The impact of EMIR Refit on Swiss-based entities as parties to OTC derivative contracts with EU-based counterparties and for Swiss banks that have affected corporate clients. What will the new fund product type look like?
On 18 April, the European Parliament approved the final versions of the amendment to EMIR (hereinafter “EMIR Refit”). It is expected that the new text will be published in the Official Journal with the approval of the Council of the European Union shortly. Most of the changes will not be subject to a transition period and will thus enter into force 20 days after its publication, presumably at the end of May or at the beginning of June.
This means that parties affected by the amendments will only have little time to prepare themselves for these changes. These changes and time constraints will unfortunately also apply to Swiss-based entities even if they have no branch in the EU but are counterparty to an OTC derivative with an EU-based counterparty.
The new obligations will also impose additional potentially material obligations on Swiss banks that have clients affected by the changes and might result in the amendment of agreements and even the need to calculate the aggregate OTC derivatives positions if contractually assumed.
The most important changes for Swiss-based counterparties to OTC derivative contracts with EU-based counterparties
- Definition of the term “financial counterparty”: The new definition encompasses certain additional categories of counterparties which might affect Swiss asset managers managing EU AIF
Definition of financial counterparty
|Only alternative investment funds (AIF) managed by alternative investment fund managers (AIFM) authorised or registered under the AIFMD are financial counterparties (FC).||Every AIF established in the EU, or managed by an AIFM authorised or registered in the EU under the AIFMD, will be an FC like any AIFM established in the EU of such an AIF.|
2. Scope of the “clearing requirement”: The methodology of the calculation of the clearing requirement has been amended and requires pro-active notification
The clearing obligation applies directly to Swiss-based counterparties to a derivative transaction with an EU-based counterparty (Art. 4, para. 1 (iv) EMIR). It thus has an extraterritorial approach and also applies to Swiss-based counterparties to OTC derivative contracts with EU-based counterparties subject to the clearing obligation.
Scope of the clearing requirement
|Affected financial counterparty (FC)||
An FC must clear all OTC derivatives of a class that has been declared subject to the clearing requirement.
Category 3 FCs will become subject to the clearing requirement on 21 June 2019; however, ESMA has asked the competent authorities in a letter not to prioritise the review of EMIR compliance with the clearing requirements considering the introduction of EMIR Refit.
|An FC will only be subject to the clearing requirement if it fails to calculate its positions (at group level) or if it is a small FC (FC-) because the calculation does not exceed any of the clearing thresholds previously applicable only to NFCs. Hedging transactions cannot be deducted in the case of an FC-.|
|Affected non-financial counterparty (NFC)||An NFC becomes subject to the clearing requirement when the rolling average of its notional positions in OTC derivatives and those of other NFCs in its group exceed, over 30 working days, any of the clearing thresholds set by the Commission for a relevant class of derivatives. An NFC can deduct hedging transactions.||An NFC party to an OTC derivative contract must every 12 months calculate its aggregate month-end average position for the previous 12 months. Hedging activities can be deducted from the gross position.|
|Clearing obligation for NFC||All OTC derivatives of each class that have been declared subject to the clearing requirement must be cleared in case the positions in OTC derivatives of the NFC exceed any of the clearing thresholds.||EMIR Refit requires only the clearing of derivatives regarding a certain asset class, if the clearing thresholds of this asset class have been exceeded. There will be no clearing requirement regarding other asset classes.|
ESMA has made it clear in a public statement dated 28 March 2019 under which circumstances the clearing obligation will apply. FCs and NFCs can choose whether or not to calculate the clearing threshold. When they choose not to, or where the result of that calculation exceeds the clearing thresholds, then these financial or non-financial counterparties are required to immediately notify ESMA and the competent authority and they will also become subject to the clearing obligation for the OTC derivative contracts entered into, or novated, from four months following that notification. In case an affected FC or NFC does not calculate the clearing threshold and does not notify ESMA about it, it will nevertheless be subject to the clearing obligation.
ESMA expects that all FCs and NFCs potentially subject to the clearing obligation and choosing to calculate their aggregate month-end average position for the previous 12 months would need to determine the results of that calculation on the day the Refit text enters into force. This can be as early as the end of May or beginning of June. Those FCs and NFCs are therefore expected to collect all the necessary data and information for the calculation in the meantime, in order to be ready for the calculation when the Refit text enters into force. From that point on, financial and non-financial counterparties taking positions in OTC derivative contracts and choosing to calculate their aggregate month-end average position are required to perform that calculation every 12 months.
This means, for Swiss banks in particular, a potential change to their agreements entered into with their clients regarding compliance with EMIR and might even result in the need to calculate the aggregate OTC derivative positions on a periodic basis if this obligation has been assumed by them. It likely also means that banks and other Swiss counterparties will have to re-evaluate the status of counterparties or clients under EMIR Refit.
3. Reporting: intragroup transactions must no longer be reported
|Counterparties and central counterparties must report to a trade repository the details of any derivative contract they have concluded and any modification or termination of that contract.||Pursuant to Art. 3 EMIR, intragroup transactions must no longer be reported if at least one of the two counterparties is an NFC (or would be an NFC if established in the EU), both parties are subject to consolidation, are subject to centralised risk management and the parent undertaking is not an FC. Counterparties must notify the competent national authorities of their intention to apply the exemption and the exemption will apply, unless the competent authorities object within three months of the date of notification.|
Call for action
Swiss-based counterparties to OTC derivatives with EU-based counterparties subject to the clearing obligation should do the following:
- Evaluate the impact of EMIR Refit on the entity or the group
- Decide whether to calculate the OTC derivative positions on a periodic basis or to clear OTC derivatives subject to the clearing obligation
- In case of the calculation of OTC derivative positions, establish a compliance process to calculate the clearing thresholds on a periodic basis
- Re-evaluate the status of counterparties and clients under EMIR Refit, in particular as to whether they are in compliance with the new rules and obligations
- Banks might have to change their agreements with corporate clients to incorporate the changes and might even have to arrange for the calculation of the aggregate OTC positions if they have assumed this obligation.