- EMIR Update: Publication of Draft Technical Standards on the Applicability of EMIR on Derivative Contracts Involving Non-European Counterparties
- December 9, 2013 | Authors: Christopher Leonard; Chris Poon
- Law Firm: Bingham McCutchen (London) LLP - London Office
The European Markets and Infrastructure Regulation (“EMIR”) requires European domiciled counterparties to (i) report all transactions in derivatives to a trade repository (including life-cycle events such as any modification and termination); (ii) clear certain derivatives through a central counterparty (“CCP”); and (iii) employ risk-mitigation techniques for derivatives that are not cleared through a CCP.
EMIR does not generally apply to persons who are not domiciled in the EU (albeit that there may be an indirect effect when a European broker requires a non-EU counterparty to agree to certain EMIR compliant terms). However, EMIR will apply directly when two counterparties, neither of whom is domiciled in the EU or a country which the EU has deemed to have equivalent derivative trading regulation1 (a “third country entity”), enter into an OTC derivative contract that has a direct, substantial and foreseeable effect within the EU and therefore be subject to the clearing and risk mitigation obligations under EMIR.
The European Securities and Markets Authority (“ESMA”) has now issued draft regulatory technical standards (the “Draft RTS”) in which it confirms that an OTC derivative contract will be considered to have a “direct, substantial and foreseeable effect” within the EU where:
- an EU financial counterparty guarantees the liability of at least one of the third country entities party to the contract, subject to the guarantee crossing prescribed liability thresholds (as discussed in further detail below) (Article 2(1) of the Draft RTS); or
- the contract is entered into through an EU branch of one (or both) of the third country entities, provided that the branch would qualify as a “financial counterparty” if it were established in the EU (Article 2(2) of the Draft RTS).
Guarantees by an EU financial counterparty
An OTC derivative contract shall be considered as having a direct, substantial and foreseeable effect within the EU when at least one third country counterparty benefits from a guarantee provided by an EU financial counterparty which covers all or part of its liability resulting from that OTC derivative contract, to the extent that the guarantee meets both following conditions:
- it covers the entire liability of a third country counterparty resulting from one or more OTC derivative contracts for an aggregated notional amount of at least EUR 8 billion or the equivalent amount in the relevant foreign currency (or the guarantee covers part of the liability with the threshold applied on a pro-rata basis); and
- it is at least equal to 5 per cent of the sum of the current exposures in OTC derivative contracts of the guarantor.
It is expected that the Draft TRS will be endorsed by the Commission and implemented within the next three months.
1At the date of publication, no jurisdiction has been deemed equivalent