EMIR Refit Is Live – What’s Changed?
The final text of the revisions to the European Market Infrastructure Regulation (EMIR), known as EMIR Refit, was published in May. The legislation is now live, and firms must be fully compliant with its various provisions. EMIR Refit made some important changes to the original regulation, many of which sought to lower compliance costs and ease the burden on small financial firms and nonfinancial firms. It is important that all firms that use OTC derivatives fully understand EMIR Refit and its key provisions.
EMIR Refit came into force on June 17, 2019. Some of its key provisions include:
- Small financial counterparties (SFCs) – The Refit introduced the category of SFCs, which are exempt from the clearing obligation (see What Is EMIR? box). The category is defined based on the gross notional amount of OTC derivatives positions a firm has. For SFCs, the threshold is less than €1 billion for credit and equity derivatives contracts, and less than €3 billion for interest rate, foreign exchange, commodity, and other OTC derivatives contracts.
- Nonfinancial counterparties (NFCs) – NFCs that fall below the clearing thresholds specified above are exempt from the clearing obligation. They may calculate their position annually, rather than monthly as required by the original EMIR rules. NFCs will only have to clear the category of OTC contracts for which they exceed the threshold.
- Historical transactions – The original rules required extensive reporting of historical OTC derivatives transactions. As firms worked to implement this provision, it became clear that this would be extremely challenging. The Refit thus removed the historical reporting requirement.
- Fair, Reasonable, Non-Discriminatory and Transparent (FRANDT) commercial terms – The Refit introduced a requirement that clearing members, and clients providing indirect clearing, must offer their services on FRANDT terms. The goal of this rule is to ensure that small firms can access clearing services on an equitable basis. These terms have yet to be fully defined by regulators.
- Extension of pension scheme exemption – The original EMIR rules exempted pension schemes from the clearing obligation. The Refit extended this exemption until August 2020 and allows for an additional two-year extension.
As firms work to complete their threshold calculations and to ensure they are meeting their clearing, reporting, and risk mitigation obligations, many worry that the UK’s upcoming exit from the European Union will disrupt clearing activities.
The EU has granted certain extensions that will allow European derivatives counterparties to use UK market infrastructure until next spring. However, the EU has declined to extend this beyond that point and many are concerned that clearing and trading firms are ill-prepared to handle the consequences of a potential no-deal Brexit.
Intuition Know-How has a number of tutorials that are relevant to EMIR Refit and central clearing of OTC derivatives:
- Derivatives – An Introduction
- Derivatives – Markets
- Swaps – An Introduction
- Swaps – Clearing
- Swaps – Documentation
- Counterparty Credit Risk (CCR) – Management
- Life of a Trade – Clearing & Settlement