FINANCIAL INSTITUTIONS
ENERGY
INFRASTRUCTURE, MINING AND COMMODITIES
TRANSPORT
TECHNOLOGY AND INNOVATION
PHARMACEUTICALS AND LIFE SCIENCES
Commodities concerns:
EMIR thresholds, notifications and reporting
MIG Seminar
Financial Services Team
Norton Rose LLP
April 2013
Overview of breakout session
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Scope and coverage of EMIR – commodities angle
Primary focus on non-financial counterparties (NFCs)
Impact of EMIR on NFCs
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FINANCIAL INSTITUTIONS
ENERGY
INFRASTRUCTURE, MINING AND COMMODITIES
TRANSPORT
TECHNOLOGY AND INNOVATION
PHARMACEUTICALS AND LIFE SCIENCES
Thresholds and calculations
Hedging exemption
Group activities
“Compromise” – potential delay in implementation of clearing obligation for
NFCs
Legal documentation – new reps and warranties
Notifications and reporting requirements
Linkages with REMIT
Latest developments on benchmarks – UK and EU level
Scope of coverage of EMIR
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Meaning of “derivatives” – what is within scope of EMIR?
FINANCIAL INSTITUTIONS
ENERGY
INFRASTRUCTURE, MINING AND COMMODITIES
TRANSPORT
TECHNOLOGY AND INNOVATION
PHARMACEUTICALS AND LIFE SCIENCES
Meaning of “derivatives” – what instruments are within scope?
“derivative” or “derivative contract” means a financial instrument as set out in
points (4) to (10) of Section C of Annex 1 to MiFID
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Excludes physical spot and FX spot transactions
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Excludes certain physically delivered forward commodity contracts
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Includes FX derivatives – grey area
“OTC derivative” or “OTC derivative contract” means a derivative contract not
executed on a regulated market within the meaning of MiFID or an equivalent
third country market under MiFID.
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Therefore, derivative contracts traded on MTFs are OTC derivatives in the
context of EMIR
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Key question for commodities firms – what do we trade?
Importance of MiFID II proposals – type of instruments classed as derivatives
may change in the future
For example, see the latest MiFID II position on C(6) carve out for OTF
contracts not entered into for speculative purposes
Note that the scope of instruments subject to mandatory clearing for FC and
NFC+ is a separate issue which will be decided in due course by ESMA
Clearing thresholds - latest
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Thresholds are particularly sensitive for commodities firms
ECON Committee proposal rejected by European Parliament
“Compromise” proposal adopted in its place
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FINANCIAL INSTITUTIONS
ENERGY
INFRASTRUCTURE, MINING AND COMMODITIES
TRANSPORT
TECHNOLOGY AND INNOVATION
PHARMACEUTICALS AND LIFE SCIENCES
Final RTS thresholds unchanged and published in Official Journal
Agreement to “phase in” clearing for NFC+ firms through ESMA powers to
control application of clearing obligation
Proposal for additional published guidance in Q&A form for NFCs
Requirement to calculate clearing thresholds commenced on 15
March
NFC must report to ESMA / FCA if it is above the threshold
For groups, the group must report in each MS in which the group has
legal entities that trade OTC derivatives. In addition, an overall group
report must be submitted to ESMA
Thresholds - calculation
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FINANCIAL INSTITUTIONS
ENERGY
INFRASTRUCTURE, MINING AND COMMODITIES
TRANSPORT
TECHNOLOGY AND INNOVATION
PHARMACEUTICALS AND LIFE SCIENCES
Clearing thresholds for each asset class
– EUR 1 billion* Credit derivative contracts
– EUR 1 billion* Equity derivative contracts
– EUR 3 billion* Interest rate derivative contracts
– EUR 3 billion* Foreign exchange derivative contracts
– EUR 3 billion* Commodity derivative contracts and others
* all figures represent gross notional values
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Calculation is based on all NFCs in the group
Important exclusion for hedging transactions of a NFC or wider group
Breach of one class = clearing obligation will apply to all classes
Intra-group transactions DO count, although exempt from clearing
obligation
Hedging transactions are those transactions objectively measurable as reducing risks directly relating to the commercial
activity or treasury financing activity of a company. An OTC derivative is a hedging transaction if:
(a)
It covers the risks arising from the potential change in the value of assets, services, inputs, products, commodities or
liabilities that the company does or anticipates it will own, produce, manufacture, process, provide etc in the normal
course of business;
(b)
It covers the risks arising from the potential indirect impact on the value of assets, services or inputs referred to in (a),
resulting from the fluctuation of interest rates, inflation rates, FX rates or credit risk; or
(c)
It qualifies as a hedging contract pursuant to IFRS.
Thresholds – notifications
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FINANCIAL INSTITUTIONS
ENERGY
INFRASTRUCTURE, MINING AND COMMODITIES
TRANSPORT
TECHNOLOGY AND INNOVATION
PHARMACEUTICALS AND LIFE SCIENCES
Notification to the FCA required on first day threshold exceeded
NFC will become NFC+ if rolling average exceeds for 30 working days
NFC+ can re-notify as soon as rolling average drops below
Notification in each MS where group has a legal entity AND ESMA
FCA is the UK regulator – forms accessible through FCA website
Legal docs, reporting issues and
other obligations
FINANCIAL INSTITUTIONS
ENERGY
INFRASTRUCTURE, MINING AND COMMODITIES
TRANSPORT
TECHNOLOGY AND INNOVATION
PHARMACEUTICALS AND LIFE SCIENCES
Categorisation as NFC or NFC+ is very important for trading counterparties of
commodities firms
 Counterparties should / likely to ask for legal representations
 New ISDA protocol deals with this - put in place for 15 March
 EMIR NFC Representation Protocol
 Timely Confirmation Amendment Agreement
 Reporting is required for all derivative contracts caught by EMIR
(this includes cleared, non-cleared and exchange traded contracts)
 EMIR TRs currently in process of making applications to ESMA
 Firms should look into forms of access to TRs – through links with CCPs /
execution venues / aggregators or directly
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Timeline for commodities firms:
• Reporting requirements likely to commence from Sept 2013 for IRS and CDS and from 1 Jan 2014
for commodities contracts
• Timely confirmation rules apply from 15 March 2013
• Portfolio reconciliation rules apply from 15 September 2013
• Portfolio compression rules apply from 15 September 2013
• Mark to market for NFC+ starts 15 March 2013
• Dispute resolution rules apply from 15 September 2013
Reporting – REMIT angle
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REMIT reporting deadline likely to be in force after the EMIR
reporting obligation commences for commodity derivatives
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REMIT expected 2014/2015
EMIR expected 1 January 2014 for relevant energy contracts
ACER has published draft technical standards for trade reporting
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Separate ACER guidelines for applying for registration as a Registered
Reporting Mechanism under REMIT and also for the registration of
Regulated Information Services under REMIT
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FINANCIAL INSTITUTIONS
ENERGY
INFRASTRUCTURE, MINING AND COMMODITIES
TRANSPORT
TECHNOLOGY AND INNOVATION
PHARMACEUTICALS AND LIFE SCIENCES
RRM registered to trade report to ACER on behalf of market participants
RIS is registered to report “regulated information” to ACER on behalf of market
participants- e.g. inside information that must be publicly disclosed under REMIT
EMIR reports will satisfy REMIT reporting obligations but not
disclosure obligations
Likely that EMIR TRs will also offer REMIT reporting services
Ofgem consulting on UK reporting and registration
REMIT enforcement and penalty measures expected to be consulted
on shortly
Benchmarks
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Recent FSA Policy Statement PS13/6 – new rules in force 1 April 2013
Deals with the regulation and supervision of benchmarks
Driven by the LIBOR scandal and the Wheatley Review
Also potentially influenced by 2012 gas market manipulation allegations
Two new distinct regulated activities in the UK of:
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FINANCIAL INSTITUTIONS
ENERGY
INFRASTRUCTURE, MINING AND COMMODITIES
TRANSPORT
TECHNOLOGY AND INNOVATION
PHARMACEUTICALS AND LIFE SCIENCES
administering a specified benchmark
providing information to a specified benchmark
New controlled function for firms contributing to benchmarks
Currently, LIBOR remains the only specified benchmark under the HM Treasury
order
However, in the future, specified benchmarks could include energy, oil, etc.
In parallel, the European Commission is continuing its review of the integrity of
benchmarks, which includes commodity indices
Commission expected to report in 2013 on the consultation so further
developments are expected
Stay up to date - capturing commodities blog
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Disclaimer
The purpose of this presentation is to provide information as to
developments in the law. It does not contain a full analysis of the law nor
does it constitute an opinion of NRLLP on the points of law discussed.
No individual who is a member, partner, shareholder, director, employee or
consultant of, in or to any constituent part of Norton Rose Group (whether
or not such individual is described as a “partner”) accepts or assumes
responsibility, or has any liability, to any person in respect of this
presentation. Any reference to a partner or director is to a member,
employee or consultant with equivalent standing and qualifications of, as
the case may be, Norton Rose LLP or Norton Rose Australia or Norton
Rose Canada LLP or Norton Rose South Africa (incorporated as Deneys
Reitz Inc) or of one of their respective affiliates.
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