October 31, 2018

ESMA issued clarifications for clearing and trading obligations under the European Market Infrastructure Regulation (EMIR or Regulation No 648/2012), ahead of the December 21, 2018 deadline. The statement addresses the challenges that certain groups and non-financial counterparties above the clearing threshold (NFCs+) would face on December 21, 2018, when they start central clearing of some of the over-the-counter (OTC) derivative contracts and trading them on trading venues.

Under the EMIR, both the following expire on December 21, 2018, for the interest rate derivative classes denominated in the G4 currencies subject to the clearing obligation:

  • The current derogation from the clearing obligation for certain intragroup transactions concluded with a third country group entity
  • The phase-in for counterparties in Category 4, broadly speaking NFCs+

With respect to the current derogation from the clearing obligation for certain intragroup transactions concluded with a third country group entity, given the absence of equivalence decisions, ESMA undertook a review of the Commission Delegated Regulations on the clearing obligation and developed draft amendments to extend the derogation expiration to December 21, 2020. Whereas, with respect to the phase-in for counterparties in Category 4, the proposal of EC to amend EMIR, which was published in May 2017 (REFIT) and is being negotiated by the EU institutions, envisages that NFCs+ would only be subject to the clearing obligation in the asset class(es) where their level of activity is above the clearing threshold.

In case the amendments mentioned above have not entered into force by the current expiration date, these counterparties would need to have clearing arrangements in place and start clearing these transactions, before they are once again no longer required to do so after the amendments enter into force. Furthermore, given the link between the MiFIR trading obligation and the EMIR clearing obligation, this potential timing gap would also have implications regarding the trading obligation. ESMA expects competent authorities to:

  • Not prioritize their supervisory actions toward group entities that benefit from the derogation for intragroup transactions meeting certain conditions on and after December 21, 2018
  • Not prioritize their supervisory actions toward NFCs+ that are not above the clearing threshold (as prescribed under the EMIR legislation) in the interest rate derivative asset class on or after December 21, 2018
  • Generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner

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Keywords: Europe, EU, Securities, Clearing Obligation, Trading Obligation, CCPs, NFC+, Intragroup Transactions, EMIR, ESMA