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Counterparties trading OTC-derivates (EMIR)

Based on the experiences of the 2008 financial crisis, the G20 decided in 2009 to increase the transparency and security of OTC (over-the-counter) derivatives trading. The G20 leaders specifically decided that in the future any standardized OTC derivatives would have to be cleared through central counterparties and that OTC derivatives must be reported to trade repositories.

What is EMIR?

Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (European Market Infrastructure Regulation – EMIR) has been in force since August 2012 to implement these objectives and create a uniform supervisory framework regarding central counterparties (CCPs). EMIR has been revised in the EMIR Regulatory Fitness and Performance programme (EMIR Refit) and came into force on 17 June 2019. 
 
Financial counterparties and non-financial counterparties need to inform AFM in case of disputes and unconfirmed transactions, and both AFM and ESMA when they exceed the clearing threshold and when they no longer exceed it.
 

Which counterparties are affected by EMIR?

The EU Regulation contains requirements for the parties to derivative transactions. In this respect, the Regulation differentiates between financial counterparties and non-financial counterparties. Pursuant to Article 2(8) of EMIR, a financial counterparty is defined as:
 
  • any investment firm authorized in accordance with Directive 2014/65/EC;
  • any credit institution authorized in accordance with Directive 2013/36/EC;
  • any insurance undertaking or reinsurance undertaking authorized in accordance with Directive 2009/138/EC;
  • any UCITS and, where relevant, its management company, authorized in accordance with Directive 2009/65/EC, unless that UCITS is set up exclusively for the purpose of serving one or more employee share purchase plans;
  • any institution for occupational retirement provision (IORP) as defined in point (1) of Article 6 of Directive (EU) 2016/2341 of the European Parliament and of the Council;
  • any alternative investment fund (AIF), as defined in point (a) of Article 4(1) of Directive 2011/61/EU which is either established in the Union or managed by an alternative investment fund manager (AIFM) authorized or registered in accordance with Directive 2011/61/EU, unless that AIF is set up exclusively for the purpose of serving one or more employee share purchase plans, or unless that AIF is a securitization special purpose entity as referred to in point (g) of Article 2(3) of Directive 2011/61/EU, and, where relevant, its AIFM established in the Union.
  • any central securities depository in accordance with Regulation 909/2014/EU
For purposes of the Regulation, all other entities established in the EU are to be classified as non-financial counterparties. The AFM has been appointed as the supervisor for the EMIR supervision of non-financial counterparties and of financial counterparties, insofar as the financial counterparty is not considered a credit institution, (re)insurance undertaking or institution for occupational retirement. These three types of financial counterparty are supervised by the Dutch Central Bank (DNB).
 

The Regulation contains the following elements in particular

A clearing obligation applies to standardized OTC derivatives. The additions to EMIR Refit mean that from now on not only non-financial counterparties but also financial counterparties will be classified according to whether the aggregate gross notional volume of the OTC derivative transactions of the FCs and NFCs consolidated within the group is below or above the clearing threshold, whereby the latter will result in the following notification requirements:

  • Under Article 4a of EMIR, financial counterparties are required to notify AFM and ESMA if they exceed the clearing threshold or if they do not calculate their positions. Financial counterparties that do not calculate their positions, or do calculate their positions and exceed the clearing threshold, are subject to the clearing obligation for all classes of OTC derivatives.
  • Under Article 10 of EMIR, non-financial counterparties are required to notify AFM and ESMA if they exceed the clearing threshold or if they do not calculate their positions. Non-financial counterparties that do not calculate their positions are subject to the clearing obligation for all classes of OTC derivatives. Non-financial counterparties that do calculate their positions and exceed the clearing threshold are only subject to the clearing obligation for the classes of derivatives in which the clearing threshold was exceeded. Moreover, non-financial counterparties can exclude from the calculation OTC derivative contracts that are objectively measurable as reducing risks relating to their commercial activity.
If the results of the calculation show that the clearing threshold has not been exceeded, a notification to AFM and ESMA is not required. However, after a year the entities are required to review whether their positions are still below the clearing thresholds. But even then, a notification is only necessary if this review leads to a change in the status (subject to the clearing obligation/not subject to the clearing obligation).
The contracting parties must also comply with special risk-management requirements in the case of transactions which, as a result of their structure, are not suitable for central clearing.
In order to increase transparency, derivative transactions must be reported to a trade repository. EMIR also governs the requirements for the authorization and continuous monitoring of central counterparties and provides for closer cooperation between the supervisory authorities. The responsibility for supervising the trade repositories has been therefore transferred to the European Securities and Markets Authority (ESMA). The provisions of the EMIR Regulation are directly applicable in the Netherlands.

To which financial instruments does EMIR apply?

OTC derivatives are derivatives within the meaning of points (4) to (10) of Section C of Annex I to Directive 2004/39/EU (Markets in Financial Instruments Directive – MiFID), which are not executed on a regulated market within the meaning of Article 4(1)(14) of MiFID or on a third-country market considered equivalent to a regulated market in accordance with Article 19(6) of MiFID. However, the requirement regarding reporting to trade repositories applies to all derivatives within the meaning of the afore mentioned Directive.