On 4 May 2017 and 13 June 2017, the European Commission published two proposals to amend the European Market Infrastructure Regulation (EMIR). After almost five years since EMIR entered into force, these proposals aim to lower the costs of compliance for market participants without compromising the objective of reducing systemic risks in the OTC derivatives market. The May 2017 proposal aims to reduce the regulatory burdens for corporates. The June 2017 proposal introduces a more pan-European approach to supervision of EU CCPs and ensures further supervisory convergence.
The most important proposals of the May 2017 proposal are as follows:
- Pension funds will again benefit from a three-year exemption from the clearing obligation.
- Non-Financial Counterparties (NFCs) that breach a clearing threshold must only clear those asset classes for which they have breached the threshold. This is different to the current regime, which provides that NFCs that breach a clearing threshold of a certain asset class will be subject to the clearing obligation for all derivatives.
- Clearing thresholds will be introduced for Financial Counterparties (FCs); clearing will not be mandatory for every FC.
- There will be several changes with respect to the reporting obligation:
- Derivatives concluded on exchanges will be reported only by CCPs on behalf of both counterparties.
- Transactions between an FC and a small NFC will have to be reported by the FC on behalf of both parties.
- Intragroup transactions will no longer have to be reported if one of the counterparties is an NFC.
- The manager of an alternative investment fund (AIF) or, in case of a UCITS, its management company, is responsible for reporting instead of the fund itself.
- The obligation to report historic data (backloading) is abolished.
- There will be two new major changes of the definition of an FC:
- Special purpose entities, for instance those used in securitization structures, will fall under this definition; and
- AIFs and UCITS, even if they are not authorized in accordance with the applicable Directives, will fall under this definition. This is different to the current wording of EMIR, which only refers to such entities to the extent they are authorized.
Most changes are indeed expected to result in a reduction of the regulatory burdens for corporates. However, the broader scope of the definition of FCs will mean that more parties will qualify as an FC. The European Commission did not explain why these parties must qualify as such. This will not only lead to additional burdens for investment funds, but will also affect the securitization market. In addition, based on the current proposed wording, EMIR will have a more extra-territorial effect since all special purpose entities, AIFs and UCITS that qualify as such will fall within the scope of this definition, regardless of where they are situated. It is of course possible that the final text of the amendment of EMIR will include a more nuanced definition of an FC in this respect.