On 31 May 2018 the EEA Joint Committee reached a decision without reservation regarding the implementation of Solvency II1 Level 2 and EMIR2 Level 2 frameworks.3 Thus, as of 1 June 2018, the EMIR and Solvency II Level 2 delegated acts are applicable to Liechtenstein, Norway and Iceland.
Market Action Required
The published EEA Joint Committee decisions enables entities domiciled in these countries to prepare for the start of their respective obligations. For EMIR this is in particular the clearing and reporting requirements, as the grace period and calculation baselines now are published. With regard to risk mitigation, in particular regarding the exchange of collateral for non-centrally cleared over-the-counter (OTC) derivative contracts, the corresponding Level 2 legal acts have not yet been decided upon.
EMIR regulates the trading with OTC derivatives and the risk to financial market stability which can result thereof and how to mitigate these risks, particularly through reporting, clearing, and risk mitigation. The Level 2 legal acts specify, how the EMIR-regulated entities are to proceed in order to achieve the goals.
For EEA domiciled entities, the reporting obligation will commence six months after the Committee decision of 31 May 2018 enters into force on 1 December 2018 or 90 days after the authorization of a trade repository for a particular class of derivatives in accordance with Art. 55 EMIR, but no earlier than six months after the decision. Same applies to those derivative contracts, for which there is no designated trade repository, reporting to ESMA commences six months after the decision of 31 May 2018 enters into force.
The clearing will be phased-in for financial and non-financial counterparties above the clearing threshold, according to their categorization. The categorization is determined by calculating the outstanding gross notional amount at a group level for all outstanding non-cleared derivatives are the months of January, February, and March 2018.
Depending on the type of derivative traded, the clearing obligation for the different categories of counterparties will take effect at different times, as detailed below. In Liechtenstein, most financial institutions will find themselves to qualify as Category 2 or 3 entities.
|NOK, PLN, SEK5|
|1||1 December 2018||1 June 2019||1 December 2018|
|2||1 June 2019||1 December 2019||1 June 2019|
|3||21 June 2019||21 June 2019||21 June 2019|
|4||1 June 2020||1 September 2021||1 June 2020|
1 Directive 2009/138/EC as amended by Directive 2014/51/EU («Omnibus II»).
2 Regulation (EU) 648/2012.
3 Decision of the EEA Joint Committee No 111/2018, No 112/2018 and No 113/2018
4 Basis swaps, fixed-to-float IRS, forward rate agreements, overnight index swaps in EUR, GBP, JPY, USD.
5 Fixed-to-float IRS, forward rate agreement classes for NOK, PLN, SEK.
Furthermore, for intragroup transactions, where one counterparty is established in a third country, the clearing obligation will take effect at different intervals, depending on which type of derivative is traded and whether or not there has been an equivalence decision with regard to the third country. Where no equivalence decision exists, this obligation will commence at the earliest in two years, where an equivalence decision exists at the earliest 60 days after the corresponding decision takes effect and/or the date as outlined above.
3. Non-adopted topics
EMIR Level 2 legal acts, which address topics such as risk mitigation, liquidation periods, indirect clearing arrangements and CCP specific topics, no decision of the EEA joint committee has been made as of yet.
II. Solvency II
Solvency II introduces a harmonized, sound and robust prudential framework for insurance firms in the EU, where based on the risk profile of each individual insurance company achieves comparability, transparency, and competitiveness. The now adopted Level 2 act is based on the 76 empowerments in the Solvency II Directive and covers the following topics in particular:
- Market-consistent valuation of assets and liabilities;
- Eligibility of the insurers’ own fund items;
- Methodology and calibration of the Minimum Capital Requirement (MCR) and Solvency Capital Requirement (SCR); and
- Reporting and disclosure requirements.
III. Impact of the 31 May 2018 EEA Joint Committee Decision
The greatest impact will be felt by insurance firms, as they are in scope of both EMIR and Solvency II and must prepare to apply the corresponding provisions. The reporting obligation will begin 1 December 2018, as will the clearing obligation for Category 1 entities. While large international financial institutions are not expected to face a struggle in light of this decision, smaller institutions should begin preparing today.
- Smaller entities, in particular non-financial counterparties, domiciled in the EEA should immediately begin to prepare for the start of the reporting obligation, which will apply as of 1 December 2018.
- Financial institutions domiciled in the EEA, particularly smaller ones, should not only begin to prepare for the reporting, but particularly the clearing obligation, which will be phased-in for Category 2 and below starting June 2019.
- Insurance firms are impacted by both the Level 2 legal acts of EMIR and Solvency II and must ensure efficient planning of resources in order to comply with all requirements and deadlines.