Ten things you need to know about the EMIR review

The European Commission has published its legislative proposal in relation to the update to EMIR. This has been produced following the EMIR review process, which was started in 2015 and involved a Call for Evidence, public consultation and two public hearings. In addition, the Commission published an accompanying Communication regarding the implementation of EMIR focussing on the controversial issue of clearing arrangements for euro-denominated securities. This article sets out the top 10 things you should know about the proposals.

The Commission proposes to expand the Financial Counterparty (FC) definition to include securitisation special purpose entities (SSPEs), central securities depositories (CSDs) and alternative investment funds within Article 4(1)(a) AIFMD.

Financial Counterparties (FCs) will be subject to an annual clearing threshold calculation. Those FCs which do not exceed the clearing thresholds will be exempt from the clearing obligation, and will be known as Small FCs.

Non-Financial Counterparties (NFCs) will only have to carry out the threshold calculation once a year. In addition, NFCs will only be subject to the clearing obligation in respect of the particular asset classes in which they have exceeded the clearing threshold. For example, an NFC which exceeds the clearing threshold in respect of commodity derivatives only would no longer be required to clear IRS or other asset classes for which there is a clearing obligation.

Frontloading will be abolished for all types of derivative contracts which are declared subject to the clearing obligation and a new mechanism allowing temporary suspension of the clearing mechanism will be introduced.

Only CCPs will be required to report exchange-traded derivatives (ETDs) transactions on behalf of both counterparties. Other amendments would confirm that UCTIS management companies and alternative investment fund managers (AIFMs) are responsible for reporting on behalf of UCITS and AIFs respectively.

The Commission proposes a new exemption from the reporting obligation for intragroup transactions where at least one of the counterparties is an NFC, and introduces single-sided reporting for OTC trades with NFCs below the clearing threshold (NFC-). For transactions between an FC and an NFC-, or a CCP and a NFC-, only the FC or the CCP will be required to make a report.

Clearing members and clients (in the case of indirect clearing services) will be obliged to provide clearing services on fair, reasonable and non-discriminatory (FRAND) commercial terms. The Commission is tasked with drafting Delegated Acts setting out the minimum standards that would have to be fulfilled in order to meet this standard.

This will be extended for another three years.

The proposal to amend EMIR will now be transferred to the European Parliament and to the Council for review and adoption. Both institutions will be able to propose additional amendments. NRFLLP expects the legislative process to complete in late Q3 2018. In addition, the Communication states that the Commission will in June publish a separate legislative proposal on enhanced supervision of EU and equivalent CCPs in respect of euro-clearing. This proposal is expected to include requirements that CCPs clearing transactions in euro-denominated securities are subject to Union law.