Summary of changes to Regulation (EU) No 648/2012 (EMIR) – Refit

Regulation (EU) 2019/834 of the European Parliament and of the Council of 20 May 2019amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories (hereinafter ‘EMIR Refit’).

EMIR Refit was published in the Official Journal of the European Union on 28 May 2019 and entered into force on the twentieth day following that of its publication, i.e. on 17 June 2019.

Note: The European Commission’s regulatory fitness and performance programme (Refit) aims to make EU law simpler and less costly.

The proposed changes to EMIR cover the following areas:

• Definition of financial counterparties;
• Clearing obligation;
• Reporting obligation;
• Risk mitigation techniques for over-the-counter (OTC) derivative contracts not cleared by a central counterparty (CCP);
• Registration and supervision of trade repositories;
• Requirements for trade repositories.

1. Changes to the definition of financial counterparties (FCs):
(Article 2(8) of EMIR has been replaced)

• Changes to the definition of insurance undertakings and reinsurance undertakings in accordance with Directive 2009/138 EC;
• Changes to the definition of UCITS – the following text is added ‘unless that UCITS is set up exclusively for the purpose of serving one or more employee share purchase plans’;
• Changes to the definition of alternative investment funds (AIFs) applicable to AIFs and their managers;
• Supplemented to include central securities depositories authorised in accordance with the Central Securities Depository Regulation (CSDR).

2. Changes to the clearing obligation:
(Articles 4 and 5 of EMIR)

• A new definition of conditions under which counterparties are required to clear OTC derivative contracts through a  central counterparty. This definition also covers contracts concluded between, on the one side, a financial counterparty (FC) that does not calculate its positions or exceeds the clearing threshold or a non-financial counterparty (NFC) that does not calculate its positions or exceeds the clearing threshold, and, on the other side, an entity established in a  third country that would be subject to the clearing obligation if it were established in the Union (e.g. an AIF established in a third country);
• A new definition of FCs subject to the clearing obligation;
• The introduction of a new category of FCs, called ‘small financial counterparties’, which will be exempted from the clearing obligation. The positions of these counterparties must not exceed the clearing threshold;
• An FC (as well as an NFC – see change to Article 10 of EMIR) taking positions in OTC derivative contracts may, every 12 months, calculate its aggregate month-end average position for the previous 12 months;
• Where an FC (as well as NFC) does not calculate its positions, or where the result of that calculation exceeds the clearing threshold, the FC (as well as NFC) must immediately notify ESMA and the relevant competent authority (NBS) thereof and becomes subject to the clearing obligation for OTC derivative contracts entered into or novated more than four months following the notification;
• In calculating the positions, the FC must include all OTC derivative contracts entered into by that FC or entered into by other entities within the group to which that FC belongs;
• For NFCs, the calculation of the positions of derivatives remains unchanged and the procedure pursuant to Article 10(3) of EMIR applies (the NFC must include all the OTC derivative contracts entered into by the NFC or by other non-financial entities within the group to which the NFC belongs, which are not objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of the NFC or of that group);
• For UCITS and AIFs, the positions must be calculated at the level of the fund; management companies which manage more than one UCITS or more than one AIF must be able to demonstrate to the relevant competent authority (NBS) that the calculation at the fund level does not lead to a  systematic underestimation of the positions of any of the funds they manage or the positions of the manager, and to a circumvention of the clearing obligation (the fact that the calculation does not lead to a  systematic underestimation of the positions applies to both FCs and NFCs);
• The competent authorities of the FC and of the other entities within the group must establish cooperation procedures to ensure the effective calculation of the positions at the group level;
• The clearing thresholds to be used to determine whether an FC may qualify as a small FC have been defined by asset class and determined in accordance with Article 11 of Commission Delegated Regulation (EU) No 149/2013 as amended (the threshold value is EUR 1 billion for credit derivative contracts and equity derivative contracts and EUR 3 billion for interest rate derivative contracts, foreign exchange derivative contracts, commodity derivative contracts and other derivative contracts);
• The published EMIR Refit text does not include deferred implementation of this new regime for FCs or NFCs, i.e. the new regime applies as soon as the EMIR Refit text enters into force. As a result, FCs and NFCs taking positions in OTC derivative contracts and opting to calculate their aggregate month-end average position for the previous 12 months must determine the result of that calculation (whether they are not exceeding clearing thresholds) as at the date of EMIR Refit’s entry into force. In order to prepare and be able to perform such a calculation as at the date of EMIR Refit’s entry into force, those FCs and NFCs are in the meantime expected to collect all the data and information necessary for the calculation so that by the end of May 2019 they are ready to perform the calculation;
• On 28 March 2019, ESMA published a PUBLIC STATEMENT on the implementation of EMIR Refit for FCs and NFCs;
• Changes to the clearing obligation procedure (Article 5(1) of EMIR) concerning the notification that a central counterparty (CCP) is authorised to clear a class of OTC derivatives; a CCP must also notify ESMA of its intention to start clearing a class of OTC derivatives covered by an existing authorisation;
• Suspension of clearing obligation – ESMA may request that the Commission suspend the clearing obligation for specific classes of OTC derivatives and for specific types of counterparties, provided that specified conditions are met (new Article 6a of EMIR);
• The act of suspending the clearing obligation for specific classes of OTC derivatives may also include the suspension of the trading obligation laid down in Article 23 of the Markets in Financial Instruments Regulation (MiFIR).

3. Changes to the reporting obligation:
(Article 9 of EMIR)

• The reporting obligation to trade repositoriesapplies to derivative contracts which:
  a) were entered into before 12 February 2014 and remain outstanding on that date;
  b) were entered into on or after 12 February 2014 (amended Article 9(1) of EMIR – previously, the date was 16 August 2012);
• The reporting obligation does not apply to OTC derivative contracts within the same group where at least one of the counterparties is an NFC, provided that specified conditions are met. Counterparties must notify their competent authority (NBS) of their intention to apply the exemption. The exemption is not valid if the competent authority (NBS) does not agree with the fulfilment of the specified conditions;
• FCs are solely responsible, and legally liable, for reporting on behalf of both counterparties the details of OTC derivative contracts concluded with an NFC that does not exceed the clearing obligation (NFC-).NFC-s that have already invested in a reporting system may decide to report the details of their OTC derivative contracts with FCs to a trade repository;
• Management companies managing an UCITS or an AIF are responsible, and legally liable, for reporting the details of OTC derivative contracts to which that UCITS or AIF is a counterparty;
• An authorised entity that is responsible for managing and acting on behalf of an IORP (supplementary pension fund) that, in accordance with national law, does not have legal personality is responsible, and legally liable, for reporting the details of OTC derivative contracts to which that IORP is a counterparty, as well as for ensuring the accuracy of the reported data;
• ESMA has a mandate to develop, in cooperation with the ESCB, implementing technical standards (ITSs) specifying the data standards and formats for the information to be reported, including at least legal entity identifiers (LEIs), international securities identification numbers (ISINs), unique trade identifiers (UTIs), the methods and arrangements for reporting, the frequency of the reports, and the date by which derivative contracts are to be reported.

4. Changes to NFCs:
(Article 10 of EMIR)

• An NFC taking positions in OTC derivative contracts may, every 12 months, calculate its aggregate month-end average position for the previous 12 months;
• Where an NFC does not calculate its positions, or where the result of that calculation in respect of one or more classes of OTC derivatives exceeds specified clearing thresholds,that NFC mustimmediately notify ESMA and the relevant competent authority (NBS) thereof, stating also the relevant period used for the calculation, and must establish clearing arrangements within four months of the notification. NFCs become subject to the clearing obligation for the OTC derivative contracts entered into or novated more than four months following the notification;
• An NFC that is subject to the clearing obligation or becomes subject to the clearing obligation remains subject to that obligation until that NFC demonstrates to the competent authority (NBS) that its aggregate month-end average position for the previous 12 months no longer exceeds the specified clearing threshold;
• The competent authorities (NBS) of an NFC and of other entities within the group must establish cooperation procedures to ensure the effective calculation of the positions at the group level.

5. Changes to CCP transparency:
(Article 38 of EMIR)

• A CCP must provide its clearing members with a simulation tool allowing them to determine the amount of additional initial margin, on a  gross basis, that the CCP may require upon the clearing of a new transaction (new paragraph 6);
• A CCP must provide its clearing members with information on the initial margin models it uses and that information must meet specified conditions (new paragraph 7).

6. Supplement to Article 39 of EMIR – Segregation and portability:

• National insolvency laws must not prevent a CCP from acting in accordance with Article 48(5) to (7) of EMIR with regard to the assets and positions recorded in accounts as referred to in paragraphs 2 to 5 of this Article (concerning defaulting clearing members (new paragraph 11)).

7. Changes to the application for registration of a trade repository (TR):
(Article 56 of EMIR)

• Specification of documents that a TR must submit to ESMA in order to be registered as TR;
• Changes to provisions empowering ESMA to draft regulatory technical standards (RTSs).

8. Changes to general investigations:
(Article 62(5) of EMIR)

• If a request for records of telephone or data traffic requires an authorisation by a judicial authority in accordance with national rules, ESMA may also apply for such authorisation.

9. Changes to on-site inspections at TRs:
(paragraphs 1, 2 and 8 of Article 63 of EMIR have been replaced)

• In order to carry out its duties under EMIR, ESMA may conduct all necessary on-site inspections on any business premises or land of the legal persons referred to in Article 61(1) of EMIR (regarding trade repositories);
• Specification of the powers of the officials and other persons authorised by ESMA to conduct an on-site inspection at a  TR;
• If an on-site inspection or assistance requires a competent authority to be authorised by a judicial authority in accordance with national rules, ESMA may also apply for such authorisation.

10. Changes to procedural rules for taking supervisory measures and imposing fines against TRs
(paragraphs 4 and 8 of Article 64 of EMIR have been replaced)

11. Changes to fines imposed on TRs:
(paragraph 2 of Article 65 of EMIR has been replaced)

• The maximum fine is increased from ‘EUR 20 000′ to ‘EUR 200 000′ in accordance with paragraph 2(a);
• The maximum fine is increased from ‘EUR 10 000′ to ‘EUR 100 000′ in accordance with paragraph 2(b);
• A new subparagraph (c) has been added to paragraph 2 – the fine for infringements referred to in Section IV of Annex I must be at least EUR 5 000 and must not exceed EUR 10 000.

12. Changes to the hearing of persons concerned at TRs
(paragraph 1 of Article 67 of EMIR has been replaced)

13. Changes to the text on supervisory fees charged to TRs
(paragraph 2 of Article 72 of EMIR has been replaced)

14. Mutual direct access to data in TRs:
(a new Article 76a(1) and (2) has been added)

• Where necessary for the exercise of their duties, relevant authorities of third countries in which one or more trade repositories are established must have direct access to information in trade repositories established in the Union provided that the Commission has adopted an implementing act in accordance with paragraph 2 to that effect.

15. General requirements for TRs:
(paragraphs 1 and 2 of Article 78 have been replaced)

• Obligation to establish specified procedures and policies;
• Provision empowering ESMA to develop draft RTSs, and the Commission’s powers.

16. Requirements for safeguarding and recording of TR data:
(paragraph 5a has been added to Article 80)

• Obligation of TRs to provide the details of derivative contracts upon request.

17. Changes to TR transparency and data availability:
(subparagraph (q) has been added to Article 81(3))

• The following is added to the list of entities to which a TR must make information available: the relevant authorities of a third country in respect of which an implementing act has been adopted;
• Empowering provisions for the development of draft RTSs have been replaced.

18. Conditions for conferring on the Commission the power to adopt delegated acts
(paragraphs 2 to 6 of Article 82 of EMIR have been replaced)

19. Changes to transitional and final provisions:
(paragraphs 1, 2 and 3 of Article 85 of EMIR have been replaced)

• Article 85 concerns the preparation of reports by the Commission and the submission of a report to the Commission by ESMA within specified periods;

(a new paragraph 3 has been added to Article 86)

(the first subparagraph of Article 89(1) of EMIR has been replaced)

• The clearing obligation exemption for pension scheme arrangements (PSAs) has been extended;
• For a period of two years following the entry into force of this amended Regulation, the clearing obligation set out in Article 4 does not apply to OTC derivative contracts that are objectively measurable as reducing investment risks that directly relate to the financial solvency of PSAs (see the definition in Article 2(10) of EMIR – pillars I, II and III of the pension system in Slovakia), and to entities established to provide compensation to members of such arrangements in case of default (previously, the exemption under Article 89(1) of EMIR expired on 16 August 2018);
• In addition, the clearing obligation set out in Article 4 of EMIR does not apply to OTC derivative contracts as referred to in the first subparagraph entered into by PSAs from 17 August 2018 until the entry into force of this amended Regulation;
• BE AWARE: Article 89(2) of EMIR nevertheless remains unchanged. The above exemption in relation to PSAs referred to in Article 2(10)(a) and (d) of EMIR (pillars I and II of the Slovak pension system) is granted by the relevant competent authority (NBS). Before granting the exemption, the competent authority must notify ESMA and EIOPA. ESMA, after consulting with EIOPA, is required to issue an opinion assessing the reasons why an exemption is justified due to difficulties in meeting the variation margin requirements;
• NOTE: As pillar II would probably not qualify, the above exemption therefore applies only to pillar III. However, this is not a real problem for pillar II, as it falls under an NFC that would be subject to the clearing obligation only if exceeding the clearing threshold. This is not realistic given the restrictions in relation to derivatives. Under Pillar I, derivatives contracts are not entered into;
• Annex 1 to EMIR has been amended in accordance with the Annex to EMIR Refit;
• This Regulation enters into force on the twentieth day following that of its publication in the Official Journal of the European Union (i.e. 17 June 2019);
• It applies from the date of entry into force, except for the following:

Provisions set out in points (10) and (11) of Article 1 of EMIR Refit, as regards Articles 38(6) and (7) and 39(11) of EMIR (six months after the entry into force);

• CCPs must provide clearing members with a simulation tool;
• CCPs must provide clearing members with information on the initial margin models that they use;
• National insolvency laws (in Slovakia this means the Act on bankruptcy and restructuring) must not prevent a CCP from acting in accordance with Article 48(5) to (7) of EMIR (note: there is no CCP established in Slovakia);

Provisions set out in point (7)(b) of Article 1 of EMIR Refit, as regards Article 9(1a) to (1d) of EMIR (12 months after the entry into force);

• Responsibility for reporting the details of OTC derivative contracts to trade repositories (FCs, management companies managing an UCITS or AIF, pension fund management companies managing second-pillar pension funds, and supplementary pension management companies managing third-pillar pension funds);

Provisions set out in points (2)(c) and (20) of Article 1 of EMIR Refit, as regards Articles 4(3a) and 78(9) and (10) of EMIR (24 months after the entry into force);

• Obligation for clearing members and clients providing clearing services to provide those services under fair, reasonable, non-discriminatory and transparent commercial terms and other specified terms;
• Obligation for trade repositories to establish procedures and policies for the reconciliation of data between trade repositories, for verifying the completeness and correctness of the data reported, and for the orderly transfer of data to other trade repositories.