  • Pension scheme arrangements, including pension funds, shall continue to be exempt from the clearing obligation for another three years. If pension funds would be subject to the clearing obligation, additional costs of around EUR 1.6 billion are expected to cut into proceeds for policyholders.

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