EMIR

Classification and Confirmation

EMIR Classification

In August 2012, the European Market Infrastructure Regulation (EMIR) came into force as binding law within the European Union, introducing new clearing and risk mitigation requirements for all derivatives counterparties.

EMIR Refit

The European Commission's Regulatory Fitness and Performance programme in 2016 (“REFIT”), assessed the existing requirements under EMIR to determine whether they could be simplified and whether certain compliance costs that were considered disproportionate could be eliminated. This has led to the preparation of a new Regulation (“EMIR REFIT”) that directly amends certain provisions of the existing EMIR Regulation and enters into force on 17th June 2019. Below information takes into account EMIR Refit regulation amendments.

The main obligations under EMIR are:

  • Application of risk mitigation techniques for non-centrally cleared OTC derivatives. Including timely confirmation, portfolio reconciliation and compression, dispute resolution;
  • Reporting to trade repositories to enhance the safety of central clearing ;
  • Central Clearing for certain classes of OTC derivatives to reduce counterpart risk.

Classification FC vs NFC

  • Financial Counterparties: The financial counterparties are MIFID investment firm, credit institution under the Banking Directive, insurance undertaking, assurance undertaking, reinsurance undertaking, UCITS or its management company, occupational retirement firm; and alternative investment fund (apart fund which are AIF SSPE (Securitization Special Purpose Entities) and AIF Purchase plan (i.e. set up exclusively for serving one or more employee share purchase plans).
  • Non-Financial Counterparties: A “Non-Financial counterparty” or “NFC” is a counterparty not classified as a Financial Counterparty or an Exempted Counterparty. (AIF SSPE and AIF Purchase plan are NFC)

Classification Large/+ vs Small/-

  • Counterparty should compute by asset class its group’s aggregate month-end average position in derivatives contracts for the previous 12 months by 17 June 2019 (i.e. from June 2018 to May 2019) and every 12 months thereafter. FC should include all the trades while NFC should exclude the trades done for hedging purpose.
  • In case average position is above at least one threshold, counterparty is Large/+ (FC are LFC/FC+ and NFC are NFC+) and in case average position is below all the thresholds, counterparty is Small/- (FC are SFC/FC- and NFC are NFC-).

Credit

€1bn

Equity

€1bn

Interest Rates

€3bn

Foreign exchange

€3bn

Commodities and others

€3bn

To calculate your position against each Clearing Threshold, you must aggregate all global activity of NFCs in the same group. Fund position is performed at fund level.

Notification to ESMA (European Securities and Markets Authority) and to NCA (National Competent Authority)

  • By 17th June 2019, the counterparty should have computed the average (as detailed above).
  • In case the computation is not done or if the computation is done and exposure is above at least one threshold, counterparty must inform the same day (17th June 2019) the ESMA and its NCA that it is a FC+ or NFC+ (for this last NFC+ case, it should mention the asset(s) class(es) where the threshold is crossed).

Exempted counterparties

EMIR identifies tree sub categories of Exempted Counterparties:

  • Fully exempted : the European System of Central Banks or similar public debt management bodies and the Bank for International Settlements - to which EMIR does not apply;
  • Partially exempted : some Multilateral Development Banks, some public sector entities, the European Financial Stability Facility and the European Stability Mechanism – to which only the Reporting Obligation under EMIR applies
  • Temporary exempted : Pension Scheme arrangements benefit of two years extension of the current transitional exemption from the clearing obligation for OTC derivatives starting from the entry into force of EMIR Refit

Timely Confirmation The EMIR obligation on timely confirmations, in force since 15th of March 2013, requires that all non-cleared OTC derivatives are confirmed as much as possible electronically and within specified time limits depending on the counterparty classification:

  • For FC (both FC+ and FC-) and NFC+: D + 1
  • For NFC- : D + 2

To execute this EMIR requirement on timely confirmations, we would have to chase our clients in case of non-respect of the above time limits.