European Market Infrastructure Regulation (EMIR) Refit - Key impacts for non-financial counterparties

Stefan Wüest Director Treasury Solutions, PwC Switzerland 06 Dec 2019

Does your company or group trade in derivatives in the European Union (EU) and thus you need to comply with EMIR?

Based on discussions with different corporates, we noted that many are not yet aware of the recent changes to EMIR (“EMIR Refit”). Therefore, this article is focussed on key impacts for non-financial counterparties (NFCs). It is primarily intended for treasury teams in Switzerland performing treasury functions for subsidiaries and other entities domiciled in the EU. This article does not address the impact on financial counterparties (FC) and does not cover the complete set of changes under EMIR Refit.

Executive Summary

EMIR Refit has relaxed some of the requirements for NFCs, which show certain alignments to existing rules in Switzerland. Nevertheless any change requires some action to adopt to the new rules.

The key changes relate to reporting and clearing duties; there are no changes for risk mitigation duties. In terms of reporting, EMIR Refit implements a “one-sided” reporting duty and an exemption for reporting deals for inter-group entities that fulfil certain requirements (both aspects are already known from FMIA in Switzerland). In addition, the regulators have eased some requirements for the clearing obligation but also introduced an adopted threshold calculation, including a calculation deadline. NFCs should analyse the impact now and act accordingly.

Who is affected by EMIR Refit in Switzerland?

Broadly speaking, any treasury team in Switzerland responsible for performing treasury operations for other entities (e.g. subsidiaries) domiciled in the EU that trade with derivatives should consider what impact EMIR Refit could have on them.

Key changes under EMIR Refit

Clearing threshold calculation methodology

The new clearing calculation methodology requires an NFC to take into account the aggregated average month-end positions (of the whole group) of the past 12 months per asset class. This calculation needs to be performed annually on 17 June and not, as previously required, on a 30 working day rolling average basis. NFCs that do not calculate their positions continue to be subject to the clearing duty.

In addition, the clearing duty only applies to the asset class where the positions have exceeded the threshold for the respective asset class. The clearing duty no longer applies for all asset classes, if only one threshold is exceeded. Whenever an asset class is identified for clearing, the NFC needs to notify the ESMA and the respective national authorities in a timely manner. Deals entered into for hedging purposes are still exempt from the calculation.

PwC practice view: 

We believe this will have a limited impact on NFCs (except for certain commodity traders) given the vast majority have not exceed any of the clearing thresholds in the past. Nevertheless, all NFCs need to adjust their calculation method.

Reporting exemption for deals between group-internal counterparties

One major change, effective as of 18 June 2020, is the reporting exemption for intra-group derivative deals whereby at least one counterparty is an NFC and certain requirements are met. For the exemption to be effective, specific notification requirements need to be adhered to with the local authority, which may vary from one jurisdiction to another within the EU.

Reporting exemption for OTC derivatives with external financial counterparties (FC) within the EU

Another key change, which will also be effective as of 18 June 2020, relates to OTC derivative deals between a FC (domiciled in the EU) and an NFC (which is not subject to the clearing duty). In the future only the FC will be required to report on behalf of itself and the NFC. The FC is solely responsible and legally liable for the correctness of the details reported. Should the FC lack certain reporting data related to the OTC derivative contracts, those data should be provided by the NFC.

Should an NFC want to continue to report, it must inform the FC accordingly, and consequently the NFC bears the responsibility and legal liability for the correctness of the reported data, including updating any changes in the reporting data in a timely manner.

Reporting exemption for OTC derivatives with external financial counterparties outside the EU

From 18 June 2020 onwards, an NFC can be exempt from reporting if it trades OTC derivatives with a FC that is not domiciled in the EU (for example, a bank in the US). This exemption is granted if certain criteria are met that ensure that the reporting requirements under EMIR are fulfilled. Please note that in such cases the NFC still needs to ensure that the counterparty adheres to the EMIR-specific reporting rules.

Backloading for reporting duty

The requirement to backload transactions that were no longer outstanding at 12 February 2014 (effective date for the reporting obligation) was removed on 12 February 2019.

PwC practice view: 

While some NFCs have already delegated (part of) the reporting obligation to their FC counterparty, others report deals independently to a trade register. The reporting concept needs to be reviewed by nearly all NFCs. Some NFCs may be able to avoid own reporting duties completely (as is the case in Switzerland).

What does this mean for you? What do you have to do?

With regard to the clearing threshold calculation, the burden on group treasurers is reduced as they now only have to calculate the clearing threshold once a year per specific deadline. Those NFCs who previously needed to fulfill the clearing duty for all asset classes because the threshold was exceeded for one particular asset class may welcome the reduction in scope for clearing. Since the 2019 deadline to calculate the clearing threshold has already passed, group treasures who have not yet performed and documented it are urged to do so as soon as possible to avoid any non-compliance and having to clear derivatives for all asset classes.

European NFCs can benefit from the relaxation of reporting requirements under EMIR Refit. In fact, some NFCs may be able to completely stop their reporting activities. A cost/benefit analysis needs to be carried out to decide if the reporting duty will cease as of the effective date (don’t forget to consider any potential penalty payment to the trade repository for early termination). In case of termination, the trade repository needs to be notified in a timely manner to ensure adherence to the notice period agreed. Once the reporting duty ceases to apply, the NFC can benefit from a reduction in operational costs. However, there are also some challenges to consider when relying on non-EU FC for reporting, as the NFC still needs to ensure that the counterparty adheres to the EMIR-specific rules.

A holistic impact analysis will allow treasurers to identify any changes in terms of compliance under EMIR Refit and if any procedures are no longer required, thereby saving costs.

How can PwC support you?

PwC can support you in identifying what impact EMIR Refit will have on your treasury function and which steps you need to take to benefit from the relaxation in requirements for NFCs.
Do you have any questions? Don’t hesitate to reach out to our experts, who are ready to assist you!

Contact us

Sebastian di Paola

Sebastian di Paola

Partner and Leader Corporate Treasury Solutions, PwC Switzerland

Tel: +41 58 792 96 03

Stefan Wüest

Stefan Wüest

Director Treasury Solutions, PwC Switzerland

Michiel Mannaerts

Michiel Mannaerts

Partner Corporate Treasury Solutions, PwC Switzerland

Tel: +41 58 792 92 10

May Peghoux

May Peghoux

Treasury Solutions, PwC Switzerland

Tel: +41 58 792 23 41