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Timeline – EMIR overview

  • 31 December 2020

    End of transition period in UK/EU Withdrawal Agreement

  • 1 September 2020

    Initial Margin requirements in force for all applicable counterparties

  • 2020
  • 31 January 2020

    "Exit Day" under the EU (Withdrawal) Act

  • 2019
  • 1 March 2017

    Variation Margin requirements in force for all other counterparties

  • 4 February 2017

    (1) Initial Margin requirements phased in from this date until 1 September 2020; and (2) Variation Margin requirements in force for the largest counterparties OTC derivative trading volume

  • 2017
  • 21 June 2016

    First clearing requirements take effect

  • 2016
  • 12 February 2014

    Trade reporting for all asset classes in force

  • 2014
  • 15 September 2013

    (1) Portfolio reconciliation and dispute resolution; and (2) portfolio compression requirements in force

  • 15 March 2013

    Timely confirmation requirements in force

  • 2013
  • 16 August 2012

    EMIR in force

  • 27 July 2012

    Text of the Regulation published in the Official Journal of the European Union

  • 2012
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For a more comprehensive overview of the application of the requirements contained in EMIR, please refer to our Timeline page.

 

The Clearing Obligation

Article 4 of EMIR requires that counterparties clear all OTC derivatives falling within a class designated for clearing under EMIR (the Clearing Obligation) which is entered into between:

  • two FC+s;
  • an FC+ and an NFC+
  • two NFC+s;
  • an FC+ or NFC+ and an entity established in a Third Country that would be an FC+ or NFC+ if it were established in the Union; and
  • two Third-Country entities which would be FC+s or NFC+s if established in the Union, if the contract has a "direct, substantial and foreseeable effect within the Union".

The meaning of "direct, substantial and foreseeable effect within the Union" has been clarified by Commission Delegated Regulation (EU) 285/2014 and includes contracts under which at least one of the Third-Country entities benefits from a guarantee by an FC established in the Union, if the guarantee covers a notional amount over EUR8 billion (or a proportion of that threshold equal to the percentage of the liability covered by the guarantee), and is equal to at least 5% of the guarantor FC’s total exposures to OTC derivative contracts.

Under Article 4(2) of EMIR, OTC derivative contracts which meet the definition of an "intragroup transaction" are exempt from the Clearing Obligation if either:

  • both counterparties are established in the Union and have given 30 days’ notice to their respective supervisors of their intention to use the exemption and there has been no objection; or
  • one counterparty is established in the Union and the other is established in a Third Country and the Union counterparty has been authorised by its supervisor to apply the exemption.

An "intragroup transaction" is an OTC derivative contract which meets the conditions in Article 3 of EMIR, which are summarised in the Key Concepts box: What is an intragroup transaction? (see below).

The Clearing Obligation – Equivalence decisions

Article 13 of EMIR provides that the Commission may adopt implementing acts declaring that the legal, supervisory and enforcement arrangements of a Third Country are equivalent to the EMIR clearing requirements and are being effectively applied and enforced so as to ensure effective supervision and enforcement in that Third Country.

Where such an equivalence decision is made, counterparties to derivative transactions will be deemed to have fulfilled the clearing requirements where at least one of the counterparties is established in that equivalent Third Country. As the UK is a Third Country for EMIR purposes (i.e. outside the EEA), an equivalence decision would be required to prevent counterparties to OTC derivative transactions from having to comply with two, possibly conflicting, sets of clearing rules.

What are "OTC derivatives"?

For the purpose of EMIR clearing and margining requirements, "OTC derivatives" are derivative contracts not executed on a regulated market. A "regulated market" for this purpose is a market authorised under MiFID, or a Third-Country market considered equivalent for the purposes of MiFID (such as markets designated by the CFTC as contract markets in the US). An equivalence decision will be required to designate UK markets as regulated markets in order that derivatives traded on a market in the UK do not become "OTC" derivatives.

A "derivative" is defined by reference to the meaning within MiFID – which, broadly, includes swaps, futures, options and forwards in each case where the underlying is a financial instrument, currency, rate or index, whether settled physically or in cash, or over commodities if settled in cash (or physically settled in certain circumstances), credit derivatives, climate and emissions derivatives which can be settled in cash, and financial contracts for difference.

Repo and stocklending contracts are not treated as derivatives for the purpose of EMIR.

Classes of derivative contract which must be cleared

The process for identifying the classes of OTC derivative contract which are subject to the Clearing Obligation (clearing classes) is set out in Article 5 of EMIR. There are two possible approaches. Generally, clearing classes are identified from among the classes of derivative for which clearing is already offered by a CCP which has obtained authorisation under Articles 13 and 14 of EMIR. Otherwise, ESMA can identify clearing classes from among classes of OTC derivative for which no clearing service is offered by an authorised CCP.

Once a CCP clearing class of derivatives has been authorised, ESMA has six months in which to produce draft regulatory technical standards (RTS) for endorsement by the Commission, specifying the clearing classes and the dates from which the Clearing Obligation will apply to them, including any phase-in period and minimum maturities. Thus new clearing classes can be added on an ongoing basis. The respective RTS are included in our Sources of Regulation page. Please see "Timelines – implementation of the Clearing Obligation for each clearing class" below for further detail.

CCP equivalence

Article 25 of EMIR provides for equivalence decisions to be made by the Commission in respect of Third-Country CCPs which comply with applicable prudential requirements for CCPs in a Third Country, where that Third Country has legally binding requirements for supervision of CCPs which are equivalent to those in EMIR. Assuming it preserves the current regime under EMIR (which would require saving legislation), the UK should be able to comply with these requirements, but will need a declaration of equivalence under Article 25 to be made by the Commission. There have so far been several equivalence decisions in respect of Third Countries in respect of their CCP supervision regimes.

Where such an equivalence decision is made, a CCP in the relevant Third Country can apply to ESMA for recognition under EMIR. Following recognition, the Third-Country CCP would be eligible to clear trades for the purpose of EMIR compliance and classes of derivative cleared by that CCP will be eligible to become clearing classes in much the same way as following notification of authorisation of a Union-based CCP.

EMIR 2.2 Impact

Under the proposals published by the Commission in June 2017 (EMIR 2.2), Third-Country CCPs seeking recognition by ESMA would be divided into tiers, depending on their systemic importance. Those CCPs considered to be "substantially systemically important" would be required to establish themselves within the EU and be authorised by ESMA. The proposals appear to be aimed at CCPs in the UK following Brexit, "as a substantial volume of derivatives transactions denominated in Euro or other EU Member States' currencies are currently cleared through CCPs located in the UK".

Key Concepts

Category 1, 2, 3 and 4 counterparties for the purpose of phase-in

Counterparties which are subject to the Clearing Obligation must also identify whether they fall within "Category" 1, 2, 3 or 4 in order to identify the date on which various obligations under EMIR begin to apply to their OTC derivative contracts. These Categories are described in each individual RTS developed by ESMA under Article 5(2). The current Categories are:

  • Category 1 – clearing members of a CCP in respect of at least one of the clearing classes being phased in;
  • Category 2
    ◦  FCs who are not clearing members; and
    ◦  AIFs which are NFCs
    which, in each case, belong to a group whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives for the relevant assessment period (see below) is above EUR8 billion;
  • Category 3
    ◦  FCs; and
    ◦  AIFs which are NFCs
    and, in each case, not belonging to Category 1 or Category 2; and
  • Category 4 – NFCs not within Categories 1, 2, or 3.

If firms are unable to determine whether they are within Category 2 or Category 3, ESMA requires a firm to assume it is classified in Category 2 for the purpose of compliance with the Clearing Obligation.

Assessment periods

Each RTS specifies the assessment period over which the counterparty must assess whether it belongs to Category 2. For both the interest rate swaps in G4 currencies class and the credit derivatives based on an index class, the assessment period is January, February and March 2016. For other classes, the assessment period is expected to be the three months after publication of the relevant RTS in the Official Journal of the European Union (the Official Journal), excluding the month of publication.

"Frontloading"

The requirement to clear trades entered into before the Clearing Obligation took effect (known as "frontloading") has been removed by the Refit Regulation, so frontloading will not be required for any transactions which become subject to mandatory clearing in the future.

Timelines – implementation of the Clearing Obligation for each clearing class

The timelines below reflect the technical standards currently in force.

Clearing for OTC Interest Rate Swaps in G4 currencies

  • 21 June 2019

    Clearing Obligation for Category 3 counterparties applies (although note the effect of the Refit Regulation)

  • 2019
  • 21 December 2018

    Clearing Obligation for Category 4 counterparties applies

  • 2018
  • 21 December 2016

    Clearing Obligation for Category 2 counterparties applies

  • 21 June 2016

    Clearing Obligation for Category 1 counterparties applies

  • 21 May 2016

    Frontloading for Category 2 counterparties applies

  • 21 February 2016

    Frontloading for Category 1 counterparties applies

  • 2016
  • 21 December 2015

    RTS in force

  • 2015
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Clearing for OTC Credit Default Swaps

  • 21 June 2019

    Clearing Obligation for Category 3 counterparties applies (although note the effect of the Refit Regulation)

  • 9 May 2019

    Clearing Obligation for Category 4 counterparties applies

  • 2019
  • 9 August 2017

    Clearing Obligation for Category 2 counterparties applies

  • 9 February 2017

    Clearing Obligation for Category 1 counterparties applies

  • 2017
  • 9 October 2016

    Frontloading for Category 1 and Category 2 counterparties applies

  • 9 May 2016

    RTS in force

  • 2016
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Clearing for additional classes of OTC Interest Rate Swaps in additional currencies

  • 9 August 2019

    Clearing Obligation for Category 4 counterparties applies (although note the effect of the Refit Regulation)

  • 21 June 2019

    Clearing Obligation for Category 3 counterparties applies (although note the effect of the Refit Regulation)

  • 2019
  • 9 August 2017

    Clearing Obligation for Category 2 counterparties applies

  • 9 February 2017

    Clearing Obligation for Category 1 counterparties applies

  • 2017
  • 9 October 2016

    Frontloading for Category 1 and Category 2 counterparties applies

  • 9 August 2016

    RTS in force

  • 2016
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ISDA and FIA initiatives in relation to clearing

The International Swaps and Derivatives Association (ISDA) and the Futures Industry Association (FIA), published their Client Cleared OTC Derivatives Addendum as a supplement to their master agreements in order to facilitate compliance with the Clearing Obligation under a principal-to-principal client clearing model. The Client Clearing Addendum is designed to enable clearing through all the major CCPs on the basis of their rules, so that separate terms do not need to be negotiated for clearing of each clearing class through individual CCPs.

ISDA has also published other clearing-related documentation, including an EMIR counterparty classification letter, which allows counterparties to indicate (i) their counterparty status for each of the clearing classes, and (ii) their Category for phase-in purposes.

 

The Margin Exchange Requirements

Requirements for exchange of collateral

Article 11(3) of EMIR requires all FCs and NFC+s to have risk management procedures in place that require the exchange of collateral for OTC derivative contracts not cleared by a CCP. Article 11(15) requires the European Supervisory Authorities (the ESAs) to develop draft RTS specifying the type and level of collateral required, as well as the procedures for exemptions for intragroup contracts. The final version of the RTS was published in the Official Journal on 15 December 2016.

In summary, the RTS require that the risk management procedures include:

  • a requirement to collect Initial Margin (without offsetting amounts due between the parties) and Variation Margin in respect of OTC derivative transactions that are not centrally cleared (see "Key Concepts box: Initial Margin and Variation Margin" below);
  • certain exemptions and thresholds limiting the requirement to collect margin;
  • a requirement to segregate Initial Margin and a restriction on its re-hypothecation;
  • rules concerning operational procedures and documentation;
  • concentration limits for Initial Margin and eligibility criteria for Initial Margin and Variation Margin; and
  • details of calculation timing and methodology for, and timing for provision of, Initial Margin and Variation Margin.

The Recitals to the RTS also require the posting of margin where a counterparty established in the Union enters into an OTC derivative contract with a counterparty which is established in a Third Country and would be subject to the rules if it were established in the Union.

Key Concepts

Initial Margin and Variation Margin

"Initial Margin" is collateral collected by a party to cover its current and potential future exposure in the interval between the last exchange of margin and (i) the liquidation of positions following the default of its counterparty, or (ii) the hedging of that exposure (the Margin Period of Risk or MPOR). In the ISDA Credit Support Annex, Initial Margin is represented by the "Independent Amount".

"Variation Margin" is collateral collected by a party on a regular basis to reflect changes to the market value of relevant outstanding contracts.

Phase-in of Initial and Variation Margin

Notional amount thresholds (the IM Notional Amount Threshold and the VM Notional Amount Threshold, respectively) are used to phase in the requirements to exchange Initial and Variation Margin.

If both parties have, or belong to groups each of which has, an average notional amount of non-cleared OTC derivatives over the then current IM Notional Amount Threshold, they will be required to exchange Initial Margin. The first requirements for exchange of Initial Margin came into effect on 4 February 2017 with an IM Notional Amount Threshold of EUR3 trillion. The value of the IM Notional Amount Threshold will then change in September of each year until 2020.

The requirement to exchange Variation Margin was phased in in two stages. If both parties have, or belong to groups each of which has, an average notional amount of non-cleared OTC derivatives over a VM Notional Amount Threshold of EUR 3 trillion, they were required to exchange Variation Margin from 4 February 2017, and all other counterparties were required to exchange Variation Margin from 1 March 2017.

In assessing whether the average of the total gross notional amount of OTC derivatives exceeds the relevant IM Notional Amount Threshold or VM Notional Amount Threshold, counterparties must:

(a)  include all amounts recorded in the last business day of the months March, April and May of the relevant year (the phase-in assessment period) in the timeline below;

(b)  include all the entities in the group;

(c)  include all the non-centrally cleared OTC derivative contracts of the group; and

(d)  include all the intragroup non-centrally cleared OTC derivative contracts of the group, counting each once.

Following the phase-in, counterparties do not need to collect Initial Margin in respect of new contracts in any calendar year unless one of the two counterparties has, or belongs to a group which has, an average notional amount of non-cleared OTC derivatives over EUR8 billion for the months March, April and May of the previous year (calculated as above).

Timeline – Initial Margin and Variation Margin requirements

  • 1 September 2020

    Initial Margin requirements apply with IM Notional Amount Threshold of EUR8 billion

  • 4 January 2020

    Variation Margin requirements apply for all non-centrally cleared derivatives on single stock equity options and index options

  • 2020
  • 1 September 2019

    Initial Margin requirements apply with IM Notional Amount Threshold of EUR0.75 trillion

  • 2019
  • 1 September 2018

    Initial Margin requirements apply with IM Notional Amount Threshold of EUR1.5 trillion

  • 3 January 2018

    Variation Margin requirements apply to physically settled FX forward contracts [However subject to regulatory forbearance]

  • 2018
  • 1 September 2017

    Initial Margin requirements apply with IM Notional Amount Threshold of EUR2.25 trillion

  • 1 March 2017

    Variation Margin requirements apply for all counterparties not caught on first VM phase-in date

  • 4 February 2017

    Initial Margin requirements apply with IM Notional Amount Threshold of EUR3 trillion. Variation Margin requirements apply with VM Notional Amount Threshold of EUR3 trillion.

  • 4 January 2017

    RTS in force

  • 2017
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Margin – Direct application to Third-Country entities

Under Article 11(12) of EMIR, the collateral exchange requirements also apply to OTC derivative contracts entered into between Third-Country entities that would be subject to the requirements if they were established in the Union, where the contract has a "direct, substantial and foreseeable effect within the Union". As to the meaning of "direct, substantial and foreseeable effect within the Union", see "The Clearing Obligation" above. This could mean that, post-Brexit, UK entities transacting with non-EEA counterparties would still be required to comply with the collateral exchange requirements if the transaction has such an effect in the Union.

Margin – Equivalence decisions

Article 13 of EMIR provides that the Commission may adopt implementing acts declaring that the legal, supervisory and enforcement arrangements of a Third Country are equivalent to the margin requirements laid down in EMIR and are being effectively applied and enforced so as to ensure effective supervision and enforcement in that Third Country. If the UK were to become a Third Country for EMIR purposes, an equivalence decision would be required in order to prevent counterparties to OTC derivative transactions from having to comply with two, possibly conflicting, sets of margining rules.

Where such an equivalence decision is made, counterparties to derivatives transactions will be deemed to have fulfilled the EMIR margin requirements where at least one of the counterparties is established in that equivalent Third Country. This means that compliance with only one set of rules is required (i.e. the EMIR margin rules or the equivalent Third Country’s margin rules). Post-Brexit, if an equivalence decision is granted, a UK entity transacting with a Union counterparty would therefore need to comply with either the UK margin rules or the EMIR margin rules but not both.

Margin – Grandfathering

The requirements for exchange of collateral will only apply to new contracts entered into after the relevant phase-in dates, although this will catch new transactions under a pre-existing master netting agreement. Counterparties will need to consider how to apply the rules to a netting set within which a portion of the individual OTC derivative contracts are entered into prior to the relevant phase-in date and the remainder are entered into thereafter.

Margin – Opt-outs and exclusions

The risk mitigation procedures of FCs and NFC+s may provide that:

  • no Initial Margin or Variation Margin is required for trades with NFC-s or with entities which would be NFC-s if they were established in the Union. This means that most repackaging, CLO and other securitisation vehicles will not be required to post collateral to their swap providers;
  • once the phase-in has ended, no Initial Margin is required to be collected for new contracts from January of each year where one of the counterparties has, or belongs to a group which has, an average month-end aggregate notional amount of non-cleared derivatives for the months March, April and May of the preceding year below EUR8 billion;
  • no Initial Margin need be collected where the counterparties are unconnected and the amount of Initial Margin otherwise required to be collected from all parties in the posting group (or from individual parties, if neither party is part of a group) for all non-cleared OTC derivatives would be equal to or less than EUR50 million (the IM Transfer Threshold). Where the counterparties are part of the same group, the IM Transfer Threshold reduces to EUR10 million. Collecting counterparties may alternatively collect a reduced amount in these circumstances, instead of waiving the full EUR50 million;
  • no collateral (whether Initial Margin or Variation Margin) need be collected from a counterparty where the amount due from that counterparty would be equal to or less than EUR500,000 (or its equivalent in another currency) across all relevant transactions (the Minimum Transfer Amount). Counterparties may set a lower threshold if preferred;
  • no Initial Margin need be collected on physically settled FX forwards and swaps or on the exchange of principal and interest in currency swaps; and
  • no margin need be collected from covered bond issuers provided that certain structural protections for the hedge counterparties are built into the transaction.

For further details of these opt-outs and exemptions, including application of the threshold amounts to funds and their managers, see our list of Client briefings or speak to one of your Ashurst contacts.

Margin – FX forwards and equity options

The RTS provide for a delayed application of the requirement to exchange Variation Margin for physically settled FX forwards, until the the date of entry into force of the delegated act under Directive 2014/65/EU (MiFID II), which entered into force on 3 January 2018.

On 18 December 2017, the ESAs submitted to the European Commission draft regulatory technical standards amending the RTS to disapply the requirement to collect variation margin for physically settled foreign exchange forward contracts where one of the counterparties is a counterparty other than a credit institution or investment firm subject to the Capital Requirements Regulation, or equivalent counterparties outside the Union. In the meantime, the ESAs have encouraged regulatory forbearance in respect of the obligation to exchange variation margin on physically settled FX forwards where firms are likely to be out of scope once the RTS have been amended.

The RTS also delay application of the rules to single-stock equity options or options on equity indices until three years after the rules enter into force (4 January 2020). This is due to uncertainty as to whether these products will be subject to margin requirements in other jurisdictions and is intended to avoid regulatory arbitrage.

Margin – Intragroup transactions

The requirements for exchange of collateral will not apply to intragroup transactions (see "Key Concepts box: What is an intragroup transaction?" below) provided that, where relevant, the competent authority(ies) has either (i) made a positive decision that (a) there is no practical or legal impediment to the transfer of capital or payment of liabilities between the counterparties, and (b) the risk management procedures of the counterparties are adequate and consistent with the complexity of the transaction, or (ii) has been notified that those two conditions are met and does not disagree within a prescribed period. The detailed requirements for notification and approval by competent authorities will depend upon whether the counterparties are FCs or NFCs, and are in the same EEA Member State, different EEA Member States, or an EEA Member State and a Third Country. Please speak to one of your Ashurst contacts for further information.

Key Concepts

What is an intragroup transaction?

Under Article 3 of EMIR, an OTC derivative contract will constitute an intragroup transaction if it meets one of the five sets of criteria set out below (the Intragroup Conditions):

1.  The contract is entered into between a Union NFC and a counterparty which is part of the same group and is established in the Union or, if established in a Third Country, the Commission has adopted an implementing act act under Article 13(2) of EMIR (a Third-Country equivalence decision) in respect of that Third Country (an Equivalent Third Country);

2.  The contract is entered into between a Union FC or Equivalent Third-Country FC and another counterparty, which is part of the same group and is an FC, a financial holding company, a financial institution or an ancillary services undertaking subject to appropriate prudential requirements;

3.  The contract is entered into between a Union FC and an NFC which is part of the same group and is established in the Union or an Equivalent Third Country,
provided that, in each case:

  • both counterparties are part of the same consolidation on a full basis; and
  • they are subject to appropriate centralised risk evaluation, measurement and control procedures.

Intragroup transactions will also include contracts between:

4.  Union FCs and certain group holding or services companies if both entities are part of the same institutional protection scheme under the Capital Requirements Directive; and

5.  Contracts entered between two credit institutions affiliated to the same central body as referred to in the Capital Requirements Directive (or where such central body is the other counterparty to the credit institution).

Transitional provisions: intragroup transactions

The Margin Rules contain transitional provisions which are designed to allow a "grace" period during which Third-Country equivalence decisions may be made under Article 13(2) of EMIR.

In effect, this means that where a Third-Country equivalence decision has not been made in respect of the relevant Third Country, but the transaction would otherwise be an intragroup transaction, the Initial Margin requirements will be delayed. Post-Brexit, this could mean that intragroup transactions involving a UK affiliate would require Initial Margin to be transferred after the three-year phase-in period, if no equivalence decision has been made by the Commission in relation to the UK by the end of that period.

As originally published in the Official Journal, the Margin Rules do not include similar transitional provisions for the Variation Margin requirements. However, on 25 February 2017, a corrigendum was published in the Official Journal, amending the Margin Rules so that the Variation Margin requirements benefit from transitional provisions analogous to those available for Initial Margin. In an explanatory memorandum published on 20 January 2017, the Commission explained that the Margin Rules were originally intended to contain transitional provisions for the application of both Variation Margin and Initial Margin, but the provisions relating to Variation Margin were unintentionally omitted. The corrigendum entered into force on 25 February 2017 and has retroactive effect, being effective from 4 January 2017.

Timeline – Intragroup transitional margin requirements

  • 1 September 2020

    Initial Margin requirements fully phased in for all counterparties unless an intragroup exemption has been obtained

  • 4 January 2020

    Initial Margin requirements apply to transactions where one counterparty is a Third-Country entity and no equivalence decision for that Third Country has been adopted under Article 13(2) of EMIR. Variation Margin requirements apply to transactions where one counterparty is a Third-Country entity and no equivalence decision for that Third Country has been adopted under Article 13(2) of EMIR.

  • 2020
  • 4 July 2017

    Variation Margin phase-in begins for group contracts not otherwise exempt or awaiting equivalence

  • 4 July 2017

    Initial Margin phase-in begins for group contracts not otherwise exempt or awaiting equivalence

  • 4 January 2017

    RTS in force

  • No set date

    Initial Margin requirements apply to intragroup transactions between an EU entity and a Third-Country entity on the later of (1) four months after an equivalence decision comes into force and (2) the applicable Initial Margin phase-in date in the Margin Timeline above. Variation Margin requirements apply to intragroup transactions between an EU entity and a Third-Country entity on the later of (1) four months after an equivalence decision comes into force and (2) the applicable Variation Margin phase-in date in the Margin Timeline above.

  • 2017
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ISDA initiatives in relation to margin

ISDA has published new credit support documentation to facilitate compliance with the EMIR requirements for collateral exchange, as well as with international initiatives such as the jointly published BCBS and International Organization of Securities Commissions (IOSCO) margin requirements for non-centrally cleared derivatives published in March 2015. New standard documents include (among others) a New York law Initial Margin Credit Support Annex and Variation Margin Credit Support Annex, and an English law Initial Margin Credit Support Deed and Variation Margin Credit Support Annex. A 2018 version of the English law Initial Margin Credit Support Deed has also been published, aimed at Phases four and five of the initial margin phased implementation. A Variation Margin Protocol has also been published, as well as EU supplemental documentation.

 

Trade Reporting

Article 9 of EMIR requires all Union derivatives market participants to report details of all their derivative contracts to a trade repository registered or recognised by ESMA (the Reporting Obligation). There is no minimum threshold in terms of volume or value of transactions below which the obligation will not apply and the obligation applies whether or not the entity facing the Union market participant is established in the Union.

ESMA is required to publish on its website an up-to-date list of registered trade repositories for EMIR trade reporting purposes. Alternatively, market participants may report such details to a trade repository established in a Third Country where the trade repository has been recognised by ESMA.

As trade repositories were authorised for all classes of derivatives in November 2013, the Reporting Obligation came into force 90 days later, on 12 February 2014 (the Reporting Start Date).

Trade Reporting – Equivalence

Article 13 of EMIR provides that the Commission may adopt implementing acts declaring that the legal, supervisory and enforcement arrangements of a Third Country governing trade reporting are equivalent to the requirements laid down in EMIR and are being effectively applied and enforced so as to ensure effective supervision and enforcement in that Third Country. As the UK is expected to become a Third Country for EMIR purposes, an equivalence decision would be required in order to prevent counterparties to OTC derivative transactions from having to comply with two, possibly conflicting, sets of reporting rules.

Where such an equivalence decision is made, counterparties to derivatives transactions will be deemed to have fulfilled the EMIR trade reporting requirements where at least one of the counterparties is established in that equivalent Third Country. This means that compliance with only one set of rules is required (i.e. the EMIR reporting rules or the equivalent Third Country’s reporting rules).

Trade Repositories – Equivalence

Article 75 of EMIR provides for equivalence decisions to be made by the Commission in respect of a Third Country where that Third Country has legally binding requirements for supervision of trade repositories which are equivalent to those in EMIR. As the EUWA preserves the current regime under EMIR, the UK should be able to comply with these requirements post Brexit, but will need a declaration of equivalence under Article 25 to be made by the Commission.

If such an equivalence decision is made, a Third-Country trade repository can apply to ESMA for recognition under EMIR, provided that the relevant Third Country has entered cooperation agreements with the Union authorities facilitating the exchange of information. Following recognition, counterparties subject to the Reporting Obligation can report trades to the Third-Country trade repository for the purpose of EMIR compliance.

Trades subject to the Reporting Obligation

Transitional provisions applied to the reporting obligation, which is now fully phased in. A previous requirement to report certain legacy trades entered into before the application of EMIR (known as "backloading") has been removed by the Refit Regulation.

From and including the Reporting Start Date, the Reporting Obligation is triggered when a Union counterparty:

  • executes a derivative contract;
  • restructures or modifies the terms of an existing derivative contract; or
  • terminates an existing derivative contract before its scheduled maturity date,

and details of the derivative contract must be reported no later than the working day after the conclusion, modification or termination of the contract.

What details need to be reported?

If a Reporting Obligation is triggered, over 80 data items must be reported to a trade repository, split into two broad categories:

  • Counterparty Data – includes detailed information on the counterparties and other entities involved in the trade, such as brokers, clearing members, CCPs and trade repositories.
  • Common Data – includes detailed information on the contract itself, such as the underlying, notional amount, maturity, price, rates and currency, amongst other items. Counterparties should ensure that the Common Data is agreed between both parties.

For further details, see "Sources of Regulation".

How to comply with the Reporting Obligation

In order to be able to comply with the Reporting Obligation, a Union market participant must obtain a unique Legal Entity Identifier (LEI) from the Global LEI System which has local operational units (LOUs) in various countries. The LOU in the UK is the London Stock Exchange. If multiple entities within a group enter into derivative contracts, then a separate LEI will be required for each entity.

Delegating the obligation to report

Under Article 9(1) of EMIR, a Union derivatives market participant may delegate the reporting of the details of its derivative contracts. Certain market participants (in particular, SPVs and counterparties with limited back office functionality) may prefer to delegate trade reporting to their derivative counterparty.

The Refit Regulation has made a number of changes to the trade reporting regime, including the following:

  • unless an NFC- chooses otherwise, FCs are responsible and legally liable for accurately reporting both sides of their trades with NFC-s; the NFC must provide certain details, and is responsible for their accuracy;
  • when an FC is reporting details of a trade with an NFC, the NFC must provide certain details, and is responsible for their accuracy;
  • a UCITS' management company and an AIF's manager is responsible for reporting trade details and for their accuracy;
  • substituted compliance is available for reporting transactions between an EU NFC- and a non-EU equivalent FC when an equivalence decision has been made; and
  • there is no reporting requirement for intra-group transactions if certain conditions are met.

ISDA initiatives in relation to trade reporting

ISDA has published an EMIR Trade Reporting Delegation Agreement enabling derivative participants to delegate their reporting obligations to their bank counterparty.

 

Other Risk Mitigation Requirements

Besides the margin exchange requirements, Article 11 of EMIR sets out a number of risk mitigation requirements which apply to OTC derivative contracts not cleared by a CCP.

Portfolio reconciliation and dispute resolution

Before entering into non-cleared OTC derivative contracts, all Union OTC derivatives market participants (i.e. FCs, NFC+s and NFC-s) are required to agree in writing with their counterparty certain arrangements for reconciling portfolios. In addition, all market participants are required to agree detailed procedures and processes in relation to:

  • the identification, recording and monitoring of disputes in relation to:

     ◦   the recognition or valuation of their non-cleared OTC derivative contracts; and 

     ◦   the exchange of collateral between the counterparties; and  

  • the timely resolution of those disputes.

The portfolio reconciliation and dispute resolution requirements apply to all market participants in the Union whether or not the facing entity is established in the Union and regardless of its status.

The frequency of portfolio reconciliations between counterparties depends on the number of OTC derivative contracts outstanding between the two parties and whether the two parties are FCs or NFC+s and whether one of the parties is an NFC-. Frequencies range from each business day to once a year.

FCs are required to report to their relevant regulator any disputes relating to an OTC derivative contract, its valuation or the exchange of collateral for an amount or a value higher than EUR15 million and outstanding for at least 15 business days.

The portfolio reconciliation and dispute resolution requirements have applied since 15 September 2013.

ISDA initiatives in relation to portfolio reconciliation and dispute resolution

The ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol allows counterparties to amend the terms of their ISDA Master Agreement to implement the portfolio reconciliation and dispute resolution requirements imposed by EMIR. In adhering to the Protocol, counterparties also waive confidentiality obligations to the extent of the required disclosure under EMIR.

Portfolio compression

All Union OTC derivatives market participants with 500 or more non-cleared OTC derivative contracts outstanding with a counterparty are required to have in place procedures to review regularly, and at least twice a year, the need for a portfolio compression exercise in order to reduce their counterparty credit risk and to conduct portfolio compression if appropriate.

Market participants are required to ensure that they are able to provide a reasonable and valid explanation to their competent authority where they conclude that a portfolio compression exercise is not appropriate.

The portfolio compression requirements have applied since 15 September 2013.

Daily mark-to-market requirements

All FCs and NFC+s are required to mark-to-market the value of their outstanding derivative contracts on a daily basis. Where market conditions prevent marking-to-market, reliable and prudent marking-to-model must be used.

The daily mark-to-market requirements have applied since 15 March 2013 and the mark-to-market values of derivative contracts have been part of the Reporting Obligation detailed above since the Reporting Start Date.

From and including 11 August 2014, FCs and NFC+s must also report the mark-to-market valuations of any collateral supporting their derivative contracts on a daily basis.

Timely confirmation

All Union OTC derivatives market participants are required to have procedures in place to ensure the timely confirmation of the terms of their non-cleared OTC derivative contracts. The deadlines imposed by EMIR in relation to timely confirmation depend on the type of OTC derivative being entered into and the status of the counterparties to the trade for EMIR purposes.

ISDA initiatives in relation to timely confirmation

The ISDA 2013 Timely Confirmation Amendment Agreement allows market participants to amend the terms of their ISDA Master Agreement to provide for compliance with the timely confirmation requirements of EMIR.

Direct application of other risk mitigation requirements for non-centrally cleared trades to Third-Country entities

Under Article 11(12) of EMIR, the risk mitigation requirements described in this section also apply to OTC derivative contracts entered into between Third-Country entities that would be subject to the requirements if they were established in the Union where the contracts have a "direct, substantial and foreseeable effect within the Union" or the requirements are necessary or appropriate to prevent the evasion of any provision of EMIR. As to the meaning of "direct, substantial and foreseeable effect within the Union", see "The Clearing Obligation" above.

Risk Mitigation – Equivalence

Article 13 of EMIR provides that the Commission may adopt implementing acts declaring that the legal, supervisory and enforcement arrangements of a Third Country are equivalent to the risk mitigation requirements laid down in EMIR and are being effectively applied and enforced so as to ensure effective supervision and enforcement in that Third Country. As the UK is expected to become a Third Country for EMIR purposes (i.e. outside the EEA), an equivalence decision would be required in order to prevent counterparties to OTC derivative transactions from having to comply with two, possibly conflicting, sets of risk mitigation rules.

Where such an equivalence decision is made, counterparties to derivatives transactions will be deemed to have fulfilled the EMIR risk mitigation requirements where at least one of the counterparties is established in that equivalent Third Country. This means that compliance with only one set of rules is required (i.e. the EMIR risk mitigation rules or the equivalent Third Country’s risk mitigation rules). If no equivalence decision is made in respect of the UK, then parties to transactions may be required to comply with both the relevant UK rules and EMIR.

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The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.

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