One of the central aspects of EMIR is the obligation for standardised over-the-counter (OTC) derivative transactions to be conducted using a central counterparty (CCP) authorised under EMIR. The ESMA was required to determine by means of Technical Standards, for which categories of derivatives a clearing obligation is prescribed.
Pursuant to Article 4 EMIR the counterparties of an OTC derivative contract are obliged to conduct all OTC derivative transactions, for which a clearing obligation exists pursuant to Article 5 EMIR, using a CCP that is authorised under EMIR.
When are counterparties affected by the clearing obligation?
The counterparties are only affected by the clearing obligation, if the relevant transactions have been concluded under the following conditions:
- Between two financial counterparties
- Between a financial counterparty and a non-financial counterparty over the clearing threshold
- Between two non-financial counterparties over the clearing threshold
- Between a financial counterparty or a non-financial counterparty over the clearing threshold and an entity in a third country, provided that it would be subject to the clearing obligation, were it incorporated within the European Union
- Between two entities registered in one or more third countries, which would be subject to the clearing obligation, were they incorporated in the European Union, provided that that the derivative contract has direct, significant and foreseeable effects within the European Union or provided that the clearing obligation is necessary, in order to prevent the circumvention of rules contained in this regulation.
When does the clearing obligation apply for counterparties?
The clearing obligations pursuant to Article 4 EMIR applies without exception for all contracts between financial counterparties. It only applies in certain circumstances for non-financial counterparties, namely when they use derivative contracts to a greater extent, and thereby exceed specific clearing thresholds set out in the Technical Standards. If the threshold is exceeded in one category, then this triggers the clearing obligation for all OTC derivative categories. If an entity exceeds the threshold for a period of 30 days, then it is required to notify the ESMA and the Financial Market Authority of this occurrence immediately.
Calculation of the clearing threshold
Two points are significant for the calculation of the clearing threshold by investment class:
- The threshold always applies to the group. All OTC derivative contracts of the fully consolidated non-financial counterparties, as well as fully-consolidated companies within the group from a third country are to be taken into account.
- OTC derivative contracts, which are concluded solely for hedging purposes, are not taken into account in the calculation
The clearing thresholds have been set as follows by asset classes:
- Credit and share-based derivatives: EUR 1 billion gross notional value of open OTC derivatives
- Interest rate, foreign exchange, currency-based and other derivatives: EUR 3 billion gross notional value of open OTC derivatives
Exemptions from the clearing obligation
OTC derivative contracts, which are used by entities for hedging of risks, and therefore do not exceed the clearing threshold, are exempted from the clearing threshold. If companies within the real economy use derivatives below the clearing threshold only for hedging purposes, and if the transactions are directly associated with the business activities or the treasury of the entity, then the derivative contracts are not subject to the clearing obligation.
Pursuant to Article 89 (1) EMIR old-age provision schemes were exempted from clearing for a period of three years from the entry into force of the Regulation. Since EMIR entered into force on 16 August 2012, this period expired in 2015. Against this background, the European Commission issued a delegated act pursuant to Article 85 (1) EMIR on 5 June 2015, in which the temporary exemption from central clearing requirements was extended for old-age provision schemes until 16 August 2017.
Transactions in derivatives within a group may be exempted from the clearing obligation. A notification or application must be submitted to the Financial Market Authority. Further information can be found here
Gradual introduction of clearing obligation until 2018
The clearing obligation was initially introduced for certain OTC interest rate derivatives denominated in Euro, Sterling, US Dollars and Japanese Yen. The relevant technical standard was published in the Official Journal of the European Union on 01.12.2015 and has been applicable for existing clearing members since 21.06.2016. A gradual introduction is intended for remaining market participants until 2018.
A link to the relevant technical standard can be found here. Other technical standards, which explain the clearing obligation for specific OTC derivatives, are being drawn up by ESMA, and are published in the Official Journal of the European Union.