EMIR/UK EMIR and the year ahead

Introduction

The turn of the year has seen “UK EMIR” come into force, meaning EMIR as amended by numerous statutory instruments, and the technical standards under EMIR as amended by binding technical standards made by the UK regulators. Below we set out developments expected during the course of the year, across both EMIR and UK EMIR.

Continued implementation of EMIR REFIT

FRANDT

In the EU, the requirement for clearing members to provide services on fair, reasonable, non-discriminatory and transparent (FRANDT) commercial terms is due to become applicable in July 2021. ESMA published, for consideration by the Commission, its final report on the FRANDT requirements, including a draft delegated act setting out the relevant conditions with which clearing members would be expected to comply, in June 2020. To read more please see our client alert ESMA publishes Final Report on FRANDT requirements for clearing services providers.

Changes to reporting rules

ESMA has published its Final Report and draft technical standards on reporting, data reconciliation and validation, orderly transfer of data and registration of trade repositories, for consideration by the Commission. Once in force, the technical standards on reporting envisage an 18-month implementation period.

UK position on FRANDT and REFIT reporting changes

The Financial Services Bill provides for the implementation of these aspects of EMIR REFIT under the UK framework, with the FCA having the power to make detailed rules relating to both FRANDT and reporting, with the Treasury to appoint the date of entry into force.

Pension scheme arrangements

The exemption under EMIR from the clearing obligation for transactions involving pension schemes is due to expire in June 2021, unless extended by the first of two possible 12-month extensions provided for under EMIR REFIT. ESMA’s most recent report to the Commission on central clearing solutions for pension schemes, published in December 2020, calls for the first extension to be applied. One area to watch will be the approach of ESMA and EU national competent authorities (NCAs) to the treatment of transactions with UK pension schemes which, on the basis of ESMA guidance, are no longer technically within scope of the EMIR clearing exemption for pension schemes. However, given the impact of the loss of this exemption for EU dealers, it has been reported that some NCAs are adopting a more pragmatic approach.

The clearing exemption under UK EMIR will apply until 18 June 2023 (further extendible by the Treasury) and applies to transactions involving both UK and EEA pension schemes.

Margin risk management procedures

The ESAs’ draft regulatory technical standards (RTS) on procedures for validation of margin risk management procedures for uncleared derivatives, widely expected to require regulatory approval of initial margin models, are now expected during 2021.

Reports under REFIT

Under EMIR REFIT, the Commission is (over) due to report on a range of topics, including alignment of the derivatives trading obligation (DTO) and clearing obligation; possible exemption from clearing for post-trade risk reduction (PTRR) services; and the interaction between the EMIR and MiFIR reporting regimes. ESMA has provided its technical advice to the Commission on the first two of these issues, showing support for alignment of the DTO and clearing obligation, and a limited exemption from the clearing obligation for PTRR services. ESMA’s proposals in its consultation paper on the final issue indicated that there may be little scope to align EMIR and MiFIR reporting obligations, with ESMA citing the difference in purpose of these obligations as a barrier to more extensive alignment. The UK’s approach to these issues remains to be seen.

CCP recognition and supervision

EMIR 2.2 and the RTS setting out the new third country CCP recognition regime on tiering, comparable compliance and fees are now in force.

In September 2020, the Commission published a time-limited equivalence decision to enable EU firms to continue to clear through UK CCPs until 30 June 2022. Pursuant to this decision, ESMA granted temporary recognition to ICE Clear Europe Limited, LCH Limited, and LME Clear Limited.

The Bank of England is currently considering its policy approach to regulating third country CCPs. In the meantime, nearly all EU-authorised CCPs and third country CCPs recognised by ESMA to provide clearing services in the EU, have been granted temporary recognition to provide clearing services in the UK.

Amendments to the EMIR margin and clearing rules

The RTS amending the EMIR margin rules for uncleared derivatives have been adopted by the Commission and are expected to enter into force during Q1 2021. These RTS will implement the long-awaited exemption from variation margin for both physically-settled FX forwards and swaps. Also included are changes to the phase-in of initial margin, bringing the EU into line with the revised BCBS/IOSCO timeline, and extensions to the temporary exemptions for intra-group transactions involving non-equivalent third country entities to 30 June 2022, and for equity options to 4 January 2024.

In addition, the RTS provide for grandfathering of legacy transactions in respect of margining obligations on novation from an UK entity to an EU affiliate during the 12-month period from 1 January 2021 to 1 January 2022. To read more, please see our client alert: Amendments to EMIR margin rules – fourth time lucky?

Also due to enter into force shortly, are draft RTS published by ESMA addressing certain equivalent points relevant to the clearing obligation. The amendments will extend the derogations from clearing of intra-group transactions with counterparties in non-equivalent third countries, which technically expired on 21 December 2020, to 30 June 2022 and also include grandfathering in respect of the clearing obligation for legacy transactions on novation, as outlined above in respect of the margin requirement for uncleared derivatives.

Looking to UK EMIR, as these RTS were not applicable as at the end of Brexit transition period, the changes have not been onshored. It has, however, been confirmed that the PRA and FCA will consult in Q1 2021 on relevant aspects of these changes and regulatory forbearance will apply in the interim. It is expected that the PRA and FCA will follow the initial margin phase-in periods announced in April 2020 by BCBS/IOSCO, and reflected in the amendments to the EMIR margin rules.

Some important EMIR/UK EMIR compliance dates

Intra-group exemptions

Now that, from an EU perspective, the UK is a third country that has not been determined as “equivalent” for the purposes of the intra-group exemption under EMIR, an EU entity transacting with a UK affiliate may need to apply to its NCA for a new temporary derogation to continue to avoid the need to clear or margin the transactions under EMIR.

By contrast, the UK has determined that EEA (including EU) jurisdictions are “equivalent” for the purposes of the intra-group exemptions under UK EMIR. However, in order to continue to rely on the intra-group exemption from clearing after 1 March 2021 and/or margining after 1 May 2021 in respect of EU group entities, UK counterparties currently relying on the exemption from clearing or margining on intra-group transactions with EU counterparties must make the following notifications to the FCA by 1 February 2021:

(i) the entity pairs to which the exemption applies; and

(ii) to confirm whether there have been any other changes to the conditions under which the original intra-group exemption was granted.

EMIR/UK EMIR counterparty classification

The FCA has confirmed that all counterparties subject to UK EMIR will need to either: (i) calculate their OTC derivatives positions under UK EMIR and notify the FCA if any of the clearing thresholds are exceeded; or (ii) if choosing not to calculate, notify the FCA, in each case by 18 June 2021. This is regardless of whether counterparties completed equivalent notifications under EMIR previously.

In calculating positions, it is helpful that the Treasury has made an equivalence determination under Article 2a of UK EMIR in favour of EU markets, so that products traded on those markets are not OTC derivatives under UK EMIR.

Counterparties subject to EU EMIR and relying on relief from clearing will, as usual, need to run calculations to confirm that their positions are below the relevant clearing thresholds for 2020/2021 by 18 June 2021 and make any necessary notifications to ESMA and their NCA. At this time, no equivalence decision has been made under EMIR in respect of UK markets. ESMA has updated its Q&As under EMIR to confirm that derivatives traded on UK venues prior to the end of the Brexit transition period will be considered exchange traded derivatives, and therefore not count as OTC derivatives for the purpose of the FC and NFC clearing thresholds under EMIR. However, derivatives traded on those venues following the end of the transition period, will be treated as OTC derivatives.

For more information on the key changes for derivatives market participants, both in the UK and the EU, in complying with EMIR following the end of the Brexit transition period, please see our client alert Brexit Planning: Compliance with EMIR and UK EMIR.

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.