Taking it Easy: EMIR, Intragroup Transactions and NFC+s
ESMA has announced that it expects competent authorities not to prioritise their supervisory actions towards group entities that benefit from the derogation for intragroup transactions and NFCs+ that are not above the clearing threshold in the interest rate derivatives asset class on or after 21 December 2018 and to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner (see ESMA’s statement here).
ESMA’s announcement reflects the fact that relevant group entities/NFC+s are set to become subject to the EMIR Clearing Requirement on 21 December 2018, but it is anticipated that, they will again fall outside the scope of that requirement shortly afterwards, once certain proposed legislative amendments are adopted.
EMIR requires in scope entities to centrally clear specified classes of over-the-counter (OTC) derivative contracts through central counterparties (CCPs). Certain intragroup transactions concluded with a third country group entity and, broadly speaking, NFC+s entering into transactions involving interest rate derivative classes denominated in the G4 currencies will first fall within the scope of the Clearing Requirement on 21 December 2018.
An NFC that is subject to the EMIR clearing obligation will also be obliged under MiFIR to trade certain classes of derivatives transactions on a regulated market, multilateral trading facility, organised trading facility or third country (ie, non-EU) trading venue that is subject to a European Commission equivalence decision.
On 27 September 2018, ESMA published a proposal to defer the application of the clearing obligation for intragroup transactions concluded with a third country group entity for a further two years until 21 December 2020. This proposal is currently being considered by the European Commission. See our briefing here.
Currently, once an NFC reaches the clearing threshold for any class of derivatives declared subject to the Clearing Requirement, it must clear derivatives in all such classes, even if it does not exceed the clearing thresholds for those other classes. The EMIR Refit proposal, which is currently being negotiated by the EU institutions, would amend EMIR so that NFCs would only be subject to the clearing obligation in the asset class or asset classes where their level of activity is above the clearing threshold. See our related briefings here and here.
In the event that neither of the above proposals is adopted by 21 December 2018, from that date:
- groups will have to start clearing certain intragroup transactions concluded with a third country group entity; and
- certain NFC+s that exceed the clearing threshold, but not in the interest rate derivative asset class will have to start clearing interest rate derivatives subject to the clearing obligation.
This is not the first time that ESMA has issued this type of “Don’t Prioritise” supervisory statement to national competent authorities, including the Central Bank of Ireland (“Central Bank”). For example, ESMA issued a similar statement with regard to the clearing obligation for pension scheme arrangements on 3 July 2018 (which was subsequently updated on 8 August 2018 to clarify that the statement also applied to the MiFIR trading obligation) and with regard to variation margin exchange, on 24 November 2017. In both cases, the Central Bank subsequently issued its own statement confirming its intention to comply with ESMA’s recommendation.
From a legal perspective, neither ESMA nor the Central Bank possesses any formal power to disapply a directly applicable EU legal text or even delay the start of some of its obligations. Therefore, any change to the application of the EU rules must be implemented through EU legislation.
Consequently, the most that either ESMA or the Central Bank can do in instances where a legal requirement takes effect before a legislative amendment to defer the application of the relevant requirement, is to confirm that they do not intend to prioritise their supervisory action in this area, as they have done here.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.