What does 2022 hold for UK EMIR/EMIR?

As EMIR moves into its second decade later this year, we will continue to see developments in the regulatory landscape, with remaining aspects of EMIR REFIT and EMIR 2.2 making their way through the legislative process. Further changes reflecting wider developments, such as interest rate reform, are also expected.

In the UK, we have had over the past year our first insight into agile, regulator-led amendment to binding technical standards under UK EMIR, and the UK Treasury’s Future Regulatory Framework proposals suggest there is more of this to come.

We highlight below some of the key developments anticipated in 2022.

Scope of the clearing obligation in response to benchmark reform

The dawn of 2022 saw the cessation, or loss of representativeness, of the vast majority of LIBOR settings and the cessation of EONIA. In preparation for these anticipated events, changes were proposed to the scope of the clearing obligation under both UK EMIR and EMIR (and the derivative trading obligation (DTO) under MiFIR in both jurisdictions) during 2021.

In the UK, these amendments have largely been implemented with the following changes to the scope of the clearing obligation becoming effective from various points ahead of end-2021:

• removal of contracts referencing EONIA, JPY LIBOR and GBP LIBOR;
• introduction of certain overnight indexed swap (OIS) contracts referencing €STR; and
• extension of the maturity of those contracts referencing SONIA already subject to the clearing obligation.

Certain OIS referencing TONA will also be included in the clearing obligation from 31 January 2022 and the Bank of England is expected to consult on changes to the clearing obligation in respect of USD LIBOR during the course of 2022.

Separately, the FCA amended the scope of the DTO to remove derivatives referencing GBP LIBOR and replace these with OIS referencing SONIA from 20 December 2021.

Under EMIR, ESMA has proposed draft RTS that would see the following changes to the clearing obligation:

• removal of contracts referencing EONIA and LIBOR (GBP, JPY and USD);
• introduction of certain OIS interest rate derivative classes referencing €STR and SOFR; and
• extension of the maturity of those contracts referencing SONIA already subject to the clearing obligation.

ESMA also proposes the removal from the DTO of derivatives referencing both GBP and USD LIBOR.

Whilst these draft RTS have not, at the time of writing, been adopted by the European Commission, ESMA issued a statement on 16 December 2021 calling on national competent authorities not to prioritise enforcement actions in respect of the clearing, or derivative trading, obligations for interest rate derivative classes referencing rates to be removed from the clearing obligation and DTO, respectively. The statement also encourages market participants to voluntarily clear those interest rate derivative classes proposed to be included in the clearing obligation ahead of the RTS entering into force.

As liquidity in risk-free rates develops, further changes to these obligations may be seen.

FRANDT

Under EMIR, the delegated regulation specifying the conditions under which commercial terms offered for clearing services are considered to be fair, reasonable, non-discriminatory and transparent (FRANDT) will apply from 9 March 2022. Clearing Service Providers will need to offer clearing services to new clients on FRANDT terms. The terms of clearing services provided to existing clients need to be reviewed and, if necessary, amended to be FRANDT compliant by 9 September 2022. Please see our note here for further details.

In the UK, the EMIR FRANDT requirement was introduced through the Financial Services Act 2021 and became applicable from 18 June 2021. However, no binding technical standards further detailing the scope of the obligations are currently expected.

Third country CCPs

The Commission announced in November 2021 its intention to propose an extension to the temporary equivalence decision for UK CCPs early this year. It has since been indicated that this proposal would seek to extend equivalence until June 2025 and is expected to be accompanied by reforms to EU regulation of CCPs taking into account the assessment by ESMA of the systemic importance of UK-based CCPs published in December 2021. The reforms, which are expected to include amendments to EMIR, will likely give greater powers to ESMA to monitor and intervene in the business of Tier 2 third country CCPs, and seek to incentivise EU clearing members to clear more transactions on EU CCPs.

In the UK, the Bank of England is consulting on its approach to regulation of third country CCPs, including tiering of incoming CCPs and comparable compliance (UK EMIR 2.2). The Bank of England expects to implement its UK EMIR 2.2 policy in July 2022. Please see our note here for further details.

Completion of phase-in of initial margin for uncleared derivatives and initial margin model validation

The final phase-in of initial margin for uncleared derivatives will take place on 1 September 2022 for those counterparties falling within Phase 6 under both UK EMIR and EMIR. Phase 6 will be the largest phase, bringing into scope those counterparties with (or belonging to groups with) an aggregate average notional amount of uncleared derivatives above EUR 8bn.

ISDA estimates that Phase 6 will see over 750 counterparties come into scope for initial margin, impacting an ever greater range of buyside firms and, in particular, multiple asset managers. The months ahead will be critical for those Phase 6 firms continuing preparations for 1 September 2022. Firms are increasingly embracing technology in this area, with the expansion of ISDA Create to include some of the triparty documents counterparties will need to negotiate for the implementation of initial margin.

Late in 2021, the EBA published for consultation draft RTS on initial margin model validation (IMMV). These RTS, mandated under EMIR REFIT, are being developed in cooperation with ESMA and EIOPA and the consultation will close in early February. The EBA has indicated that it expects to publish final draft RTS on IMMV in Q3 2022, following consideration of consultation responses. The draft RTS would then be subject to the legislative process.

Whilst power for the PRA and FCA to make such regulations was onshored in UK EMIR, the UK regulatory approach to model validation is not yet clear. The FCA and PRA are, however, expected to consult on certain changes to the UK EMIR margin rules, including the status of EEA UCITS as eligible collateral beyond the end of 2022, early in the year.

Intragroup exemption from clearing and margining and clearing exemption for pension schemes

Temporary derogations under the EMIR clearing and margining rules for intragroup transactions with counterparties in non-equivalent third countries will, unless extended, expire on 30 June 2022. Industry bodies have called for further extension to these derogations to allow additional time for adoption of equivalence decisions.

The temporary exemption from clearing for EEA pension schemes under EMIR, extended in 2021 for the first of two one-year extensions, expires on 18 June 2022. It remains to be seen whether this will be further extended. Under UK EMIR, this temporary exemption, applicable to transactions involving both UK and EEA pension schemes, applies until 18 June 2023 (and is further extendible by the Treasury).

Review of EMIR/UK EMIR reporting requirements

ESMA published draft technical standards on reporting, data reconciliation and validation, orderly transfer of data and registration of trade repositories, mandated by EMIR REFIT, in December 2020, and has also consulted on reporting guidelines to accompany the new standards. The standards have not yet been adopted by the Commission, however, when the standards come into force, there is expected to be an 18 month implementation period before the new reporting regime starts to apply.

In November 2021, the FCA and Bank of England jointly published a consultation paper on changes to reporting requirements under UK EMIR. The great majority of the proposals in the consultation paper are aligned with the draft technical standards published by ESMA, to facilitate consistency across the UK and EU reporting regimes (as well as broader global harmonisation), and to avoid operational burdens that would arise from divergence. However, a few differences are proposed, as noted in the paper. The consultation is open until 17 February 2022 and it is proposed that the new rules will take effect 18 months after they are made. It remains to be seen whether the timing for implementation of the UK rules and EU rules respectively will coincide. Please see our note here for further details

This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors.