What is EMIR Refit?¹

As with most European legislation, EMIR is subject to the European Commission’s regulatory fitness and performance programme (Refit) under which legislation is periodically reviewed to see if improvements can be made. This process has recently been completed in respect of EMIR and the proposed amendments have now been published (EMIR Refit)². The new legislation seeks to amend and simplify EMIR to address compliance costs, transparency issues and insufficient access to clearing for certain counterparties.

In particular, it introduces a new category of “small financial counterparties” which will be exempted from the obligation to clear their transactions through a central counterparty (CCP), while remaining subject to risk mitigation obligations. Smaller non-financial counterparties (NFCs) will also have reduced clearing and reporting obligations. In addition, the text extends by another two years (further extendable twice, each by an additional year) the temporary exemption from the clearing obligation of pension scheme arrangements.

The updated rules also seek to streamline the existing reporting obligations in order to improve the quality of the data reported, make supervision more effective and increase access to clearing by removing existing unnecessary obstacles.

When does EMIR Refit come into force?

EMIR Refit will enter into force on 17 June 2019, being 20 days following its publication in the Official Journal of the European Union (the EU). The published text of EMIR Refit can be found here. However, as noted below, not all of the provisions will be immediately applicable. 

How does EMIR Refit change EMIR?

As a summary, EMIR Refit:

1. amends the definition of financial counterparty (FC) in relation to investment funds and central securities depositories (the FC amendment);
2. introduces a new category of “small financial counterparty” (FC-) (the FC- category);
3. amends aspects of the threshold calculation and clearing requirements in respect of NFCs (NFC calculation and clearing);
4. amends the date on which certain entities are required to clear certain derivative contracts (mandatory clearing timing);
5. extends for two years the transitional exemption for pension scheme arrangements from the clearing obligation in respect of certain OTC derivatives and gives the Commission the ability to further extend the exemption twice for a period of one year (the pension scheme clearing exemption);
6. amends the reporting obligation in respect of historic derivative transactions and intra-group transactions (the reporting obligations – immediate provisions);
7. clarifies who should be subject to the reporting obligation in certain scenarios, reduces the reporting burden for NFCs which fall below the clearing threshold (NFC-s) and places obligations on the management company of a UCITS, AIFM and authorised manager of IORPs (each as defined below) (the reporting obligations – delayed provisions);
8. permits the Commission to suspend the clearing obligation (suspension of clearing obligation);
9. requires CCPs to provide their clearing members with a simulation tool allowing them to determine the amount of additional initial margin, on a gross basis, that the CCP may require upon the clearing of a new transaction (initial margin information);
10. provides that member states’ national insolvency laws shall not prevent a CCP from acting in accordance with certain obligations (the insolvency law provision);
11. provides that the European Supervisory Authorities (ESAs) will develop common draft regulatory technical standards specifying the supervisory procedures in relation to risk-management procedures (the risk-management RTS); and
12. obliges clearing members and clients which provide clearing services to provide services under fair, reasonable, non-discriminatory and transparent commercial terms (accessibility of clearing services).

1. FC amendment (applicable from 17 June 2019)

Alternative investment funds (AIF)³

EMIR Refit provides that an AIF (as defined in Article 4(1)(a) of Directive 2011/61/EU (AIFMD)) which is either (a) established in the EU or (b) managed by an alternative investment fund manager (AIFM) authorised or registered in accordance with AIFMD, shall be an FC (as will its AIFM, if established in the EU), unless (i) that AIF is set up exclusively for the purpose of serving one or more employee share purchase plans (the ESPP exemption), or (ii) that AIF is a securitisation special purpose entity (as referred to in Article 2(3)(g) of AIFMD) (the SSPE exemption). Previously under EMIR, only limb (b) applied.

Practically, this means that:

• any funds which are an EU AIF with a non-EU AIFM authorised or registered under AIFMD will move from being NFCs to being FCs (subject to the ESPP exemption and SSPE exemption);
• correspondingly, any funds which are a non-EU AIF with a non-EU AIFM will move from being third-country entity (TCE) NFCs to being TCE FCs (subject to the ESPP exemption and SSPE exemption); 
• an AIF which is set up exclusively for the purpose of serving one or more employee share purchase plans will not be an FC; and
• an AIF which is also a securitisation special purpose entity will remain an NFC.

Below is a summary table of the classifications:

	EU AIF	Non-EU AIF
EU AIFM	Under EMIR: AIF is an FC Under EMIR Refit: AIF is an FC (subject  to the ESPP exemption and/or the  SSPE exemption)	Under EMIR: AIF is an FC Under EMIR Refit: AIF is an FC (subject to the ESPP exemption and/or the SSPE exemption)
Non-EU AIFM	Under EMIR: AIF is an NFC Under EMIR Refit: AIF is an FC (subject to the ESPP exemption  and/or the SSPE exemption)	Under EMIR: AIF is a TCE NFC Under EMIR Refit: AIF is a TCE FC (subject to the ESPP exemption and/or the SSPE exemption)

Given the impact of such re-classifications under EMIR Refit (as detailed at FC- Category, below), we understand that the International Swaps and Derivatives Association has asked the European Securities and Markets Authority (ESMA) to grant a six month extension for such re-classifications.⁴ We are not aware of any such extension being granted as yet.

Undertakings for Collective Investments in Transferable Securities (UCITS)⁵

UCITS (authorised in accordance with Directive 2009/65/EC) will remain FCs. However, EMIR Refit has specified that (a) UCITS management companies will also be deemed FCs (though, as most will be MiFID investment firms, they are likely to currently be FCs in any event) and (b) UCITS set up exclusively for the purpose of serving one or more employee share purchase plans do not fall within the definition of FC.

Central securities depository (CSD)⁶

CSDs (authorised in accordance with Regulation (EU) No 909/2014) are now included within the definition of FC.

2. FC- category⁷ (applicable from 17 June 2019)

EMIR Refit creates a new category of FCs with lower volumes of trading activity in OTC derivatives called “small FCs”. For ease of reference, below, we (i) refer to “smalls FCs” as “FC-s” and (ii) refer to FCs which are not small FCs as “FC+s”.

Whether an FC will be considered an FC- or an FC+ will depend on the volume of its trading activity in OTC derivatives.

If the average of an FC’s aggregate month-end average gross notional value of OTC derivative transactions (AANA) for each of the previous 12 months:

• is below all of the clearing thresholds set out below (the clearing thresholds), it will be an FC-; or
• exceeds any one of the clearing thresholds, it will be an FC+.

Asset class	Gross notional value
Credit derivatives	€1bn
Equity derivatives	€1bn
Interest rate derivatives	€3bn
Foreign exchange derivatives	€3bn
Commodity derivatives and other	€4bn8

The first calculation must be made on 17 June 2019 (being the day that EMIR Refit enters into force) and the calculation will need to be repeated every 12 months.⁹ If an FC chooses not to undertake the calculation, it will be treated as an FC+.¹⁰

In making the calculation:

• the FC must include all OTC derivative contracts entered into by that FC or entered into by other entities within the group to which that FC belongs (cleared and uncleared); and
• the FC should be able to demonstrate to the relevant competent authority (being the national authority responsible for the regulatory supervision of the entity making the calculation) that the calculation does not lead to a systematic underestimation of that position (in other words, this is an anti-avoidance provision to ensure that the calculation is actually representative of the OTC derivatives trading occurring and the FC is not deliberately keeping its month-end notionals depressed).

In addition, for UCITS and AIFs:

• as under EMIR, the calculation must be made at the level of the fund (or sub-fund, if legally segregated); and
• UCITS management companies which manage more than one UCITS and AIFMs which manage more than one AIF should 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 (as above, this is an anti-avoidance provision to ensure that trades are not moved between funds prior to month-end to keep its month-end notionals depressed).

Importantly, unlike for NFCs, the calculation captures all OTC derivative transactions (cleared and uncleared) and does not provide an exemption for OTC derivatives used solely for hedging.

Finally, it should be noted that EMIR Refit empowers ESMA to “periodically review the clearing thresholds and update them where necessary”.¹¹

Impact of being an FC+¹²

Where an FC chooses not to calculate its positions, or where the result exceeds any of the clearing thresholds, the FC must:

• immediately notify ESMA and the relevant competent authority (being, in the UK, the Financial Conduct Authority (FCA)) and, where relevant, indicate the period used for the calculation; 
• establish clearing arrangements within four months after the notification referred to above¹³; and
• become subject to the clearing obligation for all OTC derivative contracts entered into or novated more than four months following the notification referred to above.

The form of notification in respect of ESMA can be found here and should be sent to EMIR-notifications@esma.europa.eu. The form of notification in respect of the FCA can be found here and should be submitted via the FCA Connect system. We assume there will be similar arrangements in other EU jurisdictions, such as Ireland and Luxembourg.

An FC+ remains subject to the clearing obligation until it demonstrates to the relevant competent authority that its aggregate month-end average position for the previous 12 months does not exceed any of the clearing thresholds.

Following the initial calculation, where an FC+ carries out the AANA calculation every 12 months and continues to remain above the clearing thresholds, pursuant to the ESMA Q&A no notification to ESMA or the relevant competent authority is required.¹⁴

When facing TCE FC+s, EU dealers will need to comply with the EMIR clearing obligation and, for all TCE FCs, will need to comply with EMIR rules on margin exchange for uncleared derivatives. As such, TCE FCs will be indirectly caught by these rules through their counterparty relationships.

Impact of being an FC-

EU FC-s will not be subject to the EMIR clearing obligation, but will still need to comply with EMIR rules on margin exchange for uncleared derivatives and the other risk mitigation requirements applicable to FCs.

Where an FC- carries out the AANA calculation every 12 months and continues to remain below the clearing thresholds, pursuant to the ESMA Q&A no notification to ESMA or the relevant competent authority is required.¹⁵ However, counterparties are likely to request that they receive an ongoing representation to that effect.

When facing TCE FC-s, EU dealers will not need to comply with the EMIR clearing obligation, but will need to comply with EMIR rules on margin exchange for uncleared derivatives.

3. NFC calculation and clearing¹⁶ (applicable from 17 June 2019)

EMIR Refit amends the clearing threshold calculation timing for NFCs to be the same as that for FCs (as outlined above), other than the below.

• Calculation: in calculating its OTC derivative positions, an NFC is not required to include OTC derivative contracts entered into by the NFC, or by other NFCs within the group to which the NFC belongs, which are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of the NFC or of that group. This means that, unlike in respect of the calculations undertaken by FCs, NFCs do not need to include hedging derivatives in their calculations. Pursuant to the ESMA Q&A, “the definition of hedging for EMIR [Refit] purposes includes and is broader that the definition used in the IFRS accounting rules. Therefore OTC derivative contracts that qualify as hedging under the definition of the IFRS rules also qualify as hedging for EMIR [Refit] purposes. Moreover, some OTC derivative contracts may qualify as hedging for EMIR [Refit] purposes (which includes also proxy hedging and macro or portfolio hedging) although they do not qualify as hedging under the definition of the IFRS rules.”¹⁷
• Impact of being an NFC which exceeds a clearing threshold (NFC+): the clearing obligation only applies to the asset class(es) in which the NFC has exceeded the relevant clearing threshold. For example, if the NFC exceeds the threshold for OTC interest rate derivatives, it only needs to clear this class of OTC derivative; whereas if an FC exceeds the threshold for any one of the asset classes, the clearing obligation applies in respect of all of its OTC derivative contracts which are caught by the clearing obligation. This is a change; previously an NFC+ would have had to clear in all asset classes. However, in respect of an NFC which has been classified as an NFC+ because it did not undertake the AANA calculation, it will be subject to the clearing obligation in relation to all asset classes.

4. Mandatory clearing timing ¹⁸ (applicable from 17 June 2019)

As noted above, FC+s will become subject to the clearing obligation for all OTC derivative contracts entered into or novated more than four months following the notification to ESMA and the relevant competent authority (i.e. from 18 October 2019).

This is relevant to entities categorised by the relevant EMIR delegated regulation on the clearing obligation¹⁹ as Category 3 or 4. Category 3 counterparties are FC+s and NFC+ AIFs with an aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives at group level for January, February and March 2016 of below €8bn. Given the FC amendment, there will be very few NFC+ AIFs (only those relying on the ESPP exemption or SSPE exemption). They will only be required to actually clear from 18 October 2019, rather than from 21 June 2019 (being the first original phase-in date for this category).

Category 4 counterparties which are all other NFC+s, are already subject to clearing their in-scope interest rate derivative contracts denominated in EUR, GBP, JPY and USD as from 21 December 2018. If an NFC+ undertakes the AANA calculation on 17 June 2019 and does not exceed the clearing threshold in respect of interest rate derivatives (but, instead, exceeds the clearing threshold with respect to a different class, such as credit derivatives such that it remains an NFC+), it will not be required to continue clearing interest rate derivative contracts.

If an NFC+ either (i) undertakes the AANA calculation on 17 June 2019 and exceeds the clearing threshold with respect of the interest rate derivative contracts asset class or (ii) does not undertake the AANA calculation, it will have to start clearing their in-scope interest rate derivative contracts denominated in NOK, PLN and SEK entered into or novated more than four months following their notification to ESMA and the relevant competent authority (i.e. from 18 October 2019), rather than from 9 August 2019 (being the original phase-in date).

Finally, it is noteworthy that the OTC derivatives trading obligation under MiFIR²⁰ has not yet been correspondingly postponed by EMIR Refit. As such, in theory an in-scope entity might have to trade an OTC derivative on exchange but not clear it. In practice though, as that is not operationally possible, we assume that the trading obligation (which refers back to the EMIR delegated regulations for its start dates) should be construed in the context of EMIR Refit, and deemed extended accordingly. Hopefully, this point will be clarified by the regulators in short order.

5. Pension scheme clearing exemption²¹ (applicable from 17 June 2019)

EMIR Refit extends, until 18 June 2021, the temporary exemption from the clearing obligation for certain pension scheme arrangements that enter into OTC derivative transactions that are objectively measurable as reducing investment risks of the pension scheme (effectively for hedging purposes).

This pension scheme arrangement exemption formally expired on 16 August 2018, although this did not impact certain smaller pension schemes that were not yet subject to mandatory clearing until 2019 (broadly, those whose AANA of uncleared OTC derivative transactions is below €8bn).

Under EMIR Refit, the pension scheme clearing exemption has been extended for a further two years and the Commission may further extend the exemption twice for a period of one year each time. However, this extension will not take effect until EMIR Refit comes into force on 17 June 2019. This means that the current timing gap, where technically no formal exemption is in place, continues.

To address this timing gap, the FCA had publically announced that pending the formal extension of the exemption it does not require pension schemes to start putting processes in place to clear OTC derivative transactions for which they are currently exempt from clearing under EMIR. This is subject to any further statements that may be issued by ESMA or the FCA.

In addition, EMIR Refit does not expressly include an exemption for pension scheme arrangements from the requirement to calculate their AANA nor does it expressly include an exemption with respect to the associated requirement to notify ESMA and the relevant national competent authority. To address what would otherwise be an unnecessary burden, the ESMA Q&A clarifies that pension scheme arrangements “do not need to calculate their positions nor notify ESMA and the relevant NCAs as long as they benefit from a temporary exemption from the clearing obligation”.²² As such, for the time being at least, pension scheme arrangements that benefit from the pension scheme exemption (presumably for all of their OTC derivatives) are not obliged to undertake the calculation and notification processes outlined above.

Conversely, if pension scheme arrangements, whilst not obliged to clear certain OTC derivatives contracts, nonetheless would like to do so, it seems that so long as they “benefit from a temporary exemption from the clearing obligation”, they are not obliged to undertake the calculation and notification processes even if they do not use the exemption.²³

6. Reporting obligations - immediate provisions²⁴ (applicable from 17 June 2019)

EMIR Refit amends the reporting obligation in respect of historic derivative transactions (so-called “backloading”). Under EMIR Refit, the reporting obligation applies to derivative contracts which (i) were entered into before 12 February 2014 (rather than 16 August 2012, under EMIR) and remain outstanding on that date or (ii) are entered into on or after 12 February 2014 (rather than 16 August 2012, under EMIR). This removes the backloading obligation.

In addition, EMIR Refit provides that the reporting obligation does not apply to derivative contracts within the same group where at least one of the counterparties is an NFC or TCE NFC, provided that:

• both counterparties are included in the same consolidation on a full basis;
• both counterparties are subject to appropriate centralised risk evaluation, measurement and control procedures;
• the parent undertaking is not an FC; and
• both counterparties notify their competent authorities of their intention to apply this exemption.

This exemption will be valid unless the notified competent authorities do not agree, within three months of the date of notification, that the above points have been fulfilled. The form of notification in respect of the FCA can be found here and should be submitted via the FCA Connect system.

Finally, EMIR Refit states that counterparties and CCPs that (i) are required to report the details of derivative contracts must ensure that such details are reported correctly and without duplication, and (ii) are subject to the reporting obligation, may delegate that reporting obligation.

7. Reporting obligations - delayed provisions²⁵ (applicable from 18 June 2020)

EMIR Refit provides some further amendments to the rules covering whom should be subject to the reporting obligation in certain scenarios. This lessens the reporting requirements for NFCs when trading with FCs. We summarise these in the table, below:

Party A	Party B	Reporting obligation
FC	NFC-	Scenario 1: NFC- either is not set up for reporting (including through delegation to a counterparty); or is set up for reporting but does not wish to report following EMIR Refit: FC is solely responsible, and legally liable, for reporting on behalf of both counterparties and for ensuring the correctness of the details reported; and NFC- must provide the FC with details of the OTC derivative contracts concluded between them, which the FC cannot be reasonably expected to possess. The NFC- is responsible for ensuring that those details are correct. Scenario 2: NFC- is set up for reporting (including through delegation) and decides to continue reporting following EMIR Refit: NFC- informs the FC of their decision prior to reporting those details;  NFC- reports the details of their OTC derivative contracts to a trade repository; and NFC- is responsible, and legally liable, for reporting those details and for ensuring their correctness.
TCE FC	NFC-	NFC- will not be legally liable for reporting or ensuring the correctness of the details of such OTC derivative contracts, provided that: the legal regime for reporting to which the TCE FC is subject has been declared equivalent under EMIR; and the TCE FC has reported the information pursuant to the third-country legal regime for reporting to a trade repository that is subject to a legally binding and enforceable obligation to grant various entities (including ESMA, the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and European Systemic Risk Board (ESRB), amongst others) direct and immediate access to the data.

In addition, EMIR Refit provides that in respect of OTC derivative contracts:

• to which a UCITS is a counterparty, the management company of the UCITS;
• to which an AIF is a counterparty, the AIFM; and
• to which an institution for occupational retirement provision (IORP) (that does not have legal personality) is a counterparty, the authorised entity that is responsible for managing and acting on behalf of the IORP, shall in each case be responsible, and legally liable, for reporting the details of the OTC derivative contracts as well as for ensuring the correctness of the details reported.

8. Suspension of clearing obligation²⁶ (applicable from 17 June 2019)

Pursuant to EMIR Refit, ESMA may request (accompanied by evidence of at least one of the following conditions) that the Commission suspend the clearing obligation for specific classes of OTC derivatives or for a specific type of counterparty, where:

• the specific classes of OTC derivatives are no longer suitable for central clearing;
• a CCP is likely to cease clearing those specific classes of OTC derivatives and no other CCP is able to clear those specific classes of OTC derivatives without interruption; or
• the suspension of the clearing obligation for those specific classes of OTC derivatives or for a specific type of counterparty is necessary to avoid or address a serious threat to financial stability or to the orderly functioning of financial markets in the EU and that suspension is proportionate to those aims. In respect of this condition, prior to making the request, ESMA must consult the ESRB and the designated competent authorities.

Where the suspension of the clearing obligation is considered by ESMA to be a material change in the criteria for the trading obligation under MiFIR, the request may also include a request to suspend the trading obligation laid down in MiFIR.

Additionally, the competent authorities responsible for the supervision of clearing members (amongst others) may request (with reasons and evidence of at least one of the above conditions) that ESMA submit a request for a suspension of the clearing obligation to the Commission.

The suspension of the clearing obligation is valid for an initial period of no more than three months, but the Commission may (subject to certain criteria) extend the suspension for additional periods of no more than three months, provided that the total period of the suspension does not exceed 12 months.

9. Initial margin information²⁷ (applicable from 18 December 2019)

EMIR Refit obliges CCPs to provide their clearing members with a simulation tool allowing them to determine the amount of additional initial margin, on a gross basis, that the CCP may require upon the clearing of a new transaction. That tool must only be accessible on a secured access basis, and the results of the simulation will not be binding.

CCPs must also provide their clearing members with information on the initial margin models they use. Such information must:

• clearly explain the design of the initial margin model and how it operates;
• clearly describe the key assumptions and limitations of the initial margin model and the circumstances under which those assumptions are no longer valid; and
• be documented.

10. Insolvency law provision²⁸ (applicable from 18 December 2019)

EMIR Refit provides that member states’ national insolvency laws will not prevent a CCP from acting in accordance with its obligations regarding (i) the transfer (i.e. porting) or liquidation of assets and positions held by a defaulting clearing member and (ii) client collateral segregation.

11. Risk-management RTS²⁹ (applicable from date specified in the RTS; however, the RTS must only be submitted to the Commission by 18 June 2020)

EMIR Refit provides that the ESAs will develop common draft regulatory technical standards specifying the supervisory procedures, including the levels and type of collateral and segregation arrangements, to ensure initial and ongoing validation of those risk-management procedures.

The EBA, in cooperation with ESMA and EIOPA, must submit those draft regulatory technical standards to the Commission by 18 June 2020. As such, the timing regarding the applicability of the regulatory technical standards is not yet known.

12. Accessibility of clearing services³⁰ (applicable from 18 June 2021)

Under EMIR Refit, clearing members and clients which provide clearing services, whether directly or indirectly, must provide those services under fair, reasonable, non-discriminatory and transparent commercial terms (so-called “FRANDT” services). Such clearing members and clients must also take all reasonable measures to identify, prevent, manage and monitor conflicts of interest, in particular between the trading unit and the clearing unit, that may adversely affect the fair, reasonable, non-discriminatory and transparent provision of clearing services. Such measures must also be taken where trading and clearing services are provided by different legal entities belonging to the same group.

Clearing members and clients are permitted to control the risks related to the clearing services offered.

The Commission is empowered to adopt delegated acts specifying the conditions under which the commercial terms are to be considered to be fair, reasonable, non-discriminatory and transparent, based on:

• fairness and transparency requirements with respect to fees, prices, discount policies and other general contractual terms and conditions regarding the price list, without prejudice to the confidentiality of contractual arrangements with individual counterparties;
• factors that constitute reasonable commercial terms to ensure unbiased and rational contractual arrangements;
• requirements that facilitate clearing services on a fair and non-discriminatory basis, having regard to related costs and risks, so that any differences in prices charged are proportionate to costs, risks and benefits; and
• risk control criteria for the clearing member or client related to the clearing services offered.

As yet, we do not know what impact this will have on clearing products and documentation.

What practical steps should be taken?

Given the obligations and impact of EMIR Refit, buy-side entities may want to, or need to, undertake some of the following:

• prepare for the calculations – both FCs and NFCs should be prepared to undertake their clearing threshold calculations and the associated notification process on 17 June 2019. Remember, if an FC or NFC does not undertake the calculation, it can be treated as an FC+ or NFC+, respectively. 
• check classifications – entities that are re-classified from NFC or TCE NFC to FC or TCE FC, respectively, may need to review and amend any NFC representations (including if made through ISDA Amend or EMIR side letters). In addition, we understand that IHS Markit is working in collaboration with ISDA to release a questionnaire on ISDA Amend, which will include designations for an entity to communicate if it is an FC-, as well as clearing dates for OTC interest rate and credit derivative contracts for NFC+s. The movement from NFC to FC will also change an entity’s regulatory obligations, so internal policies may need to be updated;
• check preparations for margining – from 17 June 2019, entities that are re-classified from NFC or TCE NFC to FC or TCE FC, respectively, will (i) in respect of FC+s and FC-s, need to comply with EMIR rules on margin exchange for uncleared derivatives, or (ii) in respect of TCE FC+s or TCE FC-s, be facing an EU dealer which itself needs to comply with EMIR rules on margin exchange for uncleared derivatives (thereby making the TCE FC indirectly subject to compliance). This will mean that credit support documents (e.g. credit support annexes) will need to be amended to be variation margin compliant;
• check preparations for clearing (if a Category 3 or 4 entity) – parties now have slightly longer to prepare, so any process or negotiations being rushed to completion over the next two weeks have more time to finalise; and
• use of a special purpose vehicle  (SPV) – SPVs are NFCs for the purposes of EMIR Refit and, provided that the SPV also falls below the clearing thresholds, it will be an NFC-. As no initial margin or variation margin is required for trades with NFC-s or with TCE NFC-s, using SPV subsidiaries to enter into trading relationships may be a way to address the margining requirements and the clearing obligation.

Physically-settled FX forwards

When the variation margin rules came into force in March 2017, the exemption for physically-settled FX forwards was set to expire on 3 January 2018 when MiFID II³¹ came into force. However, at the end of November 2018, the ESAs acknowledged that the industry was not in a position to fully comply, and so effectively granted forbearance by requiring local regulators to apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in a proportionate manner. Shortly thereafter, local EU regulators, including the FCA, Commission de Surveillance du Secteur Financier and Central Bank of Ireland confirmed that they would not require most firms (other than banks and MiFID investment firms) to exchange variation margin for their FX forwards.

This regulatory “patch” is further confirmed in EMIR Refit, as “it is appropriate to restrict the mandatory exchange of variation margins on physically settled foreign exchange forwards and physically settled foreign exchange swaps to transactions between the most systemic counterparties in order to limit the build-up of systemic risk and to avoid international regulatory divergence”. However, EMIR Refit has not formally exempted FX forwards from variation margin, and further legislation will be required to effect this.

How will Brexit affect EMIR Refit?

Despite the UK’s expected exit from the EU on or by 31 October 2019, the changes described above will still be relevant for UK entities. This is because, if the UK exits the EU with no withdrawal deal and without a transition period (for example), under the European Union (Withdrawal) Act 2018 (which came into force in the UK on 26 June 2018), the UK will (from the exit date) incorporate EMIR, with a couple of changes, into domestic law by way of a statutory instrument (The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018). 

 

^{1 ESMA, Press Release, Capital markets union: Council adopts updated rules for financial derivative products and clearing, 14 May 2019, (last accessed on 3 June 2019)}

^{2 Regulation (EU) No 2019/834 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories}

^{3 Definition of “financial counterparty”, Article 2 of EMIR as amended by EMIR Refit}

^{4 Risk.net, Emergency docs: funds rush to meet EU’s revised EMIR rules, dated 6 June 2019}

^{5 Definition of “financial counterparty”, Article 2 of EMIR as amended by EMIR Refit}

^{6 Definition of “financial counterparty”, Article 2 of EMIR as amended by EMIR Refit}

^{7 Article 4a of EMIR as amended by EMIR Refit}

^{8 In respect of EU EMIR, the threshold in respect of “commodity derivatives and other” was increased from €3bn to €4bn in November 2022. Note that, in respect of UK EMIR, the threshold is still €3bn.}

^{9 ESMA, Public Statement, Implementation of the new EMIR Refit regime for the clearing obligation for financial and non-financial counterparties, 28 March 2019, page 2, f (last accessed on 3 June 2019)}

^{10 Article 4a of EMIR as amended by EMIR Refit}

^{11 Recital (9) of EMIR Refit}

^{12 Article 4a of EMIR as amended by EMIR Refit}

^{13 The legislation does not expressly tie this only to entities trading classes of derivatives that are subject to mandatory clearing, but we assume this is the case, otherwise an FC would have to set up clearing arrangements even if it was exceeding the thresholds only in FX or equities which are not currently clearable}

^{14 ESMA Q&A on EMIR as amended on 28 May 2019, page 18}

^{15 ESMA Q&A on EMIR as amended on 28 May 2019, page 18}

^{16 Article 10(1) and (2) of EMIR as amended by EMIR Refit}

^{17 ESMA Q&A on EMIR as amended on 28 May 2019, page 28}

^{18 ESMA Q&A on EMIR as amended on 28 May 2019, page 43}

^{19 Article 2 of Commission Delegated Regulation (EU) 2015/2205; Commission Delegated Regulation (EU) 2016/592 and Commission Delegated Regulation (EU) 2016/1178} 

^{20 Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012}

^{21 Article 89 of EMIR as amended by EMIR Refit}

^{22 ESMA Q&A on EMIR as amended on 28 May 2019, page 19}

^{23 ESMA Q&A on EMIR as amended on 28 May 2019, page 19}

^{24 Article 9 of EMIR as amended by EMIR Refit}

^{25 Article 9 of EMIR as amended by EMIR Refit}

^{26 Article 6a of EMIR as amended by EMIR Refit}

^{27 Article 38(6) and (7) of EMIR as amended by EMIR Refit}

^{28 Article 39 of EMIR as amended by EMIR Refit}

^{29 Article 11(15) of EMIR as amended by EMIR Refit}

^{30 Article 4(3a) of EMIR as amended by EMIR Refit}

^{31 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU}