BACKGROUND
This background information is intended as a summary of the relevant regulation. Please note that we do not provide legal or regulatory advice. We urge you to seek advice if you are unclear as to your position.
EMIR (as amended via EMIR Refit in June 2019) introduced, among other things, the exemptions from the clearing obligation for financial counterparties and non-financial counterparties.
The UK has adopted a version of EMIR (referred to herein as UK EMIR) that is broadly identical to EMIR (including EMIR Refit).
Financial counterparties (FCs) are defined in Article 2(8) of EMIR/UK EMIR and broadly include banks, insurance companies, investment firms, UCITS funds, alternative investment firms and most pension schemes.
Non-financial counterparties (NFCs) are defined in Article 2(9) of EMIR/UK EMIR and broadly represent entities established in the European Union or the UK (as applicable) that are not financial counterparties.
Financial and non-financial counterparties may calculate their aggregate month-end average gross notional amount of cleared and non-cleared OTC derivatives, across all asset managers and counterparties, for the relevant 12-month period (the total gross notional). The 12-month period relevant with respect to your current calculation started on 1 June 2023 and will end on 31 May 2024.
The total gross notional must be compared with the following ‘clearing thresholds’:
- OTC credit derivatives contracts: EUR 1bn
- OTC equity derivatives contracts: EUR 1bn
- OTC interest rate derivatives contracts: EUR 3bn
- OTC foreign exchange derivatives contracts: EUR 3bn
- OTC commodity derivatives contracts and other OTC derivatives contracts: EUR 4bn (EU based entities) or EUR 3bn (UK based entities)
Note that for the purposes of calculating the gross notional figures for your mandate, we have grouped inflation swaps under ‘OTC interest rate derivatives contracts’ and bond total return swaps (TRS) under ‘OTC credit derivatives contracts’.
Our calculations further reflect the following:
- For EU based entities only, any exchange-traded derivatives traded on a non-European exchange not recognised by the European Securities and Markets Authority (ESMA) shall be treated as OTC derivatives for the purposes of your calculations. In particular, this includes all exchange-traded derivatives executed via UK venues from 1 January 2021.
- For UK based entities, EU exchanges are recognised as “equivalent” for the purposes of UK EMIR; exchange-traded derivatives executed via EU venues shall therefore not be considered OTC derivatives (and shall not be taken into account when assessing your gross derivative exposures).
If you have any questions on the calculation methodology, please contact us.
Large and small financial counterparties
A large financial counterparty (FC+) is a financial counterparty whose total gross notional exceeds one or more of the clearing thresholds in the relevant 12-month period.
A small financial counterparty (FC-) is a financial counterparty whose total gross notional is less than or equal to all of the clearing thresholds for the relevant 12-month period.
An FC- is exempt from the clearing obligation unless or until it becomes an FC+, in which case it must notify either: (1) (if EU based) ESMA and its national regulator; or (2) (if UK based) the UK FCA, and shall be mandated to clear within four months.
An FC+ can later become an FC- and benefit from the exemption from the clearing obligation, by demonstrating to relevant authorities that it meets the threshold criteria.
Non-financial counterparties
A NFC+ Rates is an NFC whose total gross notional exceeds the clearing threshold in the relevant 12-month period for the interest rate derivatives asset class.
A NFC- Rates is an NFC whose total gross notional is less than or equal to the clearing threshold in the relevant 12-month period for the interest rate derivatives asset class.
A NFC+ Credit is an NFC whose total gross notional exceeds the clearing threshold in the relevant 12-month period for the credit derivatives asset class.
A NFC- Credit is an NFC whose total gross notional is less or equal to the clearing threshold in the relevant 12-month period for the credit derivatives asset class.
A NFC- Rates is exempt from the clearing obligation for interest rate derivatives unless or until it becomes an NFC+ Rates, in which case it must notify either: (1) (if EU based) ESMA and its national regulator; or (2) (if UK based) the UK FCA, and shall be mandated to clear within four months.
A NFC- Credit is exempt from the clearing obligation for credit derivatives unless or until it becomes an NFC+ Credit, in which case it must notify either: (1) (if EU based) ESMA and its national regulator; or (2) (if UK based) the UK FCA, and shall be mandated to clear within four months.
For the purposes of calculating total gross notional, NFCs shall exclude hedging positions (note that no such exclusion applies to FCs). For further information on calculation of total gross notional please refer to the relevant regulation.
Pension scheme exemption
The availability of the pension scheme exemption differs under the EMIR and UK EMIR regulatory regimes.
EMIR
The EMIR pension scheme exemption expired in June 2023. EU pension schemes shall therefore carry out yearly assessments of their derivatives exposures against the clearing thresholds. Any schemes which, based on the latest assessment, are newly above any clearing threshold shall notify ESMA and their national regulator of their classification and will need to begin clearing the relevant products.
UK pension schemes entering into mandatorily clearable transactions with relevant EU entities subject to EMIR and benefitting from the pension scheme exemption under UK EMIR (see below)have been granted forbearance by the French and German regulators who currently do not require local entities to clear transactions with UK pension schemes. It is envisaged that this forbearance will be applied for so long as the UK pension schemes remain exempt from mandatory clearing under UK EMIR. Under the final texts of EMIR 3 (expected to come into force in Q4 2024), exemption from clearing for such schemes trading in-scope transactions with EU counterparties is to be formally introduced (and will apply on a permanent basis to all such schemes that continue to be exempt under UK EMIR).
UK EMIR
UK EMIR permits UK pension schemes to benefit from a longer-term temporary pension scheme clearing exemption (currently running to June 2025, with possibility of further extension(s)). Relevant transactions executed during the period of the exemption will therefore not be mandated to clear regardless of the size of the respective scheme’s derivatives notional. Accordingly, the exempted schemes are not required to assess their derivatives notional against the clearing thresholds, and are not required to notify the UK FCA of their classification.
EU pension schemes facing relevant UK entities cannot rely on such exemption. They are required to clear transactions within the scope of mandatory clearing under EMIR, unless a particular scheme is an FC-.