European Market Infrastructure Regulation (EMIR)

Introduction

The European Markets and Infrastructure Regulation (EMIR) is a European Union law that aims to reduce the risks posed to the financial system by derivatives transactions in the following three main ways:

  1. reporting of derivatives trades to an authorised trade repository;
  2. clearing derivatives trades if entities' derivative trading exceeds certain thresholds; and
  3. mitigating the risks associated with derivatives trades by, for example, exchanging margin, reconciling portfolios periodically and agreeing dispute resolution procedures between counterparties

EMIR impacts market participants in the EEA (European Economic Area) and market participants outside of the EEA trading with an EEA counterparty.

EMIR may also have extra-territorial impact on trading between two non-EEA counterparties where;

i. Both counterparties trade through branches located within the EU; or,

ii. Either counterparty has a qualifying guarantee for OTC derivative activity from an EU Financial Counterparty (FC).

EMIR REFIT

The European Commission's Regulatory Fitness and Performance programme in 2016 ("REFIT"), assessed the existing requirements under the European Markets and Infrastructure Regulation (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 from 17 June 2019. This article includes such amendments to the existing rules.

Are you impacted by EMIR?

When you enter into derivative products with HSBC, including options, forwards or swaps relating to (amongst other things) foreign exchange, interest rate protection, credit, commodities or equities, you become a 'counterparty' to HSBC in these transactions. EMIR applies to transactions between all counterparties and the EMIR requirements are different depending on the country where your entity is established.

Considering the complexity of EMIR regulations and the intricacies around the extra-territorial reach of EMIR, we strongly recommend you seek guidance from your usual legal advisors with respect to your obligations under EMIR.

Counterparty Classification

Entering into derivative transactions identifies you as a 'counterparty'.

EMIR introduces two sets of counterparties:

  1. Financial Counterparties (FC) include banks, investment managers, insurance companies or brokers.
  2. Non-Financial Counterparties (NFC) include all entities that are not Financial Counterparties.

EMIR identifies two sub-categories of Non-Financial Counterparties (NFC).

All Non-Financial Counterparties must calculate their group's aggregate month-end average position in derivative contracts for the previous 12 months, excluding derivative trades executed for hedging purpose (the "position"). It is important to note that the first calculation must be conducted by 17 June 2019 for the period between 1 June 2018 and 31 May 2019 and must be conducted every 12 months thereafter.

Counterparties must compare their position to the EMIR clearing thresholds stated below to determine if they exceed them in any asset class:

  1. Credit: EUR1 billion
  2. Equity: EUR1 billion
  3. Interest Rates: EUR3 billion
  4. Foreign exchange: EUR3 billion
  5. Commodities and others: EUR3 billion

When a Non-Financial Counterparty (NFC) determines that its position does not exceed any asset class clearing threshold it is classified as a 'Non-Financial Counterparty below the clearing thresholds' or 'NFC-'.

When a Non-Financial Counterparty (NFC) determines that its position exceeds an asset class clearing threshold or decides not to calculate its position, it is classified as a 'Non-Financial Counterparty above the clearing thresholds' or 'NFC+'.

EMIR identifies two sub-categories of Financial Counterparties (FC).

All Financial Counterparties must calculate their group's aggregate month-end average position in derivative contracts for the previous 12 months, including derivative trades executed for hedging purpose (the "position"). It is important to note that the first calculation must be conducted by 17 June 2019 for the period between 1 June 2018 and 31 May 2019 and must be conducted every 12 months thereafter.

Financial Counterparties must compare their position to the EMIR clearing thresholds stated below to determine if they exceed them in any asset class:

  1. Credit: EUR1 billion
  2. Equity: EUR1 billion
  3. Interest Rates: EUR3 billion
  4. Foreign exchange: EUR3 billion
  5. Commodities and others: EUR3 billion

When a Financial Counterparty (FC) determines that its position does not exceed any of the clearing thresholds, it is classified as a 'Small Financial Counterparty' or 'FC-'.

When a Financial Counterparty (FC) determines that its position exceeds any of the clearing thresholds or decides not to calculate its position, it is classified as a large Financial Counterparty or "FC+".

EMIR classification of AIFs and UCITS

Alternative Investment Fund (AIF) must be classified as Financial Counterparties (FC), irrespective of the AIF Manager's country of incorporation (whereas EU AIFs managed by non-EU AIFMs were previously classified as NFC).

AIFs that are Securitisation Special Purpose Entities (SSPE) or are set up exclusively for serving one or more employee share purchase plans must be classified as Non-Financial Counterparties (NFC).

Undertakings for Collective Investments in Transferable Securities (UCITS) continue to be classified as Financial Counterparties (FC).

Both UCITS and AIFs must must compare their position to the EMIR clearing thresholds to determine if they exceed them in any asset class as any other NFC or FC.

EMIR obligations apply differently based upon the counterparty's classification

ESMA's website provides forms for counterparties to notify ESMA and their national regulatory authority of their classification. ESMA notifications should be returned via email to EMIR-notifications@esma.europa.eu.

EMIR Obligation NFC- FC- NFC+/FC+
Central Clearing    
Timely Confirmations T+2    
Timely Confirmations T+1  
Market to market/model valuation  
Margining  
Portfolio Reconciliation
Dispute Resolution
Portfolio Compression (for 500 or more outstanding contracts)
Trade repository reporting

EMIR in the UK following Brexit

The European Union (Withdrawal) Act 2018 (EUWA) creates a new body of UK law, known as retained EU law, based on the EU law that applied in the UK on 31 December 2020. That retained law may have been amended under EUWA powers to ensure that it operates appropriately after Brexit. These amendments are not intended to make policy changes, other than to reflect the UK's new position outside the EU, and to smooth the transition to this situation. As a result and from January 2021, there will be an EU version of EMIR and a UK version of EMIR containing substantially the same rights and obligations.

Whilst the substance of EMIR obligations is largely unchanged as a result of onshoring in the UK, a wide range of practical impacts on MiFID II provisions arise as a result of the UK’s exit from the EU.

A small number of indicative examples of the impact of Brexit on EMIR implementation (as amended by EMIR Refit):

  • In particular, since the UK will become a non-EU ("third") country, counterparties will need to ensure they report to a trade repository that is authorised under the applicable EU or UK EMIR regime. Trade repositories have created bifurcated reporting arrangements to facilitate this.
  • Similarly, EU EMIR clearing obligations can no longer automatically be satisfied via UK central counterparties and EU counterparties will need to ensure they direct their clearing arrangements to appropriately authorised or recognised CCPs. Note that the EU has provided temporary recognition until 30 June 2022 to three UK CCPs.

The many and varied issues arising in relation to EMIR as a result of Brexit have been the subject of much discussion in the press, by regulators and by trade associations. HSBC Global Banking & Markets has been working to establish arrangements to ensure we continue to service our clients through Brexit and beyond. For specific questions about your relationship and transactions with HSBC please speak to your usual HSBC contact in the first instance.

 

Last updated: 18 December 2020