EMIR Refit benefits European corporate entities
- June 24, 2020
Private Equity | Kennett Square, PA
Private Equity | Kraków
SummaryChanges to EMIR that that will benefit the compliance obligations for European corporate entities became effective June 17, 2019.
European regulators have recently enacted changes to EMIR that could impact fund-level hedging, including but not limited to REITs. Specifically, regulators have expanded the financial counterparty definition to directly or indirectly include all funds, and consequently, these funds may now be required to comply with the margin, clearing, and daily valuation requirements.
These regulatory changes have arisen through a years-long process whereby European regulators have reviewed the European derivatives regulation, a process known as the EMIR Refit. As discussed further below, the EMIR Refit has made several significant changes to EMIR, and most of these changes became effective on June 17, 2019. Any (i) entities directly subject to EMIR, and (ii) any entities facing European counterparty banks, whether or not domiciled in Europe, should review EMIR Refit to determine its impact on their future hedging strategies.
Although there are many other revisions, we have summarized some of the most important amendments that will impact funds and fund-level hedging. For more information, please contact your Chatham relationship manager.
Expansion of financial counterparty (FC) definition:
- The definition of FC will be expanded to include all alternative investment funds (AIFS) established in the European Union, as well as all AIFs formed outside of the European Union that are trading with European banks. This includes funds and REITs domiciled in the United States.
- Impact: Unless a product exemption applies, financial counterparties are required to comply with the margin and clearing rules as well as submit daily valuations of their derivative transactions.
Exemption of deliverable FX forwards and swaps from margin rules:
- The EMIR Refit declares the intention of regulators that deliverable FX forwards and swaps should be exempted from the margin rules for all market participants except credit institutions and investment firms.
- Impact: This change mitigates some of the impact of the change to the financial counterparty definition as deliverable FX forwards are not required to be margined even by counterparties classified as financial counterparties.
New small FC clearing category:
- A new small FC (or “FC-”) clearing category is being created. An FC will be considered an FC- and will be exempt from the clearing obligation if its average month-end notional value of trades in derivatives over the prior 12 months does not exceed any of the statutory thresholds (EUR 1 billion for credit or equity derivatives; EUR 3 billion for IR, FX, and commodities).
- Hedging contracts are not excluded from the clearing calculation for FCs (unlike for non-financial counterparties (NFCs)).
- If an FC’s calculation is above the threshold in any class of OTC derivatives, it will be subject to the clearing obligation for all classes of OTC derivatives (unlike NFCs above the clearing threshold (NFC+s)), which will only be subject to the clearing obligation for the specific class for which they have exceeded the applicable threshold).
- Impact: Funds with low levels of derivatives trading activity are exempted from the mandatory clearing requirement when trading products subject to mandatory clearing (i.e., vanilla interest rate swaps and certain credit default products). The FC- clearing exemption does not alter the applicability of requirements pertaining to the exchange of margin under EMIR.
Changes to the clearing calculation:
- FCs and NFCs will need to run the clearing calculation every 12 months (starting from the date EMIR Refit goes into force), and the calculation will be based on the aggregate month-end position for the previous 12 months (versus the existing pre-EMIR Refit calculation, which was based on the rolling average position over 30 working days).
- Impact: FC-s and NFC-s will now need to be able to show that they are under the clearing thresholds. Once EMIR Refit goes into effect, NFCs and FCs will become subject to the clearing obligation if they either (i) do not calculate their average position to determine whether they’re over the clearing threshold, or (ii) do the calculation and determine that they are over the clearing threshold.
New mandatory delegation of reporting obligation:
- 12 months after the rest of EMIR Refit comes into force (June 17, 2020), the reporting obligation will be greatly reduced for many portfolio companies as the financial counterparty will become solely responsible and legally liable for reporting on behalf of portfolio company and for ensuring the correctness of the reported details as long as the portfolio company provides the financial counterparty with all relevant details that the bank would not be reasonably expected to possess.
- The EMIR Refit also eliminates the requirement to report intergroup derivative transactions.
- The EMIR Refit transitions the responsibility and legal obligation to report derivative transactions from funds to their respective fund managers.
How can Chatham help your derivatives regulatory compliance program?
Send us a message today to start a conversation about your derivatives regulation compliance program.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.19-0161
Our featured insights
LIBOR transition update — Q2 2021 review
Chatham’s update on the LIBOR transition, summarizing recent news, transaction activity, and upcoming deadlines to help you stay current as the market transitions away from LIBOR.
SOFR: A comprehensive guide
How SOFR, the benchmark rate chosen by the ARRC to replace USD LIBOR, works and what drives its movements
Introduction of 2021 ISDA definitions and digital library
ISDA recently announced their launch of an online library (ISDA MyLibrary) to house ISDA published documentation. This platform provides users with an interactive format offering search functions, comparability tools and hyperlinks to defined terms and external resources, like educational materials.
USD LIBOR transition: credit-sensitive fallback rates
With more and more talk of various credit-sensitive alternatives to USD LIBOR, we’ve prepared an overview of some of the leading credit-sensitive alternative benchmarks (e.g., AMERIBOR, BSBY, et al.). We discuss what market events led to the current state, provide a comparison of the leading...
Axios interviewed Matt Hoffman about banks pulling away from LIBOR
Matt Hoffman explains to Axios why some banks may be planning their move away from LIBOR to another credit-sensitive rate by the end of this month.
FAQ: GBP LIBOR transition to SONIA
GBP LIBOR will transition to SONIA, likely by the end of 2021. Chatham's experts answer the most pressing questions asked by our clients about how the transition will affect them.
FAQ: USD LIBOR transition to SOFR
USD markets started transitioning from LIBOR to SOFR in 2017 after the FCA announced that LIBOR was at risk of discontinuation at the end of 2021. Chatham’s experts answer the most pressing questions asked by our clients about how the transition will affect their port.
LIBOR transition in the UK — an unexpected first date with SONIA?
“Moving on” from LIBOR, an interest rate benchmark which underpins around $300T ($30T in GBP markets)1 of financial contracts across derivatives, bonds, and loans was never going to be easy. Last month we, in the U.K., started to experience what life after LIBOR will look like...