EMIR for Non-Financial Counterparties

The EMIR regulation applies to financial and non-financial counterparties (FC and NFC) that enter into derivatives contracts. 

 

The Law of 15 March 2016 on OTC derivatives, central counterparties (CCPs) and trade repositories (TRs) has designated, among others, the CSSF as competent authority for the supervision of EMIR obligations by NFCs.

 

The NFCs that enter into positions in OTC derivatives contracts are required to notify the CSSF if they pass the clearing threshold, either going above or below it.

 

This page is specially addressed to Non-Financial Counterparties (NFC) as defined by EMIR Article 2(9). The scope of the NFC definition includes, among others, the following types of entities: securitisation undertakings, professionals of the financial sector, corporates and holding companies.

 

NFCs are divided into two categories: 

  • NFCs above the clearing threshold (NFC+), and
  • NFCs below the clearing threshold (NFC-).

NFC- benefit from a lighter regime than NFC+ as some EMIR requirements do not apply to them as illustrated below. 

 

We remind that NFCs are subject to the following EMIR obligations:

 

  —————————————

1 Over-the-counter

2 Exchange-traded derivatives

  

  

Main requirements

1.1. Main requirements: Reporting to Trade Repositories

All counterparties (i.e. FC, NFC+, NFC-) must report the details of all derivative contracts (i.e. OTC contract subject to the clearing obligation, OTC contract not subject to the clearing obligation, Exchange Traded Derivatives (ETD) ) they have concluded to TRs, which centrally collect and maintain the records of those contracts. 

  
Both counterparties to a derivative contract have to report to the same or different TRs the details of the contract they have entered into as well as all modification, novation or termination of the contract. The reports must be submitted no later than the working day following the conclusion, modification or termination of the contract. Commission Delegated Regulation (EU) No 148/2013 of 19 December 2012 lays down the minimum details of the data to be reported to TRs (RTS No 148/2013) and Commission Implementing Regulation No 1247/2012 of 19 December 2012 lays down the format and frequency of trade reports to TRs (ITS No 1247/2012). RTS No 148/2013 is amended by the Commission Delegated Regulation 2017/104 of 19 October 2016 and ITS No 1247/2012 is amended by Commission Implementing Regulation 2017/105 of 19 October 2016.

  
Additionally, as of 11 August 2014, NFC+ are required to provide information concerning the valuation of their contracts as well as the collateral exchanged according to Article 3 of Commission Delegated Regulation (EU) No 148/2013 and Article 5(5) of Commission Implementing Regulation No 1247/2012

  
Counterparties can freely choose to report their derivative contracts to one of the TRs registered and recognised by ESMA. The following TRs currently provide services within the European Union:

  • Regis-TR S.A., based in Luxembourg
  • CME Trade Repository Ltd. (CME TR), based in the United Kingdom
  • DTCC Derivatives Repository Ltd. (DDRL), based in the United Kingdom
  • ICE Trade Vault Europe Ltd. (ICE TVEL), based in the United Kingdom
  • Krajowy Depozyt Papierów Wartosciowych S.A. (KDPW), based in Poland
  • UnaVista Ltd, based in the United Kingdom


The list of registered TRs is kept up to date by ESMA. For any updates or modifications please consult the ESMA register.

 
The counterparties can decide to conduct the reporting activities by themselves or to delegate them. The reporting can be delegated either to the counterparty of the contract or to a third party. However, counterparties which delegate their reporting must ensure that accurate reporting is submitted on their behalf.

1.2. Main requirements: Clearing obligation

NFCs are required to assess whether their OTC derivative activity, measured on a group-wide basis, exceeds the clearing threshold.

 

NFC+ are subject to the clearing obligation for all those classes of OTC derivatives which must be centrally cleared.

 

Commission Delegated Regulation (EU) 2015/2205 with regard to regulatory technical standards on the clearing obligation entered into force on 21 December 2015 and triggered the clearing obligation for: basis swaps classes, fixed-to-float interest rate swaps classes denominated in EUR, GBP, JPY and USD, forward rate agreement classes and overnight index swaps classes denominated in EUR, GBP and USD.

 

Commission Delegated Regulation (EU) 2016/592 with regard to regulatory technical standards on the clearing obligation entered into force on 9 May 2016 and triggered the clearing obligation for Index CDS (iTraxx Europe Main and iTraxx Europe Crossover).

 

Commission Delegated Regulation (EU) 2016/1178 with regard to regulatory technical standards on the clearing obligation entered into force on 9 August 2016 and triggered the clearing obligation for fixed-to-float interest rate swaps classes and forward rate agreement classes denominated in NOK, PLN and SEK.


The list of CCPs authorised or recognised within the EU as well as the list of derivative classes to be cleared by each CCP is published by ESMA in the Public Register for the Clearing Obligation

 

1.2.1. Identifying the contracts for hedging purposes

 

For the calculation of the clearing threshold, NFCs are required to assess which part of their OTC derivative activity, measured on a group-wide basis, can be considered as objectively reducing risks directly relating to the commercial activity or treasury financing activity of the non-financial counterparty.

 

According to Article 10 of Commission Delegated Regulation No 149/2013 of 19 December 2012, the following three types of contracts can be considered as objectively reducing risks:

 

  • Contracts hedging risks directly associated with the normal course of business, or according to the wording of Article 10(1)(a): “the contract covers the risks arising from the potential change in the value of assets, services, inputs, products, commodities or liabilities that the non-financial counterparty or its group owns, produces, manufactures, processes, provides, purchases, merchandises, leases, sells or incurs or reasonably anticipates owning, producing, manufacturing, processing, providing, purchasing, merchandising, leasing, selling or incurring in the normal course of its business”;
  • Contracts hedging risks indirectly associated with the normal course of business, or according to the wording of Article 10(1)(b): “the contract covers the risks arising from the potential indirect impact on the value of assets, services, inputs, products, commodities or liabilities referred to in point (a), resulting from fluctuation of interest rates, inflation rates, foreign exchange rates or credit risk”;
  • Contracts qualifying as a hedging contract in accordance with International Financial Reporting Standards (IFRS). 

The contracts described above are not taken into account for the purpose of the clearing threshold. All other contracts shall be taken into consideration for the calculation of the clearing threshold.

 

1.2.2. Calculating the Clearing Threshold

 

After conducting the hedging assessment, NFCs must sum up all the other existing OTC derivative contracts they entered into and compare this amount with the following clearing thresholds as provided in Commission Delegated Regulation No 149/2013:

 

a. EUR 1 billion in gross notional value for OTC credit derivative contracts

b. EUR 1 billion in gross notional value for OTC equity derivative contracts

c. EUR 3 billion in gross notional value for OTC interest rate derivative contracts

d. EUR 3 billion in gross notional value for OTC foreign exchange derivative contracts

e. EUR 3 billion in gross notional value for OTC commodity derivative contracts and other OTC derivatives contracts not provided for under points (a) to (d)

 

In determining whether it is above or below these clearing thresholds, the NFC should first net its positions per counterparty and contracts and then add up the absolute notional value of all these net positions (calculation based on the notional amounts of the contracts). Netting per contracts and counterparty should be understood as fully or partially offsetting contracts having exactly the same characteristics (type, underlying, maturity, etc.) with the only exception of the direction of the trade and notional amount (in case of partial offset) concluded with the same counterparty. 

 

1.2.3. Notification to the CSSF and ESMA 

 

NFCs established in Luxembourg and exceeding the threshold must notify the CSSF and ESMA on the first day after exceeding any of the clearing thresholds.

 

NFCs whose rolling average position over 30 working days does not exceed the clearing threshold anymore, shall re-notify as soon as possible the CSSF and ESMA.

 

For further information and details concerning the notification procedure please consult: http://www.cssf.lu/surveillance/emir/forms and http://www.esma.europa.eu/page/Non-Financial-Counterparties-0.

 

1.2.4. Clearing Obligation for NFC+

 

If the clearing threshold is exceeded for at least one asset class, then the NFC+ will be required to clear all future OTC derivative contracts they enter into (including contracts used for hedging purposes) for as long as they are above the clearing threshold. An NFC+ whose rolling average position over 30 working days does not exceed the clearing threshold anymore will no longer be subject to the clearing obligation.

 
The clearing will be conducted by a CCP, which is an entity that interposes itself between counterparties to the contracts traded by becoming seller to every buyer and buyer to every seller. 

  
An NFC+ can fulfil its clearing obligations by becoming a clearing member of the CCP, client of a clearing member or by establishing indirect clearing arrangements with a clearing member. Please note that the above-mentioned membership is subject to the internal policies and procedures of the CCPs, respectively of the clearing members and clients of the clearing members. 

  
As already mentioned above, the list of authorised CCPs and classes of OTC derivatives subject to the clearing obligation can be consulted by visiting the Public Register for the Clearing Obligation kept by ESMA.

  
The above-mentioned Commission Delegated Regulation (EU) 2015/2205 with regard to regulatory technical standards on the clearing obligation lays down different categories of counterparties for which different phase-in periods for the clearing obligation apply.

  

  • For counterparties in category 1, the clearing obligation is applicable as of 21 June 2016. This category comprises of counterparties which, on 21 December 2015, were clearing members, for at least one of the classes of OTC derivatives subject to the clearing obligation, of at least one of the CCPs authorised or recognised before that date;
  • For counterparties in category 2, the clearing obligation is applicable as of 21 December 2016. This category comprises counterparties not belonging to category 1 and which belong to a group whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives for January, February and March 2016 is above EUR 8 billion and which are either (i) financial counterparties; or (ii) alternative investment funds as defined in Article 4(1)(a) of Directive 2011/61/EU that are non-financial counterparties;
  • For counterparties in category 3, the clearing obligation is applicable as of 21 June 2017. This category comprises counterparties not belonging to category 1 or category 2 which are either: (i) financial counterparties or (ii) alternative investment funds as defined in Article 4(1)(a) of Directive 2011/61/EU that are non-financial counterparties;
  • For counterparties in category 4, the clearing obligation is applicable as of 21 December 2018. This category comprises non-financial counterparties that do not belong to category 1, category 2 or category 3.
     

Commission Delegated Regulation (EU) 2016/592 with regard to regulatory technical standards on the clearing obligation of CDS provides for the following phase-in periods for the different categories of counterparties. 

  

  • For counterparties in category 1, the clearing obligation shall take effect on 9 February 2017. This category comprises counterparties which, on 9 May 2016, were clearing members for at least one of the classes of OTC derivatives set out in the Annex of the aforementioned regulation, of at least one of the CCPs authorised or recognised before that date to clear at least one of those assets;
  • For counterparties in category 2, the clearing obligation shall take effect on 9 August 2017. This category comprises counterparties not belonging to category 1 and which belong to a group whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives for January, February and March 2016 is above EUR 8 billion and which are either (i) financial counterparties or (ii) alternative investment funds as defined in Article 4(1)(a) of Directive 2011/61/EU that are non-financial counterparties;
  • For counterparties in category 3, the clearing obligation shall take effect on 9 February 2018. This category comprises counterparties not belonging to category 1 or category 2 which are either: (i) financial counterparties or (ii) alternative investment funds as defined in Article 4(1)(a) of Directive 2011/61/EU that are non-financial counterparties;
  • For counterparties in category 4, the clearing obligation shall take effect on 9 May 2019. This category comprises non-financial counterparties that do not belong to category 1, category 2 or category 3.


Commission Delegated Regulation (EU) 2016/1178 with regard to regulatory technical standards on the clearing obligation for fixed-to-float interest rate swaps classes and forward rate agreement classes denominated in NOK, PLN and SEK provides for the following phase-in periods for the different categories of counterparties. 

  

  • For counterparties in category 1, the clearing obligation shall take effect on 9 February 2017. This category comprises counterparties which, on 9 August 2016, were clearing members for at least one of the classes of OTC derivatives set out in the Annex of the aforementioned regulation, of at least one of the CCPs authorised or recognised before that date to clear at least one of those assets;
  • For counterparties in category 2, the clearing obligation shall take effect on 9 August 2017. This category comprises counterparties not belonging to category 1 and which belong to a group whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives for January, February and March 2016 is above EUR 8 billion and which are either (i) financial counterparties or (ii) alternative investment funds as defined in Article 4(1)(a) of Directive 2011/61/EU that are non-financial counterparties;
  • For counterparties in category 3, the clearing obligation shall take effect on 9 February 2018. This category comprises counterparties not belonging to category 1 or category 2 which are either: (i) financial counterparties or (ii) alternative investment funds as defined in Article 4(1)(a) of Directive 2011/61/EU that are non-financial counterparties;
  • For counterparties in category 4, the clearing obligation shall take effect on 9 August 2019. This category comprises non-financial counterparties that do not belong to category 1, category 2 or category 3.

1.3. Main requirements: Risk mitigation techniques for non-centrally cleared transactions

All OTC derivative contracts not cleared by a CCP are subject to risk mitigation techniques such as timely confirmation, portfolio reconciliation, portfolio compression and dispute resolution, according to Article 11 of EMIR. These requirements apply both to NFC+ and NCF-.

 

Additionally, NFC+ are required to implement a series of stricter risk management procedures such as daily mark-to-market valuation of the contracts and bilateral exchange of collateral. For further details, please refer to Commission Delegated Regulation No 149/2013 of 19 December 2012.

 

With regard to the bilateral exchange of collateral, Commission Delegated Regulation 2016/2251 with regard to regulatory technical standards for risk mitigation techniques for OTC derivative contracts not cleared by a CCP was published on 15 December 2016 and entered into force on 4 January 2017. Commission Delegated Regulation (EU) 2017/323 of 20 January 2017 made a few amendments to Commission Delegated Regulation 2016/2251.

1.4. Main requirements: Intragroup transactions

 1.4.1. Exemption from the clearing obligation

 

Intragroup transactions concluded between an NFC and a financial counterparty or between two NFCs might be exempted from the clearing obligation.

  

Since NFC- do not fall under the clearing obligation, they cannot ask for the intragroup exemption from the clearing obligation.

 

In relation to an NFC, Article 3(1) of EMIR defines intragroup transactions as OTC derivative contracts concluded between two counterparties included in the same consolidation on a full basis and which are both subject to appropriate centralised risk evaluation, measurement and control procedures. In order to benefit from such intragroup exemptions, the counterparties must obtain the prior consent of their national competent supervisory authorities.

 

NFC+ established in Luxembourg must notify the CSSF in writing about their intention to make use of the intragroup exemption not less than 30 calendar days before the use of such exemption and will be informed within 30 calendar days from the receipt of the notification by the CSSF if it has any objection to the use of this exemption.

  

The date of the clearing obligation for transactions in basis swaps classes, fixed-to-float interest rate swaps classes denominated in EUR, GBP, JPY and USD, forward rate agreement classes and overnight index swap classes denominated in EUR, GBP and USD concluded between a counterparty in one of the categories with a counterparty in category 4 is 21 December 2018.

  

For transactions in Index CDS concluded between a counterparty in one of the categories with a counterparty in category 4, the date of the clearing obligation is 9 May 2019.

 

For transactions in fixed-to-float interest rate swaps classes and forward rate agreement classes denominated in NOK, PLN and SEK concluded between a counterparty in one of the categories with a counterparty in category 4, the date of the clearing obligation is 9 August 2019.

  

This large phase-in period offers the counterparties sufficient time to make their notification/application for intragroup exemption from the clearing obligation.

  

Notifications/applications for intragroup exemptions can be submitted to the CSSF by filling in the interactive form available under EMIR forms

 

1.4.2. Exemption from the exchange of collateral 

 

NFC+ entering into OTC derivative contracts which are not centrally cleared by a CCP are required to implement a series of stricter risk management procedures such as daily mark-to-market valuation of the contracts and bilateral exchange of collateral. However, the NFC+ might benefit from an exemption of the obligation to exchange collateral when the following conditions are met:

  

  • the risk-management procedures of the counterparties are adequately sound, robust and consistent with the level of complexity of the derivative transaction;
  • there is no current or foreseen practical or legal impediment to the prompt transfer of own funds or repayment of liabilities between the counterparties.

 
The Luxembourg based NFCs shall notify to the CSSF their intention to apply the exemption three months prior to the intended date of the use of such exemption. Notifications for intragroup exemptions can be submitted to the CSSF by filling in the interactive form available under EMIR forms

2. Implementing EMIR

Non-financial counterparties trading derivative contracts should first assess their EMIR readiness. Please find below a few starting points for your assessment: 

 

  • Reporting: 
  1. Which types of derivatives do you trade?
  2. To which TR do you wish to report?
  3. Will you report directly or will you delegate the reporting activity to your counterparty or a third party? 
  • Clearing: 
  1. Are OTC derivatives in your portfolio subject to the clearing obligation?
  2. Which CCPs do clear the types of OTC derivatives that you trade?
  3. How will you access the clearing services? As a member or as a client? 
  • Risk mitigation: 
  1.  Do you have the appropriate systems, procedures and processes to implement the new risk mitigation requirements set out in EMIR?
  2. Do you have collateral agreements in place and sufficient means available to collateralise the non-centrally cleared OTC trades?