EMIR

EMIR REFIT

EMIR REFIT will continue to have an impact during 2020. From 18 June, FCs entering into OTC derivatives with NFC-s will be required to report the transactions on behalf of the NFC- (mandatory reporting), unless the NFC- elects in advance to make its own report. EU fund managers will also be required to report on behalf of funds from that date.

Existing delegated reporting arrangements between NFC-s and the FCs with which they contract will need amending or terminating going forward (and consideration also needs to be given to reporting of modifications and terminations of existing transactions outstanding at 18 June 2020). Since an NFC- is required under EMIR to provide the FC with certain information to facilitate mandatory reporting by the FC, the FC is likely to want an agreement in place covering the information to be provided. ISDA and other trade associations have jointly published a new Master Regulatory Reporting Agreement to replace the existing ISDA/FIA form of Delegated Reporting Agreement.

During 2020, ESMA is expected to publish various draft technical standards on reporting, trade repositories and procedures for validating initial margin models. In Q1, we anticipate ESMA’s final report and technical advice on the FRANDT requirement for clearing services, spelling out the conditions under which, when providing CCP clearing services to clients under EMIR, commercial terms are to be considered fair, reasonable, non-discriminatory and transparent, to assist the Commission in drafting a delegated act on these matters.

Clarity on the Commission’s position is also expected on the alignment of the trading obligation under MiFIR with the clearing obligation under EMIR, duplication of reporting requirements under MiFIR for non-OTC derivatives, and exemption from clearing for trades resulting from post-trade risk reduction services, with EMIR REFIT requiring the Commission to report on these issues by 18 December 2020.

EMIR 2.2

Wide-ranging legislative changes with respect to the supervision of EU CPPs and recognition of third country CCPs (so-called EMIR 2.2) came into force on 1 January 2020. The new tiering, comparable compliance and fee regimes for the third country CCPs will require delegated legislation and the Commission is expected to consult on draft legislation early in the year. There will, however, be a significant lead-time before the regulatory framework for third country CCPs recognised by ESMA changes in practice.

Changes to the margin rules for uncleared derivatives

Changes to the margin rules are expected pursuant to the final report and draft RTS published by the ESAs in December 2019. The draft RTS would introduce:

• the long-awaited exemption from variation margin for physically-settled FX forwards and swaps otherwise than between credit institutions or investment firms;
• extensions to the temporary exemption from margin for single-stock equity options and index options and the temporary derogation for intragroup transitions involving a third country where no equivalence decision applies, to 4 January 2021 and 21 December 2020, respectively; and
• changes to reflect the extension of initial margin phase-in to reduce the scope of counterparties in Phase 5 to those with an AANA of above EUR 50 billion and introduce a new Phase 6 for counterparties with an AANA of above EUR 8 billion, in line with the BCBS/IOSCO statement of July 2019.

Helpfully, the ESAs have stated that they expect national regulators to show forbearance regarding these provisions pending the entry into force of the RTS.

The ESAs also make very clear in their final report that no further extensions, or changes to the thresholds, for initial margin are anticipated, so it is important that those within Phase 5 and Phase 6 make use of the coming months to prepare for implementation of the requirements.