European Market Infrastructure Regulation (“EMIR”)
- recap and update
Will Dibble, Partner
CMS Cameron McKenna LLP
Warsaw
Friday 26 September 2014
What is EMIR?
-
EU regulation on OTC derivatives, central counterparties and trade
repositories
-
Effective as of 16 August 2012 in all member states, without the
need for any national legislation
-
“Framework legislation” – detailed implementing rules contained in
subordinate legislation (RTS) developed by the European Securities
& Markets Authority (ESMA)
Who is in scope?
 Financial counterparties (FCs): broadly, banks, investment firms,
insurers/reinsurers, UCITS/UCITS managers, pension schemes,
alternative investments funds (AIFs) managed by AIFMs, in each
case authorised or registered in accordance with the relevant EU
directive
 Non-financial counterparties (NFCs): all undertakings established
in the EU which are not FCs; NFCs whose OTC derivatives exceed
certain “clearing thresholds” are referred to as NFC+
 Third country entities (TCEs) outside the EU may also be impacted
 Exempt: public bodies, EU central banks, pension funds
Major EMIR requirements
 EMIR imposes four main obligations on EU derivatives market
participants:
• Obligation to notify competent authority immediately (= on the first day)
if over clearing threshold
• Mandatory clearing of certain types of OTC derivatives via a central
counterparty (CCP)
• Implementation of risk mitigation techniques in relation to any OTC
derivatives that are not cleared, including arrangements for timely
confirmation; portfolio reconciliation, portfolio compression and dispute
resolution; daily valuation of outstanding derivative contracts; margining
• Mandatory reporting of all derivatives (OTC and ETD) to an authorised
trade repository (TR)
EMIR - implementation timeline
20 days later
1st Clearing Obligation
RTS in force
18 March 2014
First CCP authorised
July 2015
1st Clearing Obligation
Category 1
January 2018
1st Clearing Obligation
Category 3
July 2016
1st Clearing Obligation
Category 2
Mid-December 2014
1st Clearing Obligation
RTS published in OJ
Q1
Q2
Q3
Q4
2013
Q1
Q1
Q2
Q3
Q4
2014
Q2
Q3
15 March 2013
Confirmations
Daily valuation
NFC+ reporting
15 September 2013
Portfolio reconciliation
Portfolio compression
Dispute resolution
Q4
Q1
Q1
Q2
Q3
Q4
2015
Q2
Q3
12 February/ 11 August 2014
Reporting to TRs
Q4
Q1
Q1
Q2
Q3
Q4
2016
Q2
Q3
Q4
Q1
Q1
Q2
Q3
Q4
2017
Q2
Q3
Q4
Q1
Q1
2018
Q2
Q3
Q4
16 August 2015
End of transitional period
for pension schemes
1 December 2015
Variation margin applies and phasein of initial margin starts
Note: Assumes ESMA delivers 1st Clearing Obligation RTS to EC on 18 September 2014 in the form proposed for consultation, Commission endorses RTS without
amendment in early November 2014 and Council/Parliament do not object to the RTS and do not extend their objection period.
Q1
What is already live?
 15 March 2013
•
NFC+ notification (Art. 10 of EMIR): NFCs must immediately notify the
competent authority if their (and their non-financial affiliates’) positions in OTC
derivatives of the same asset class (excluding hedging positions) exceed/no
longer exceed specified clearing thresholds in respect of such class
•
Timely confirmations (Art. 11(1) of EMIR):
o OTC derivatives between in scope counterparties must be confirmed by T+1
for contracts between FCs/NFC+ and T+2 for contracts with an NFC (as of the
effective date (i.e. 15 March 2013), phase-in period which expired on 31
August 2014)
o FCs must have procedures for monthly reporting of unconfirmed transactions.
•
Daily valuation (Art. 11(2) of EMIR): FCs and NFC+ must carry out daily mark-tomarket or, where market conditions prevent this, mark-to-model valuation
What is already live? (cont.)
 15 September 2013
•
Portfolio reconciliation (Art. 11(1) of EMIR): FCs and NFCs must agree
processes for regular portfolio reconciliation with counterparties, in frequencies as
follows:
o FC/NFC+: each BD (where 500 or more contracts outstanding); weekly (where
between 51 and 499 contracts outstanding during the week); quarterly (where
50 or less contracts outstanding during the quarter)
o NFC-: quarterly (where more than 100 contracts outstanding during the
quarter); annually (where 100 or less contracts outstanding)
•
Portfolio compression (Art. 11(1) of EMIR): FCs and NFCs must have
processes to address portfolio compression opportunities
•
Dispute resolution (Art. 11(1) of EMIR): FCs and NFCs must agree procedures
for identification, recording, monitoring and resolution of disputes and FCs must
report on unresolved disputes
What is already live? (cont.)
 12 February 2014 / 11 August 2014
•
Reporting to TRs (Art. 9 of EMIR):
o When: Counterparties must report all their contracts (OTC and ETD) to a
registered or recognised TR or to ESMA by T+1
o Delegation: Counterparties may delegate the reporting to a third party but
retain responsibility for the reporting obligation
o TRs: Six TRs authorised so far: DTCC, REGIS-TR, CME TR, KDPW, ICE
TVEL, UnaVista
o What needs to be reported: (1) Common Data, including main characteristics
of the trade such as the type of derivative, underling, maturity, notional value,
price and settlement data, economic terms and trade identifiers; (2)
Counterparty Data, including counterparty classification, beneficiary
information and legal entity identifiers of the parties; (3) Collateral and
Valuation Data, FCs and NFC+ have to report the daily mark-to-market (or
mark-to-model) value as well as the value of collateral posted
What is already live? (cont.)
o When did the reporting obligation start:
12 February 2014 for Common Data and Counterparty Data
12 August 2014 for Collateral and Valuation Data
Contracts outstanding on 16 August 2012 and still outstanding on 12 February
2014 (the reporting start date) had to be reported within 90 days of the
reporting start date and contracts entered into before, on or after 16 August
2012 but not outstanding on the reporting start date must be reported within 3
years of the reporting start date
o LEI: Counterparties should obtain a global legal entity identifier (LEI) when
available for the purpose of reporting Counterparty Data (by registering with a
pre-LOU (Local Operating Unit), i.e. GMEI Utility
What is already live? (cont.)
 Segregation and Portability
• Following the authorisation of a CCP under EMIR, counterparties (both
FCs and NFCs) will have to make a choice between different types of
omnibus and individually segregated accounts at the CCP
• Each counterparty is required to have notified their clearing broker of its
account election with respect to a CCP on which it currently clears or
wishes to clear
• Counterparties can change elections at any point in time
Future stages of the EMIR implementation
TCE – TCE transactions
10 April 2014 / 10 October 2014
 TCEs may be subject to certain EMIR requirements, namely clearing and
risk mitigation, in the following circumstances:
Direct impact
• The clearing obligation will apply directly to certain TCEs (= those that
would be subject to the clearing obligation if it were established in the
EU) when they enter into OTC derivative contracts with FCs/NFCs+
• ESMA has issued RTS for directly extending EMIR clearing and risk
mitigation obligations to OTC derivatives between two TCEs where:
o the contract has a direct, substantial and foreseeable effect within the
EU; or
o it is necessary to prevent evasion of the EMIR rules
Future stages of the EMIR implementation
TCE – TCE transactions (cont.)
• A contract will have a direct, substantial and foreseeable effect within the
EU where:
o at least one TCE benefits from a guarantee of an EU FC and certain
quantitative thresholds are met with respect to that guarantee; or
o the contract is between EU branches of TCEs where the TCEs would
qualify as FCs if they were established in the EU
TCEs are encouraged to tell their counterparties if they have an EU FC
guarantor
Future stages of the EMIR implementation
TCE – TCE transactions (cont.)

Quantitative Threshold 1
Guarantee covers:

•
the entire liability of a TCE resulting from one or more OTC derivative contracts
for an aggregated notional amount of at least EUR 8bn (or foreign currency
equivalent); or
•
a part of the liability of a TCE resulting from one or more OTC derivative contracts
for an aggregated notional amount of at least EUR 8bn (or foreign currency
equivalent) divided by the percentage of the liability covered
Quantitative Threshold 2
Liability covered is at least equal to 5 per cent. of the sum of the EU FC guarantor’s
current exposures in OTC derivative contracts

Issues: (i) single guarantee test / multiple guarantee test; (ii) ongoing assessment of
the thresholds
Future stages of the EMIR implementation
TCE – TCE transactions (cont.)
Indirect impact
• EMIR can indirectly impact TCEs when they enter into derivatives with
EU counterparties »»» any such counterparty will only be able to enter
into a derivative on terms which enable it to comply with its EMIR
obligations
 EMIR envisages equivalence assessments by the Commission of non-EU
jurisdictions:
• for the purpose of determining exemptions from conflicting and/or
duplicative clearing, reporting and risk mitigation obligations; and
• as part of the recognition process for non-EU CCPs and non-EU TRs
Future stages of the EMIR implementation
Margining of uncleared OTC derivatives
-
Article 11(3) of EMIR
-
FCs and NFC+s
-
On 14 April 2014, the ESAs published a consultation paper on
margin for uncleared OTC derivatives (comment period closed 14
July 2014), proposing a start date of 1 December 2015 for
margining, subject to phase-in of initial margin requirements
-
ESAs expected to deliver final draft RTS to the Commission by end
2014
Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
-
Draft RTS – overview
• Applicable prospectively
• 5 Chapters:
o Counterparties’ risk management procedures
o Margin methods
o Eligibility and treatment of collateral
o Operational procedures
o Procedures concerning intragroup derivative contracts
Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
-
Risk management procedures – general
• the collection of collateral – Initial Margin (IM)
Collected “to cover potential future exposure to the other counterparty providing
the margin in the interval between the last margin collection and the liquidation of
positions following a default of the other counterparty”
→ on gross basis (ie, without the possibility of netting IM amounts between each
other)
• the collection of collateral – Variation Margin (VM)
Collected “to reflect current exposures resulting from actual changes in market
price”
→ on net basis
• an upfront agreement on a list of eligible collateral
Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
-
IM
• Phased in from 1 December 2015
• Must be collected within the BD following the execution of a new
derivative contract
• The total amount of IM collected from another counterparty must be
recalculated and collected, amongst others, when:
o a new contract is executed with that counterparty
o an existing contract with that counterparty expires
o an existing contract triggers a payment (or delivery) other than posting or
collecting VM
o no IM recalculation has been performed in the last 10 BDs
Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
Phase-in timetable for IM
From 1 December
Trigger level for consolidated groups
2015
€3 trillion
2016
€2.25 trillion
2017
€1.5 trillion
2018
€0.75 trillion
2019 onwards
€8 billion
Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
-
VM
• Effective as from 1 December 2015
• Must be collected at least on a daily basis starting from the BD following
the execution of the contract
• Based on the current valuation of each derivative contract calculated in
accordance with Art. 11(2) of EMIR and Arts. 16 and 17 of RTS
Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
-
Risk management procedures – specific
• Counterparties may agree not to collect IM with respect to:
o physically settled foreign exchange forwards and swaps
o exchange of principal of a currency swap
• FCs may agree with their FC or NFC counterparties on a margin
threshold of €50m covering all IM to be exchanged between
consolidated groups – on the condition that capital be held against a
party’s exposure to its counterparty
Counterparties may reduce the amount of IM exchanged by the value of the
threshold
Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
-
Risk management procedures – specific (cont.)
• Counterparties may agree a minimum transfer amount of €500,000
covering all IM and VM and excess collateral (if any)
• FCs/NFC+s may agree not to collect IM or VM from NFC-s and/or
counterparties exempt from EMIR
• Counterparties may agree that IM and VM are not posted by covered
bond issuers and cover pools if certain conditions are met, including:
o derivative must not terminate in case of default of the covered bond issuer
o legal over collateralisation of at least 102%
o derivative used only for hedging purposes
Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
Margin methods
Margin methods
Standardised method
Initial margin models
•
Annex IV of the draft RTS
•
•
Notional amounts or underlying
values of the derivative contracts
be multiplied by the relevant
percentages – dependant,
essentially, upon residual maturity
•
•
May be developed by a
counterparty or jointly by the two
counterparties or by a third party
agent
No industry-wide modelling
common approach
Counterparties must notify the
relevant competent authorities if
they are intending to use an initial
margin model
Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
-
Initial margin models - requirements:
•
Calibration of the model
o Based on historical data from a period of at least three years
o At least 25% of stressed data
o Recalibration at least every 6 months
•
Primary risk factor and underlying classes
o IM to be calculated first at underlying class level
o Total IM = sum of IM calculated for each underlying class
•
Assessments of the validity of the model’s risk assessments
o Initial validation by independent parties
o At least annually
o A process for verifying at least annually that the netting agreements considered for IM calculation are
legally enforceable
o Clear documentation showing all changes to the initial margin model and the tests performed
Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
-
Eligibility and treatment of collateral
• Asset classes as listed in the draft RTS – cash; gold; debt securities
issued by central governments, central banks, public sector entities,
credit institutions, investment firms; corporate bonds; equities; shares or
units in UCITS
• Requirement for credit quality assessment in relation to certain asset
classes using one of the methodologies specified in the draft RTS:
o IRB (if authorised)
o ECAI
• Specific eligibility criteria apply to certain asset classes
Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
-
Eligibility and treatment of collateral (cont.)
• Concentration limits for IM and VM
o No limits applicable to cash
o 50%; 10%; 40%
• Haircuts
o standard methodology in Annex II (0.5% – 24%, depending in particular upon
the residual maturity and the type of securities)
o own estimates subject to criteria in Annex III
Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
-
Operational procedures
• Exchange of collateral:
o a detailed documentation of policy (covering collateral levels, types and
eligibility, applicable haircuts) – updated at least annually
o processes for escalation with counterparties
o counterparties must agree in writing the terms of the operational process for
the exchange of collateral (including any segregation arrangements, settlement
of margin calls, methods for calculating and valuing collateral etc.)
o procedures to periodically verify the liquidity of the eligible collateral
• Segregation of IM
• No ability to re-hypothecate, re-pledge or otherwise re-use IM
Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
-
Procedures concerning intragroup derivative contracts
• Intragroup risk management procedures must ensure the regular
monitoring of the intragroup exposures and the timely settlement of the
obligations arising out of the intragroup OTC derivatives
• No current or foreseen practical or legal impediment to the prompt
transfer of own funds or repayment of liabilities between the
counterparties, that is:
o sufficient assets available to satisfy transfers or repayments when due (no
operational obstacles etc.)
o no restrictions under the applicable laws or any relevant contractual
relationships (the absence of currency or exchange controls, regulatory
restrictions, limitation on the ability to transfer funds etc.)
Future stages of the EMIR implementation
Clearing obligation

Article 4 of EMIR

Certain OTC derivatives that has been declared subject to the clearing obligation entered into
between certain market participants will have to be cleared

Two parties to an OTC derivative contract replace it with two separate contracts with a central
counterparty (CCP) which takes each party’s positions under the original contract

Obligation applies to any combination FCs and NFC+s (including a TCE), provided one or more of
the parties is established in the EU

NFC is an NFC+ if over 30 working days exceeds any of the clearing thresholds in any derivatives
asset class (other than hedging derivatives)
List of CCPs that have been authorised to offer
services and activities in the Union as at 23
September 2014
No
Name of the CCP
Country of
establishment
Competent authority (if established in the Union)
Date of authorisation
1.
Nasdaq OMX Clearing AB
Sweden
Finansinpektionen
18 March 2014
2.
European Central Counterparty N.V.
Netherlands
De Nederlandsche Bank (DNB)
1 April 2014
3.
KDPW_CCP
Poland
Komsija Nadzoru Finansowego (KNF)
8 April 2014
4.
Eurex Clearing AG
Germany
Bundesanstalt für Finanzdienstleistungs aufsicht (Bafin)
10 April 2014
5.
Cassa di Compensazione e Garanzia
S.p.A. (CCG)
Italy
Banca d’Italia
20 Mary 2014
6.
LCH.Clearnet SA
France
Autorité de Contrôle Prudentiel et de Résolution (ACPR)
22 May 2014
7.
European Commodity Clearing
Germany
Bundesanstalt für Finanzdienstleistungs aufsicht (Bafin)
11 June 2014
8.
LCH.Clearnet Ltd
United Kingdom
Bank of England
12 June 2014
9.
Keler CCP
Hungary
Central Bank of Hungary (MNB)
4 July 2014
10.
CME Clearing Europe Ltd
United Kingdom
Bank of England
4 August 2014
11.
CCP Austria Abwicklungsstelle für
Börsengeschäfte GmbH (CCP.A)
Austria
Austrian Financial Market Authority (FMA)
14 September 2014
12.
LME Clear Ltd
United Kingdom
Bank of England
3 September 2014
13.
BME Clearing
Spain
Comisión Nacional del Mercado de Valores (CNMV)
16 September 2014
30
Future stages of the EMIR implementation
Clearing - obligation (cont.)
 Hedging derivatives excluded in determining NFC category:
• “objectively measurable as reducing risks directly relating to the
commercial activities or treasury financing activities of the NFC or of the
group”
• only needs to constitute a hedge at time of entry into transaction
 Exemptions apply for intragroup transactions, OTC derivative
contracts associated with covered bond programmes and pension
funds until August 2015
Future stages of the EMIR implementation
Clearing - obligation (cont.)

ESMA is required to draft RTS on the clearing obligation within six months of the
authorisation of the CCPs

ESMA published two consultation papers on 11 July 2014 (comment periods closed
18 August 2014 and 18 September 2014)

ESMA was expected to publish first draft RTS by 18 September 2014. The EC then
has 3 months to determine whether to endorse, endorse with amendments or not
endorse the RTS

If endorsed, the RTS will come into force 20 days after publication in the Official
Journal (i.e. Jan 2015). However, the consultation papers have indicated a phased-in
approach

ESMA has taken a ‘Bottom-up’ approach. The determination of those classes which
will be subject to the clearing obligation is based upon the classes which are already
cleared by authorised CCPs
Future stages of the EMIR implementation
Clearing - obligation (cont.)
Consultation No.1
- Interest rate OTC derivative classes – in-scope
• Type: Fixed-to-float interest rate swaps, float-to-float swaps (basis
swaps), forward rate agreements, overnight index swaps
• Central Counterparties: Nasdaq OMX (Sweden), Eurex (Germany),
KDPW_CCP (Poland) and LCH.Clearnet Limited (UK)
- Equity and interest rate futures and options classes - out-of scope
• interest rate future and option classes cleared by LCH.Clearnet Limited
(UK) and Nasdaq OMX (Sweden)
• Interest rate OTC derivative classes cleared by KDPW_CCP (Poland)
(only authorised for IRS denominated in PLN and not covered )
• Equity OTC derivative classes cleared by Nasdaq OMX (Sweden) and
LCH.Clearnet Limited (UK)
Future stages of the EMIR implementation
Clearing - obligation (cont.)
Consultation No.2
 Credit default swaps – in-scope
• Type: untranched index credit default swaps
• Central Counterparties: LCH.Clearnet SA (France) (with ICE Clear
Europe expected to be authorised by the time the RTS enters into force)
 Single name credit default swaps cleared by Nasdaq OMX
(Sweden) and LCH.Clearnet SA (France) – out of scope
Future stages of the EMIR implementation
Clearing - obligation (cont.)
Proposed timetable
Category 1 – Clearing members – 6-month phase-in period after entry into RTS

Entities which are, at the date the relevant RTS comes into force:
•
clearing members of at least one CCP (such CCP having been authorised to clear
the class of derivatives which are subject to the RTS); and
•
their clearing membership allows it to clear the relevant class of derivatives
Category 2 – Non-clearing members – 18-month phase-in period after entry into RTS

Counterparties not falling in Category 1 or Category 3. This will include (i) FCs not in
Category 1 and (ii) AIFs qualifying as NFC+ not included in Category 1
Category 3 – NFC+ – 3-year phase-in period after entry into RTS

NFC+ not included in Category 1 or 2
Where a contract is entered into with counterparties in different categories, the date the
clearing obligation will take effect is the later of the two
Future stages of the EMIR implementation
Clearing - frontloading
 Does not apply to contracts if at least one party is a NFC
 Frontloading can be split into two different timeframes:
• Period A – between the notification of the classes to ESMA and the
publication in the OJ of the RTS on the clearing obligation
• Period B – between the publication in the OJ of the RTS and the date on
which the clearing obligation takes effect
 Different minimum remaining maturity (MRM) periods:
• Period A – MRM is set at the maximum maturity of the contracts per
class minus the length of the implementation period. Therefore, no
contracts in Period A will be subject to the frontloading obligation
• Period B – MRM is set at 6 months (i.e. those contracts which are close
to expiration on the date of application of the clearing obligation are not
required to be cleared)
Expected developments
Commission to report on progress on the transfer by pension scheme arrangements of on-cash collateral as variation margin and whether the exemption from the clearing
obligation for pension scheme arrangements will be extended under Art.82(2) EMIR (17 August 2014)
Expiry of compliance schedule for confirmations of uncleared OTC derivatives (31 August 2014), T+1 or T+2 deadline fully applicable
Q3 2014
ESMA to deliver first draft clearing obligation RTS to the Commission by 18 September 2014, with other draft RTS to follow by 12 December 2014
ESMA to publish reports under Art.85(3) EMIR by 30 September 2014 (preparatory to Commission’s general report on EMIR)
Commission expected to publish first equivalence assessments under Art.25 EMIR (and possibly also under Art.13 EMIR)
Expected authorisation of additional EU CCPs and first recognitions of non-EU CCPs, triggering additional consultations on clearing obligations
Possible ESMA Q&A on how obligations apply to TCE-TCE trades before 10 October 2014 (start date under RTS on TCE-TCE trades)
Deadline for comments on the ESMA DP on calculation of counterparty risk by UCITS for cleared OTC derivative transactions (22 October 2014)
Q4 2014
Possible amendment of the CRR to extend the transitional capital relief for exposures to qualifying CCPs before 15 December 2014
Expected publication of the first clearing obligation RTS in the OJ in mid-December 2014
ESAs expected to deliver the draft margin RTS to the Commission by the end of Q4 2014
Possible ESMA consultation on guidelines on the definition of spot foreign exchange under MiFID
Q1 2015
Commission to publish annual report on possible systemic risks and cost implications of interoperability arrangements pursuant to Art.85(4) EMIR
ESMA to present annual report on penalties imposed by NCAs pursuant to Art.85(5) EMIR
Expected publication of the margin RTS in the OJ in early Q2 2015
Q2 2015
Additional third country central banks expected to be added to the list of exempted entities in Art.1(4) EMIR (before first clearing obligation effective)
NCAs expected to start accepting applications for the intra-group exemption to the clearing obligation (before first clearing obligation effective)
Q3 2015
2017
Commission to publish general report on EMIR implementation pursuant to Art. 85(1) EMIR by 17 August 2014
ESMA to list pension arrangements specifically exempted from the clearing obligation by NCAs (before first clearing obligation effect for NFC+)
Deadline for reporting to TRs pre-existing contracts that were not outstanding on the reporting start date (12 February 2017)
Any questions?