EMIR – OTC Clearing and Third Country Provisions

Article 4 of EMIR places a clearing obligation in respect of certain OTC derivative transactions.

Generally the obligation does not extend to such transactions between entities that are established in third countries unless (a) they would be subject to the clearing obligation if they were established in the Union and (b) the contract “has a direct, substantial and foreseeable effect within the Union or where such an obligation is necessary or appropriate to prevent the evasion of any provisions of this Regulation”.

ESMA was tasked with developing draft regulatory technical standards (TS) specifying which contracts would fall into the above and has recently published its Final Report containing the draft TS.

The report clarifies that OTC derivative contracts entered into by two counterparties established in one or more non-EU countries, for which a decision on equivalence of the jurisdiction’s regulatory regime has not been adopted, will be subject to EMIR where one of the following conditions are met:

  • One of the two non-EU counterparties to the OTC derivative contract is guaranteed by an EU financial counterparty for a total gross notional amount of at least €8bn, and for an amount of at least 5% of the OTC derivatives exposures of the EU financial guarantor; or
  • The two non-EU counterparties execute their transactions via their EU branches and would qualify as financial counterparty if established in the EU.

Article 3 of the Final Report addresses transactions carried out with the intention of evading the EMIR requirements.

The draft TS were submitted to the European Commission on 15 November; the Commission has three months to decide whether to endorse the final draft which will then have to be submitted to the European Parliament and Council.