On 17 June 2019, EMIR Refit entered into force. As a response to an effectiveness review of the European Market Infrastructure Regulation (“EMIR”), it is designed to simplify EMIR to make it more efficient and proportionate, especially for smaller market participants.
Most of the provisions contained within EMIR Refit will apply as of 17 June, although a number of provisions will only be phased in between December 2019 and June 2021.
EMIR Refit introduces a number of key changes to the current framework, including:
i) Defining counterparties
EMIR Refit introduces a new category of financial counterparty (“FC”): the small financial counterparty (“SFC”). Whether a firm qualifies as FC or SFC will be assessed on the basis of the non-financial counterparty (“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. SFCs will furthermore not be subject to the clearing obligation; however, they will remain subject to risk mitigation requirements.
Aside from introducing a new type of FC, EMIR Refit also amends the definition of FC itself. Under the amended definition of FC, EU-established AIFs will be seen as FC regardless of where their manager is located. Non-EU-established AIFs managed by non-EU managers will now be seen as third country entities that would be FCs if they had been located in the EU. Therefore, EU FCs will have to comply with EMIR obligations if and when they trade with such AIFs.
ii) Reporting changes
Backloading, i.e. reporting historical transactions still outstanding in a specific time frame, will no longer be required. Historical trade reporting was subject to a 12 February 2019 deadline; however, EMIR Refit does away with the burdensome backloading obligation.
There will be a shift in reporting obligations for transactions that involve an FC and an NFC. NFCs still have to provide their FC counterparts with the necessary information, but the responsibility (and liability) to correctly report transactions rests with the FC. This reporting obligation is one of the provisions that will be phased in at a later date (12 months).
EMIR Refit also stresses that the reporting responsibility and liability for UCITS and AIFs rests with its respective management company or AIFM.
Furthermore, intragroup transactions which involve an NFC are exempt from the reporting obligation.
Frontloading, i.e. the obligation to clear contracts entered into before the clearing obligation went live and which met certain conditions, is no longer required under EMIR Refit.
NFCs that exceed the clearing thresholds will only fall within the scope of the clearing obligation for those asset class(es) for which the threshold has been exceeded. This approach, however, does not extend to SFCs. SFCs that exceed the clearing threshold for one asset class will have to clear all asset classes.
EMIR Refit furthermore alters the way the clearing thresholds should be calculated. Under the previous regime, thresholds were calculated on a 30-day rolling average basis. This calculation has been replaced by aggregated month-end averages over a 12-month (preceding) period.
Clearing brokers are to provide clearing services on fair, reasonable, non-discriminatory and transparent commercial terms (FRAND), a measure that aims to incentivise and facilitate clearing access.
Pension scheme arrangements will see an extension to their exempt status from the clearing obligation for two years, extendable twice by one year.
EMIR Refit also gives the Commission the authority to suspend the clearing obligation, in certain circumstances, for three months.
The introduction of the above changes raises a number of concerns for firms that fall within the scope of EMIR Refit. These firms should assess their own and their counterparties’ current categorisations and they may need to, or will be requested through their counterparties to, revise their current documentation.
For AIFs that were previously outside the scope of EMIR in particular, the question arises as to whether they correctly notified their status, and whether they are (or can become within a short time frame) compliant with the risk mitigation requirements imposed by EMIR.