European regulators have recently enacted changes to EMIR that will significantly reduce the compliance obligations for European corporates and European subsidiaries of U.S. corporates (together, “European corporate entities”). Specifically, regulators have eliminated the requirement for European corporate entities to report derivative transactions when trading with European banks. Additionally, European corporate entities will no longer be required to report intragroup derivatives transactions. Chatham advocated on behalf of our clients for these changes to the reporting rules, and we welcome them taking effect.
These regulatory changes have arisen through a years-long process whereby European regulators have reviewed the European derivatives regulation, a process known as the EMIR Refit. As discussed further below, the EMIR Refit has made several significant changes to EMIR. While most changes will go into effect on June 17, 2019, the changes to the reporting rules will become effective one year later, or June 17, 2020.
Although there are many other revisions, we have summarized some of the most important amendments that will impact European corporate entities. The portfolio reconciliation requirement remains under EMIR, and Chatham can assist with this process. For more information on changes to EMIR, please contact your Chatham relationship manager.
New Mandatory Delegation of Reporting Obligation:
- 12 months after the rest of EMIR Refit comes into force, the reporting obligation will be greatly reduced for many European corporate entities because European banks now will become solely responsible and legally liable for reporting on behalf of the European corporate entity and for ensuring the correctness of the reported details.
- However, the European corporate entity will still be responsible for alerting the European bank with any relevant details that the bank would not be reasonably expected to possess.
- The EMIR Refit also eliminates the requirement to report intragroup transactions for European corporate entities.
- If a European corporate entity is facing a non-European bank, the corporate will still be responsible and liable for reporting the trade unless a comparability determination has been made (currently there are no comparability determinations in place, though several are expected before the mandatory delegation regime goes into effect).
Changes to the Clearing Calculation:
- European corporate entities are exempt from the requirement to clear interest rate swaps so long as their speculative derivatives trading activity remains below applicable thresholds by asset class (i.e., credit and equity derivatives: EUR 1bn; interest rate, FX and commodities derivatives: EUR 3bn). Hedging transactions are not included in this calculation for corporates.
- The EMIR Refit will now require corporates to run the clearing calculation every 12 months (starting from the date EMIR Refit goes into force), and the calculation will be based on the aggregate month-end position for the previous 12 months (versus the existing pre-EMIR Refit calculation, which was based on the rolling average position over 30 working days).
- Impact: European corporate entities will now need to be able to show that they are under the clearing thresholds. Once EMIR Refit goes into effect, corporates will become subject to the clearing obligation if they either (i) do not calculate their average position to determine whether they’re over the clearing threshold, or (ii) do the calculation and determine that they are over the clearing threshold.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit https://www.chathamfinancial.com/legal/notices/.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved. 19-0161