European Market Infrastructures Regulation (EMIR) was the European Union’s (EU) response to systemic risks created by OTC derivatives. EMIR introduced an obligation for standardised and liquid OTC derivative contracts to be traded over a trading venue, a clearing obligation for OTC derivatives by means of a central counterparty (CCP), as well as an obligation to report all transactions to a trade repository. As a result, EMIR has had an impact on every legal person who engages in OTC derivatives, with the highest burdens placed upon counterparties qualified as financial counterparties.
These obligations proved to place a heavy burden on market participants, prompting an assessment of the current framework, referred to as the Regulatory Fitness and Performance (REFIT) programme. EMIR REFIT will decrease regulatory requirements for small financial, as well as large and small non-financial counterparties. However, it will increase requirements for others, including Alternative Investment Funds (AIF).
Trilogue negotiations between the European Commission, Council and Parliament began in July 2018, in order to finalise the amendments to EMIR, which is expected before the end of the year and application by Q1 of 2019.
EMIR REFIT Process
The following table shows the pre-negotiation positions of the three institutions, at the start of the trilogue.
Impact for Switzerland and Liechtenstein
For Switzerland and the EEA countries, including Liechtenstein, these projected changes will have strong impacts on their business models. Swiss entities will particularly notice changes regarding intragroup transactions and when entering into transactions with their EU group companies.
The burden will in particular increase for AIFs in Liechtenstein, which will become subject to the requirements of FC/SFC. Thus, it is recommended for these entities to begin preparing quickly. At the same time, it is important for all market participants to assess the current model for collateral risk management, as the competent supervisory authority will review these practices in future.
Particularly smaller market participants will be able to reduce their clearing and reporting efforts, which will transpire into significant financial savings.
Furthermore, in June 2017, the European Commission published a separate proposal to amend the current EMIR authorisation and recognition regime for CCPs, in light of the expected Brexit. This will include a pan-European supervision of CCPs, closer cooperation amongst supervisory authorities and central banks responsible for Euro currencies. These changes will also impact CCPs in non-EU countries, as the third-country provisions for countries of systemic importance to EU financial stability will be strongly impacted, particularly the United Kingdom where there are systemically important CCPs, but also Switzerland. Here, significant changes to the CCP set-up and supervision can be expected.
Next Steps and PwC Service Offering
The final amendments are currently awaited. The amended Regulation text will likely contain phase-in periods for certain new requirements which extend the scope, while others, such as the definition of financial counterparties will probably apply without delay.
As such, many of the discussed changes will require the existing EMIR processes to be reassessed and revised, new processes to be established, as well as current dealings with clients and counterparties to be updated. We recommend that this process is started today, in order to be prepared for the upcoming changes to EMIR, as our experience has shown that the implementation of EMIR requires a significant amount of lead time.
We at PwC Legal Switzerland can rely on our long-standing knowledge regarding the implementation of EMIR projects, and our international network will assist you in preparing for EMIR in the best possible way, by:
- Assisting you in determining whether you are in scope of EMIR and which obligations apply to your set-up specifically.
- Providing a gap assessment to determine the applicable changes to your set-up based on EMIR REFIT and assisting you in re-aligning your set-up, policies and interfaces regarding clearing, reporting and counterparty interactions.
- Assisting you in the implementation of EMIR requirements, particularly, if in the past you were not within the full scope of EMIR (i.e. AIF) and providing group-wide assistance in re-aligning the legal requirements to ensure EMIR REFIT compliance.
- Assisting national supervisory authorities and central banks in adapting to the impending changes and their increased responsibilities regarding increased CCP supervision, as well as assisting in amending their supervisory processes for entities within the scope of EMIR.
- Let us assist you with your day-to-day queries regarding EMIR and EMIR REFIT.