Following publication, it is set for EMIR Refit to become effective on the 17th of June. Most of its provisions will begin applying on the same effective date, whereas others are set to be phased in gradually.
The aim behind EMIR Refit is to reduce compliance costs for the end-user counterparties (Non-Financial Counterparties (“NFCs”)) and small financial counterparties (“SFCs”). Some of these changes include:
(i) an exemption from the reporting of intragroup transactions;
(ii) an exemption for SFCs from the clearing obligation;
(iii) removal of the obligation and legal liability for reporting when an NFC transacts with an FC; and
(iv) a determination of the NFC clearing obligation on an asset-class-by-asset-class basis.
While these amendments provide relief, end-users should remain aware of the distinctions within the text of EMIR Refit itself, the extent to which relief applies, the timing and steps involved in these changes and any notifications which must be filed.
There are two noteworthy immediate action items which will take effect as of the 17th of June. The first relates to an end-user’s requirement to perform a new calculation to determine whether or not it exceeds the clearing threshold, while the second requires an end-user to file a notification with the relevant National Competent Authority (“NCA”) in order to take advantage of an exemption for the reporting of intragroup transactions.
Key impacts of EMIR Refit on end-users
Changes to Clearing Threshold Calculation
EMIR Refit will create a new regime to determine when an NFC and an FC are subject to the clearing obligation. This regime and its respective determinations will be based on whether the position of an NFC or an FC, as applicable, exceeds the requisite clearing thresholds.
In particular, the NFCs and FCs must regulate whether their aggregate month-end average position for the previous twelve months across the entire group exceeds any of the thresholds for a particular asset class. Should an NFC or FC not make this calculation by the effective date (17th June 2019) or if it exceeds the calculation, it must notify the European Securities and Markets Authority and the relevant NCA immediately and such NFC or FC will then become subject to the clearing obligation which will be set to begin four months following such notifications.
The NFCs and FCs that are currently subject to the clearing obligation and that remain subject to the clearing obligation under EMIR Refit must still provide notifications to ESMA and the relevant NCA.
Exemption from Intragroup Transaction Reporting – Immediate Action Required
Currently, Article 9 of EMIR ensures that all counterparties subject to EMIR are required to report their intragroup transactions (also known as inter-affiliate transactions) to a trade repository. However, as of the 17th of June, EMIR Refit provides relief to NFCs from the requirement to report these intragroup transactions in certain circumstances.
Specifically, EMIR Refit provides an exemption from the reporting of derivatives contracts “within the same group where at least one of the counterparties is [an NFC] or would be qualified as [an NFC] if it were established in the [EU]” subject to pre-set criteria:
1. Both counterparties are included in the same consolidation on a full basis;
2. Both counterparties are subject to appropriate centralized risk evaluation, measurement and control procedures; and
3. The parent undertaking is not an FC.
If you are an end-user counterparty (Non-Financial Counterparty (“NFCs”)) and/or a Small Financial Counterparty (“SFC”), your internal or outsourced compliance officer should ensure that the Refit is looked into prior to the effective date, that is, the 17th of June 2019, to ensure that any reporting that must be done to the NCA is done without undue delay.
The Malta Financial Services Authority has issued a circular on Regulation (EU) No2019/834, which circular should be read in conjunction with Regulation (EU) No 648/2012, its Delegated Regulations and previous circulars issued by the Authority.
About the Author
The article has been authored by Dr Ursula Farrugia, Advocate at CSB Legal, who specialises in Company Law, Financial Services, Compliance & AML and the Fintech Industry.