EMIR Update: Small Financial Counterparties – ESMA Statement Regarding Clearing And Trading Obligations

Author:Mr Aiden Small, Phil Cody, Maedhbh Clancy and Barry Sexton
Profession:Arthur Cox

ESMA has acknowledged potential difficulties that small financial counterparties will face if EMIR Refit (the proposal to amend EMIR), which will exempt them from the clearing obligation, is not in force by 21 June 2019 (the deadline for certain small financial counterparties to start clearing and trading some of their over-the-counter (OTC) derivative contracts on trading venues). In a recent statement, it has encouraged regulatory forbearance.

EMIR Refit

On 4 May 2017, the European Commission published its proposals to reform EMIR (known as 'EMIR Refit'). See our briefings on EMIR Refit here and here.

Clearing and trading obligations for small financial counterparties

One proposal made by the Commission in EMIR Refit was to introduce clearing thresholds for certain small financial counterparties on the basis that central clearing is not economically viable for them in light of their low activity volumes (although these small financial counterparties would still be subject to EMIR's margin requirements). The clearing threshold for the small financial counterparties exemption under EMIR Refit to apply is €1 billion in gross notional value for credit and equity derivatives contracts, and €3 billion for interest rate, foreign exchange, commodity and other OTC derivative contracts.

EMIR Refit is not yet finalised, so the above clearing thresholds do not yet apply. EMIR already provides that the commencement date for the clearing obligation for Category 3 financial counterparties is 21 June 2019 for the interest rate and credit derivative classes subject to the clearing obligation. Category 3 financial counterparties are those whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives is equal to or below €8 billion, subject to certain conditions. The MiFIR trading obligation for derivatives for those financial counterparties' OTC derivative contracts would also apply from the same date.

If EMIR Refit does not come into force before 21 June 2019, certain small financial counterparties whose derivative positions are below the EMIR Refit clearing thresholds would need to start complying with the EMIR clearing and MiFIR trading obligations until EMIR Refit comes into force, at which stage they will be exempt from that obligation.

On 31 January 2019, ESMA issued a public statement in respect of this issue (and also the backloading requirement (discussed in...

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