Regulation (EU) 2019/834 of the European Parliament and of the Council of 20 May 2019 amending Regulation “EMIR Refit” entered into force as of 17 June 2019.

EMIR Refit aims to provide more proportionate rules for over-the-counter derivatives, helping to reduce costs and regulatory burdens for market participants without compromising financial stability.

EMIR Refit includes wide ranging changes to the application EMIR. The key changes can be summarized as follows:

1. Entity scope

EMIR Refit will result in an expansion of the scope of AIFs that are considered to be a “financial counterparty” (“FC”) for the purposes of EMIR. EU AIFs, regardless of the location and status under the AIFMD of its manager, are categorised as FCs unless they are set-up exclusively for the purpose of employee share purchase plans or as securitisation special purpose.

EU AIFs with a non-EU AIFM will now be categorised as FC (previously NFC) and non-EU AIFs with non-EU AIFMs will be classed as “third-country entity FCs”, which means that the rules will apply to them where they face an EU bank or broker.

2. Clearing obligations

Two major changes are being made to the current system:

Currently, if a non-financial counterparty (“NFC”) exceeds the clearing obligation for one asset class, all other asset classes become subject to the clearing obligation (“NFC+”). Under EMIR Refit, NFC+s will only be subject to the clearing obligation for the asset class or classes which exceed the threshold.

Furthermore, a new category of “small financial counterparties” (“SFC”) has been created to reduce the clearing obligations on smaller FCs with low volumes of derivatives trading. In summary, whether a firm qualifies as FC or SFC will be assessed on the basis of the NFC clearing obligation thresholds, i.e. EUR 1 billion for Credit and Equity derivatives and EUR 3 billion for Interest Rate, Foreign Exchange, and Commodity derivatives. These thresholds will be calculated on the basis of aggregated month-end averages for the past 12 months, where an initial calculation should already be available on the day of entry into force. 

Similar to NFCs, FCs (together with all other entities in their group) that do not exceed any of the clearing thresholds set for NFCs (based on average annual month end positions) will not be subject to the clearing obligation. However, once the clearing threshold is crossed for one asset class, all assets classes will be subject to the obligation.

For transactions between an FC and an an NFC that is not subject to the clearing obligation (“NFC-“), the FC will be responsible and legally liable for reporting the transaction on behalf of both parties. NFCs are required to provide accurate data to the FC for reporting purposes. This will be a welcome development for corporates. However, NFCs which have already established direct reporting arrangements may continue to report themselves.

NFC-s will also no longer have reporting obligations when the transaction is with a third country entity which would be an FC if established in the EU. This is conditional on the non-EU entity reporting the transaction under its home regime and that the regime is considered equivalent under EMIR.

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par Anders Noren.

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