EMIR REFIT: What do I need to know?

The amended European Market Infrastructure Regulation (“EMIR REFIT” or simply “REFIT”) came into force on 17 June. It’s designed to simplify a derivatives regime currently seen as burdensome to some market participants, particularly those whose risk profile is unlikely to impact macro stability. In this note, we summarise the key reforms and give some pointers about what you need to think about.

What are the most significant changes for investment managers?

• The most notable changes are: the introduction of the small financial counterparty category (“FC-”), which will not be subject to the clearing obligation but nevertheless will remain subject to margin exchange requirements; plus
• the classification as financial counterparties (“FC”) EU domiciled alternative investment funds (“AIF”) and third country AIFs managed by an authorised Alternative Investment Fund Manager (AIFM).

Under the current regime: 

• Category 3 firms (FCs and AIFs currently treated as non-financial counterparties (“NFC”), with aggregate notional exposure of less than EUR 8bn) are expected to start clearing certain interest rate and credit default swap contracts entered into or novated on and after 21st June 2019;
• Categories 1 (clearing members), 2 (same as 3 but whose positions are above EUR 8bn) and 4 (non-financial counterparties in categories 2 and 3) are already subject to this clearing obligation.

So the immediate effects of REFIT will be seen in clearing?

Yes. EMIR REFIT updates the clearing obligation, requiring all counterparties, including those already subject to it , to calculate the aggregate notional month-end average positions for the previous 12 months for each asset class to determine whether any asset classes cross a clearing threshold. If a threshold has been crossed, the counterparty must notify the FCA and ESMA immediately and start clearing the asset classes subject to the clearing obligation four months after REFIT is implemented. FCs must include all their OTC derivative positions in the calculations, whereas NFCs will still be exempt from including in the calculation contracts for risk management purposes. The calculations must be performed again every 12 months.

For FCs, the asset classes subject to mandatory clearing do not need to cross a threshold for the clearing obligation to take effect. Instead, any of the asset classes whose positions exceed a threshold will trigger the clearing obligation. In contrast, NFCs are only required to clear those asset classes that cross a threshold and are subject to mandatory clearing.

Note that counterparties have the option to not perform the calculations, in which case they must notify the FCA and ESMA and become subject to the clearing obligation four months from now.

What are the primary changes for AIFMs and ManCos?

The biggest impact will be with regards the reporting obligation. AIFMs and UCITS ManCos become legally responsible for reporting on behalf of their funds, and NFCs below the clearing thresholds whose counterparties are EU financial counterparties are exempt from reporting (the FCA will report on their behalf) unless they opt to report themselves.

The following outlines some of the main changes:

EU AIFM managing an EU AIF 

The AIFM's EMIR classification will change from NFC to FC.

As a result, the AIFM will have to undertake the following in addition to existing requirements: 

• Annual calculations vs clearing threshold;
• Clearing (if exceeding the threshold);
• Margin (regardless of FC+/- status, whereas previously only caught if NFC+) - ISDA changes. Counterparties should discuss with their brokers.

EU AIFMs exempt under AIFMD managing a close-ended EU AIF

The AIF's and the AIFM's EMIR classification will change from NFC to FC. As a result, the AIF and the AIFM will have to undertake the following in addition to existing requirements: 

• Annual calculation vs clearing threshold;
• Clearing (if exceeding the threshold);
• Margin (regardless of FC+/- status, whereas previously only caught if NFC+) - ISDA changes, speak to brokers.

Non-EU AIFM managing an EU AIF

The AIF's EMIR classification will change from NFC to FC. As a result, the EU AIF will have to undertake the following in addition to existing requirements:

• Annual calculation vs clearing threshold;
• Clearing (if exceeding the threshold);
• Margin (regardless of FC+/- status, whereas previously only caught if NFC+) - ISDA changes. Counterparties should discuss with their brokers.

EU AIFM managing a non-EU AIF

Whilst the AIF’s EMIR classification remains the same (FC), the EU AIFM’s classification will change from NFC to FC. Thus, the AIFM will have to undertake the following in addition to existing requirements: 

• Annual calculation vs clearing threshold;
• Clearing (if exceeding the threshold);
• Margin (regardless of FC+/- status, whereas previously only caught if NFC+) - ISDA changes, speak to brokers.

EU AIFM exempt under AIFMD managing a close-ended non-EU AIF or Non-EU AIFM managing a non-EU AIF

The AIF's EMIR classification will change from Third Country Entity (“TCE”) / Hypothetical NFC to TCE / Hypothetical FC. As a result, the AIF will have new indirect obligations when trading with EU counterparties, namely: 

• Clearing (if both parties exceed the threshold);
• Margin (if trading with an FC+, FC- or an NFC+) - ISDA changes, speak to brokers.

Does the way threshold are calculated change under REFIT?

Yes, the 30-day rolling average calculation to determine whether the NFC is over or under the clearing threshold is reduced to an annual calculation. Calculation should be done as of the day REFIT comes into effect (or as soon as possible thereafter).

What are the changes for NFCs above the clearing thresholds (“NFC+”)?

NFC+s will no longer have to clear all instruments subject to the clearing obligation. Instead they will only have to clear those instruments which are subject to the obligation and whose threshold has been exceeded. Unless, as above, the NFC has voluntarily opted up.

Note also that NFC+s must still exchange margin for ALL asset classes – this is no change to the current position.

For More Information

Should you have any questions related to the above, please contact Joao Ferreira, Bobby Johal or your usual compliance consultant on +44 (0)20 7042 0560.