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The extraterritorial effect of the EU regulation of OTC derivatives
June 2014
1. On10April2014someofthelegislationthatprovidesfortheextraterritorialeffectoftheEuropeanMarketsInfrastructure
Regulation(“EMIR”)cameintoforce.Theremaininglegislationwillcomeintoforceon10October2014.Thislegalupdate
considersthislegislationandthecounterpartiestowhichitapplies.Italsoconsiderswhethersomecounterpartiesmight
beabletoavoidtheextraterritorialeffectasaresultoftheEuropeanCommissionmakinganequivalencedecisioninrespect
ofthirdcountryjurisdictions.ItconsiderstheEuropeanSecuritiesandMarketAuthority(“ESMA”)advicetodateonthe
equivalenceoftheregulatoryregimesintheUS,Japan,Australia,Canada,HongKong,India,Singapore,SouthKoreaand
SwitzerlandandnotesthatevenintheUSESMAdidnotfindfullequivalence.Finallythislegalupdatealsoconsidersthe
requirementsthatthirdcountrycentralcounterparties(“CCPs”)andtraderepositoriesmustmeetinorderrespectivelyto
provideclearingservicestotheirEUclearingmembersandtoprovidereportingservicestoEUcounterpartieswhichenable
thosecounterpartiestosatisfytheirclearingreportingrequirementsunderEMIR.
2. TherearerealrisksthattheextraterritorialeffectoftheEUlegislation,particularlywhencombinedwiththeextraterritorial
effectsofthirdcountrylegislation,willdisruptcross-bordertrades.Thereisanurgentneedforregulatorstoagree,in
particular,onhowcounterpartiesestablishedindifferentjurisdictionsareexpectedtocomplywithduplicativeclearing
obligations.Thislegalupdate,therefore,alsoconsiderstheconsequencesoftheapplicationofEMIRtocross-border
transactions.
3. Wehavesoughttoaddressallpointsthatarerelevantasregardsnon-EUcounterparties.Theindexbelowwillassistthose
readerswhowishtofocusonlyonspecificareas:
Index
Theextraterritorialeffect ofEMIRinsummary para.4
ScopeofEMIR: para.6
HowdoesEMIRcategorise non-EUcounterparties? para.10
GeneralapplicationofEMIRto differentcounterparties para.17
ContractsbetweenanEUcounterparty andanon-EUcounterparty para.19
Contractsbetweennon-EUcounterparties para.25
Whatisanequivalencedecision? para.31
ThirdcountryCCPsandtraderepositories para.33
ESMA’sadvicetotheCommissionon thirdcountryequivalence para.36
• Australia para. 51
• Canada para.57
• HongKong para.58
• India para.59
• Japan para.48
• Singapore para.60
• SouthKorea para.62
• Switzerland para.63
• US para.43
ODRG Report para.65
Next steps para.68
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The extraterritorial effect of EMIR
4. EMIRwasconsideredinourlegalupdateentitled“AQuickStartGuidetoEMIR”1.Thislegalupdatefocusesonthe
extraterritorialreachofEMIR.EMIRexplicitlystatesthatithasextraterritorialeffectintwosituations:
(a) Theclearingobligationappliestocontractsenteredintobya‘financialcounterparty’ora‘non-financialcounterparty
+’intheEUandathirdcountryentityprovidedthatthethirdcountryentitywouldbesubjecttotheclearingobligation
ifitwereestablishedintheEU2.Onlynon-EUentitiesthatwouldbecategorisedasfinancialcounterpartiesor
qualifyingnon-financialcounterpartiesweretheyestablishedintheEUwouldbesubjecttotheclearingobligationin
thesecircumstances.
(b) Boththeclearingobligationandtheriskmitigationrequirementsapplytocontractsbetweenthirdcountry
entitiesthatwouldbesubjecttotheclearingobligationiftheywereestablishedintheEU,providedthatthecontract
hasa“direct,substantialandforeseeableeffectwithintheEU”orwheresuchanobligationisnecessaryor
appropriatetopreventtheevasionofanyprovisionsofEMIR3.Againthisprovisiononlycapturesnon-EUentitiesthat
wouldbecategorisedasfinancialcounterpartiesorqualifyingnon-financialcounterpartiesunderEMIR.
Inaddition,marketdevelopmentsarecreatinganindirectextraterritorialeffectasEUcounterpartiesalreadyboundto
complywiththereportingobligationandtheEMIRriskmitigationrequirementsthatapplytounclearedtradesare
encouragingtheirnon-EUcounterpartiestocomplyalsosoastofacilitatetheirowncompliance.
5. Thesedirectandindirectextraterritorialeffectsandtheirconsequencesareconsideredindetailatparagraphs 19- 30below.
ThepossibilityofcomplyingwiththirdcountryregimesthathavebeendeclaredequivalenttotheEUregimeasopposed
tocomplyingwithEMIRisconsideredatparagraphs 31-65below.Beforeconsideringtheextraterritorialeffectsandthe
conceptofequivalencefurther,however,itisnecessarytosummarisethegeneralscopeandapplicationofEMIRsoastoput
intocontextthetermsandconceptsusedintheEUlegislation.
Scope of EMIR:
6. EMIRappliestoanylegalornaturalpersonestablishedintheEU4thatisalegalcounterpartytoaderivativecontract5,
includinginterestrate,foreignexchange,equity,creditandcommodityderivatives.EMIRidentifiestwomaincategoriesof
counterpartytoaderivativescontract:
(a) ‘financialcounterparties’(“FC”)6,whichincludesEU authorisedfinancialinstitutionssuchasbanks,insurers,MiFID
investmentfirms,UCITSfundsand,whereappropriate,theirmanagementcompanies,occupationalpensionschemes
andalternativeinvestmentfundsmanagedbyamanagerauthorisedorregisteredunderAIFMD;and
(b) ‘non-financialcounterparties’(“NFC”),whichmeansan undertaking establishedintheEUwhichisnotclassifiedasa
FC,includingentitiesnotinvolvedinfinancialservices7.
1 SeeourlegalupdateofJanuary2013entitled“AQuickStartGuidetoEMIR:Whatyouneedtodoandwhen.”2 SeeArticle4(1)(a)(iv)EMIR.3 SeeArticles4(1)(a)(v)and11(12)EMIR. 4 WhilethisnotepredominantlyreferencestheapplicationofEMIRintheEU,EMIRwilleventuallyapplyacrosstheentireEuropeanEconomicArea
(“EEA”)aswell. TheEEAconsistsofthe28MemberStatesoftheEUplusIceland,LiechtensteinandNorway.AllrelevantEUlegislationinthefieldoftheSingleMarketis integratedintotheEEAAgreementsothat itappliesinIceland,LiechtensteinandNorwayaswellastheEU. EMIRiscurrentlyunderconsiderationforincorporationintotheEEAAgreementbut,untilsuchincorporationhastakenplace,EMIRwillnotapplyinIceland,LiechtensteinandNorway.
5 Definedasafinancial instrumentsetoutinpoints(4)to(10)ofSectionCofAnnexItoDirective2004/39(MiFID).6 SeeArticle2(8)EMIR.7 SeeArticle2(9)EMIR.
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7. TheCommissionhasmadeclearinitsFAQonEMIR8thattheconceptof‘undertaking’inthedefinitionofaNFCcoversany
entityengagedinaneconomicactivity,regardlessofthelegalstatusoftheentityorthewayinwhichitisfinanced.Caselaw
oftheEuropeanCourtofJusticeisconsistentwiththisapproachandhasmadeclearthatanyactivityconsistinginoffering
goodsandservicesonamarketisaneconomicactivity.Accordingly,individualsandnon-profitentitiescarryingoutan
economicactivityareconsideredtobeundertakingsandthuscapableofbeingNFCs,providedtheyoffergoodsandservices
inthemarket.Theconceptdoesnotextendtoincludepublicauthorities.
8. ANFCwhosepositionsinOTCderivativesexceedsaclearingthresholdisknownasa‘qualifyingnon-financialcounterparty’
(“NFC+”).Ingeneral,NFCs+aretreatedinthesamewayasFCs.ItistheresponsibilityoftheNFCtodeterminewhetheror
notitspositionsexceedtheclearingthresholdandtonotifyESMAandtherelevantnationalregulatorifthisisthecase.
9. Inessence,forthepurposeofdeterminingwhetheraNFCexceedsthethresholdssoastobecomeaNFC+,hedging
transactionsareexcludedfromthecalculationofpositionsinOTCderivativecontracts9.Thecalculationofpositionsmust
includeallOTCderivativecontractsenteredintobytheNFCitselforotherNFCswithinitsgroupwhicharenotobjectively
measurableasreducingrisksdirectlyrelatedtothecommercialactivityortreasuryfinancingactivityofthecounterpartyor
of its group10.Thethresholdsdifferaccordingtothetypeofderivativecontract11andaredeterminedbytakingintoaccount
thesystemicrelevanceofthesumofthenetpositionsandexposurespercounterpartyandperclassofOTCderivative.The
thresholds,andthecriteriaforestablishingwhichcontractscanbedeemedtobeforhedgingpurposes,aresetoutinthe
subordinatelegislationadoptedbytheCommissionon19December201212.
How does EMIR categorise non-EU counterparties?
10. Giventhecross-referencetoregulatoryauthorisation,itisstraight-forwardtoestablishwhetheranEUcounterpartyisa
FC.Itisalsorelativelyeasytoestablishwhetheranon-EUcounterpartyisaFCasESMA’sQ&A13directsthatconsideration
shouldbegiventothenatureoftheactivitiesthenon-EUentityundertakes.Itislesseasytoestablishwhetherany
counterpartyisaNFC+andtheappropriatecategorisationofnon-EUNFCs.
11. Itisfirstworthconsideringwhenanentityisanon-EUentity.EntitieswithoutanyphysicalpresenceintheEUareclearlynon-
EUentitiesbutfurtherconsiderationneedstobegiventonon-EUentitiesthathaveEUsubsidiariesandbranches.InitsFAQ
theCommissionsummarisesthatforthepurposeoftheapplicationofEMIR,aNFCreferstoanundertakingestablishedin
theEUbutpointsoutthat‘undertaking’and‘established’arenotfurtherdefined.
12. Wehaveexplainedtheconceptof‘undertaking’atparagraph7abovebuttheconceptofestablishmentiscrucialtothe
treatmentofbranchesandsubsidiariesintheEU.ThisconceptisanEUconstructthatisnotsetoutinanyoneplacein
particularbutisthesubjectoflegaldefinitionbasedonEUprimarylegislationdealingwiththerightofestablishment
(Articles49–55oftheTreatyontheFunctioningoftheEU)andsubsequentcaselaw.Theconceptdoesnotinclude
branches:establishmentreferstotheestablishmentofsoloentitieswithindividuallegalidentitywhichareincorporated
(oraredomiciledorhavetheirregisteredoffice)inaMemberStateintheEU.Asaresult,subsidiariesareincludedwithin
theconceptbutbranchesarenotcapableofbeingestablishedintheirownright.Thusasubsidiaryofanon-EUentitycanbe
establishedintheEUbutabranchcannot.Tosummarise,ifbankAisabankheadquarteredandregulatedintheUSandhasa
branch(“B”)inDublinandasubsidiary(“S”)inLondon,AandBarenon-EUentitiesbutSisanEUentity.
8 “EMIR:FrequentlyAskedQuestions” Updated:18December20139 SeeArticle10(3)EMIR.10SeeArticle10(1)–(3)EMIR.11 Adistinctionisdrawnbetweencreditandequityderivativesontheonehandandinterestrate,foreignexchange,commodityderivativesandall
other derivatives on the other.12 SeeArticles10and11oftheCommissionDelegatedRegulationNo.149/2013/EUwithregardtoregulatorytechnicalstandardsonindirectclearing
arrangements,theclearingobligation,thepublicregister,accesstoatradingvenue,non-financialcounterparties,riskmitigationtechniquesforOTCderivativecontractsnotclearedbyaCCP.
13 QuestionsandAnswers: ImplementationoftheRegulation(EU)No.648/2012onOTCderivatives,centralcounterpartiesandtraderepositories(EMIR).
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13. Wehavealreadycommentedthatitisrelativelystraight-forwardtoassesswhetheranon-EUentitywouldberegardedasan
FCifitwereestablishedintheEU.Intheexamplegivenintheaboveparagraph,asAisregulatedasabankintheUS,itwould
beanon-EUFC.Itismoredifficultinthecaseofnon-EUNFCsandNFCs+.ESMA’sQ&Aprovidesthat ifthenon-EUentity
ispartofagroupwhichalsoincludesNFCsestablishedintheEU,itsstatusaseitheranNFC+orNFCshouldbeassumedto
bethesameasthatoftheEUNFCs.Ifthenon-EUentityisnotpartofsuchagroup,butbenefitsfromasimilarbutlimited
exemptioninitsownjurisdiction,itcanbeassumedthattheentitywouldbeNFCwereitestablishedintheEU.
14. Ifneitheroftheaboveapplies,however,thenthereisonlyonewaytodetermineconclusivelywhetheranon-EUentityisa
NFCorNFC+:itwouldhavetocalculateitsgroup-levelpositionagainsttheEMIRclearingthreshold.
15. EUcounterpartiesshouldobtainrepresentationsfromtheirnon-EUcounterpartiesdetailingtheirstatus14.TheEU
counterpartyisnotexpectedtoconductverificationsoftherepresentationsandmayrelyonsuchrepresentationsunless
theyareinpossessionofinformationwhichclearlydemonstratesthatthoserepresentationsareincorrect.Ifitisnot
possibletoobtainsuchrepresentationsandassesswhatthecounterparty’sstatuswouldbeunderEMIR,firmsshould
assumethattheircounterpartystatusisNFC+andapplytheEMIRrequirementsaccordingly.
16. Seemingly,whennon-EUcounterpartiesarethemselvesdirectlyboundbyEMIR,theonusisonthemtoestablishtheir
appropriatecategorisationunderEMIR.
Application of EMIR to different counterparties
17. TheprovisionsinEMIRapplydifferentlytoNFCs+thantoNFCs.Ingeneral,NFCs+aretreatedinthesamewayasFCs.The
provisionsapplicabletothedifferenttypesofcounterpartyareasfollows:
FC Clearingobligation
Allriskmitigationtechniques:
• timely confirmation;
• portfolio reconciliation and compression;
• dispute resolution;
• marking-to-market or marking-to-model;
• the exchange of collateral to cover the exposures arising from OTC
derivatives not cleared by a CCP;
• increased capital requirements; and
• the reporting of unconfirmed trades.
Reportingobligation
NFC+ Clearingobligation
RiskmitigationtechniquesasaboveforFC(saveinrelationtothe
increasedcapitalrequirementsandthereportingofunconfirmedtrades)
Reportingobligation
NFC Certainriskmitigationtechniques(timelyconfirmation,portfolio
reconciliationandcompression,disputeresolution)
Reportingobligation
18. Non-EUcounterpartiesarenot,however,treatedinthesamewayastheirEUcounterparties.
14 TheISDA2013EMIRNFCRepresentationProtocolenablespartiestoamendthetermsoftheirISDAMasterAgreementstoreflectcertainknowyourcounterpartyrequirements,andtheconsequencesoftransactingonthebasisofanincorrectclassification, imposedbyEMIR.
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Contracts between an EU counterparty and a non-EU counterparty
19. Thisextraterritorialeffect,summarisedinparagraph4(a)above,onlyapplieswhenanEUFCorNFC+istransactingwitha
non-EUFCorNFC+(astheEMIRclearingobligationdoesnotapplywhenaNFCispartytoatransaction).Theapplicationwill
notcomeintoeffectuntiltheclearingobligationisoperativeandthatisunlikelytobeuntil201515.ESMAstillneedstodevelop
subordinatelegislationknownasRegulatoryTechnicalStandards(“RTS”)todeterminetheclassesofOTCderivativesthat
willbesubjecttotheclearingobligation.AfirstnotificationthatanEUCCP(NasdaqOMX)hadbeenauthorisedtoclear
certainclassesofOTCinterestrateswapsandequityderivativeswasmadetoESMAon18March2014andthistriggeredthe
clearingobligationproceduredescribedinArticle5(2)EMIRunderwhichESMAconsiderswhethertheclassofderivatives
currentlyclearedbyNasdaqOMXshouldbesubjecttotheclearingobligation.Ifitconsidersthattheassetclassescleared
byNasdaqOMXshouldbesubjecttotheclearingobligation,ESMAmustdraftRTSandsubmitthemtotheCommission
within6monthsoftheauthorisationoftheCCP.ThusESMAhasuntil18September2014tosubmitthefirstsetofdraftRTS.
DifferentdeadlineswillapplyforeachclassofOTCderivativesclearedbyauthorisedCCPs,thedeadlinebeingtriggeredby
thedateonwhichtheCCPwasauthorised.
20. Thefirstclearingobligationswereoriginallyexpectedtotakeeffectinsummer2014,subjecttophase-inperiods,butthis
timetableisnowclearlyimpossible.FollowingthesubmissionbyESMAofthedraftRTS,thedraftRTSmustbeendorsedby
theEuropeanCommission(whichhasbetweenoneand3monthstodoso)andnotbesubjecttoobjectionbytheEuropean
ParliamentandtheCouncil(whichalsohavebetweenoneand3monthstoconsidertheirposition)beforethelegislationcan
beadopted.TheactualdateofapplicationofaclearingobligationwilldependonthedateofentryintoforceoftheRTSand
theexpectedphase-inperiodpertypeofcounterparty,tobedefinedintheRTS.Inthesecircumstances,thefirstclearing
obligationisunlikelytotakeeffectbeforeearly2015.
21. Asaresultoftheneedtodeterminetheclearingobligationasdescribedabove,EMIRdoesnotcurrentlyexpresslyapply
toanon-EUcounterpartytransacting(withinthescopeofEMIR)withanEUcounterpartybutthisdoesnotmeanthat
non-EUcounterpartiesinsuchtransactionsarenotaffectedbyEMIR.Article11EMIRprescribestheriskmitigation
requirementsthatapplytounclearedtradesandalreadyapplieswheneveratleastonecounterpartyisestablishedwithin
theEU.Accordingly,whenanEUcounterpartyistransactingwithanon-EUentity,theEUcounterpartymust(bynegotiating
appropriateobligationsinthemasteragreement)ensurethattheEMIRrequirementsforportfolioreconciliation,dispute
resolution,timelyconfirmationandportfoliocompressionaremetfortherelevantportfolioand/ortransactionseven
thoughthenon-EUcounterpartyisnotitselfsubjecttoEMIR.ItisforthesereasonsthatEUcounterpartieshavebeen
increasinglyencouragingtheirnon-EUcounterpartiestocomplyvoluntarilywiththerequirementsofEMIRandtosignthe
relevantISDAprotocols16.Althoughthereisnolegalobligationonthenon-EUcounterpartytocomply,marketpressuresmay
give them little option.
22. TheEMIRreportingobligationdoesnot(andwillnotapplytonon-EUcounterparties)butEUcounterpartiestransacting
withnon-EUcounterpartiesarestillrequestinginformationfromtheircounterpartiesinordertocomplywiththereporting
obligationthemselves.Article9(5)EMIRprovidesthatatleasttheidentitiesofthepartiestothederivativecontractsshould
bereportedtotraderepositories.ItisthisinformationthatEUcounterpartiesmayseekfromtheirnon-EUcounterparties
butconfidentialityanddataprotectionlegislationinthirdcountriesmaypreventsomenon-EUcounterpartiesprovidingthis
information.ThiscausesaproblemfortheEUcounterpartyas,asESMApointsoutinitsQ&A,theArticle9(5)requirement
15 Itoughttobenotedthattheconceptof ‘front-loading’createsarequirementtoclearOTCderivativecontractsenteredintoafteraCCPhasbeenauthorisedunderEMIRandbeforethedateofapplicationoftheclearingobligationiftheremainingmaturityofthosecontractsexceedsa limitdefinedbyESMAintheRTS. ESMAwrotetotheCommissionon8May2014requestingthattheextentofthefront-loadingperiodbelimitedtotheperiodbetweentheentryintoforceoftheRTSandthedateofapplicationoftheclearingobligation. Atpresent,however,thefront-loadingwindowisopenduetothenotificationmadetoESMAinrespectofNasdaqOMXon18March. Theextentofthefront-loadingperiodmay,therefore, impactthedateonwhichtheclearingobligationcomesintoforce.
16 TheISDA2013EMIRPortfolioReconciliation,DisputeResolutionandDisclosureProtocolenablespartiestoamendthetermsoftheirProtocolCoveredAgreementstoreflecttheportfolioreconciliationanddisputeresolutionrequirementsimposedbyEMIRaswellastoincludeadisclosurewaivertohelpensurepartiescanmeetthevariousreportingandrecordkeepingrequirementsunderEMIRwithoutbreachingconfidentialityrestrictions.
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cannotbewaived.Accordingly,anEUcounterpartydealingwithcounterpartiesthatcannotbeidentifiedbecauseof
legal,regulatoryorcontractualimpediments,wouldnotbedeemedcompliantwithArticle9(5)ofEMIR.Thereisnolegal
obligationonthenon-EUcounterpartytosupplytherequestedinformation,butEUcounterpartiesmaychoosenottodo
businesswithnon-EUcounterpartieswhowillcausethemtobenon-compliantwithEMIR.
23. IrrespectiveofthefactthattheEMIRriskmitigationrequirementsdonotapplytocontractsbetweenEUandnon-EU
counterparties,thesedevelopmentsarecausingcounterpartiesdealingincross-bordertransactionstofaceconflicting
andduplicativerequirements.Whentheclearingobligationcomesintoforce,itistobehopedthattherewillbeclarityasto
wherecross-bordertransactionsshouldbeclearedasitwillnotbepossibletohaveduplicativerequirementsthatmandate
thatthetradebeclearedinmorethanonelocation.Withoutthisclarity,ifanEUandaUSentity,forexample,enterintoa
tradethatissubjecttoaclearingobligationunderEMIRandTitleVIIofDodd-Frankrespectivelybothpartieswillnotbeable
tocomplywiththeirrespectiveobligations.Thiscoulddiscouragecross-bordertrades.
24. Inthefuture,ifthenon-EUentityisestablishedinajurisdictionwhichtheCommissionhasfoundhasanequivalentregimeto
thatinEMIR,thecounterpartiescouldcomplywiththeequivalentrulesinthethirdcountry.Theconceptof‘equivalence’is
consideredatparagraphs 31 to 65below.
Contracts between non-EU counterparties
25. Asdescribedinparagraph4(b)above,therearesomecircumstancesunderwhichEMIRobligationswillapplywhenboth
counterpartiesareoutsidetheEUandestablishedinthirdcountriesthathavenotbeendeclaredequivalenttoEMIR.Boththe
clearingobligationandtheriskmitigationrequirementsapplytocontractsbetweennon-EUentitiesthatwouldbesubjectto
theclearingobligationiftheywereestablishedintheEU,providedthatthecontracthasa“direct, substantial and foreseeable
effectwithinthe”EU“orwheresuchanobligationisnecessaryorappropriatetopreventtheevasionofanyprovisionsof”EMIR.
ThisprovisionmirrorssimilarlanguageinArticle722(d)oftheUSDodd-FrankWallStreetReformandConsumerProtection
Act2010leavinggloballyactivefinancialmarketparticipantsfacingthespectreofduplicativeandevenconflictingregulation.To
someextentthisduplicationwasinevitableasG20nationsmadeajointdecisioninSeptember2009toregulateOTCderivative
transactions.Accordingly,internationalregulatorshavebeenseekingtoaddresstheproblem.
26. OnFriday21March2014,theOfficialJournaloftheEUpublished the RTSspecifyingthecontractsthatareconsideredto
have“direct,substantialandforeseeable”effectwithintheEUandthecaseswhereitisnecessarytopreventtheevasion
ofrulesandobligationsforthepurposesofEMIR.TheseRTSdevelopArticle4(4)and11(14)(e)EMIRthatspecifythe
circumstancesbywhichclearingandriskmitigationtechniqueswouldapplytoOTCderivativescontractsenteredinto
betweentwocounterpartiesestablishedinthirdcountries(providedthattheywouldbesubjecttotheEMIRclearing
requirementiftheywereestablishedintheEU).TheclearingobligationinEMIRdoesnotapplywhenaNFCispartytoa
transaction.ThustheseRTSonlyapplywhenanycombinationofnon-EUFCsorNFCs+aretransacting.TheRTSenteredinto
forceon10April2014butArticle2(Contractswithadirect,substantialandforeseeableeffectwithintheUnion)doesnot
applyuntil10October2014.
27. Thelegislationstatesthatacontracthasa“direct,substantialandforeseeableeffectwithinthe”EUwheneithersub-
paragraph(a)or(b)belowapplies:
(a) AtleastoneofthecounterpartiesbenefitsfromalegallyenforceableguaranteeprovidedbyaFCestablishedintheEU
andcoveringallorpartofitsliabilityresultingfromtheOTCderivativecontract,totheextentthattheguarantee
meetsthefollowingconditions:
(i) Whereitisaguaranteewhichcoversallsuchliability,itcoversOTCderivativestransactionsenteredintoby
thethirdcountrycounterpartyforanaggregatednotionalamountthatisatleast8billioneuroequivalentor
whereitisaguaranteewhichcoversonlyapercentageofsuchliability,itcoversOTCderivatives
transactionsenteredintobythethirdcountrycounterpartyforanaggregatednotionalamountofat
least8billioneuroequivalentdividedbythepercentageoftheliabilitycovered;and
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(ii) Itisatleastequalto5%ofthesumofcurrentexposuresinOTCderivativecontractsoftheFCestablishedin
theUnionissuingtheguarantee.17
(b) ThetwocounterpartiesenterintotheOTCderivativecontractviatheirbranchesintheEU18.
28. Additionally,thelegislationprovidesthatitisnecessaryorappropriatetopreventtheevasionofEMIRwhereOTCderivative
contractswouldhavebeensubjecttotheclearingobligationortheriskmitigationtechniquesbuthavebeenconcludedin
awaywhichiscontrivedtoevadeapplicationoftheclearingobligationoroftheriskmitigationtechniques.Thelegislation
providesthatanOTCderivativecontractshallbedeemedtohavebeensocontrivedifthewayinwhichtheOTCderivative
contracthasbeenconcludedisconsidered,viewedasawholeandhavingregardtoallthecircumstances,tohaveasits
primarypurposetheavoidanceoftheapplicationofEMIR19.
29. ThelegislationalsomakesclearthatitshallbeconsideredthatanOTCderivativecontracthasbeencontrivedtocircumvent
EMIRwhenitispartofanarrangementwhichhasbeenputintoplacefortheessentialpurposeofavoidanceofEMIR
includingwhenitispartofanartificialarrangement.Thelegislationstatesanarrangementisartificialwhereitlacks
commercialsubstanceorrelevanteconomicjustificationinitself.20
30. As pointed out in paragraph25above,theRTSonlyapplyifneithercounterpartytoaOTCderivativecontractisestablished
inathirdcountrywhoselegal,supervisoryandenforcementregimehasbeendeclaredequivalenttoEMIR.Thisisbecause
whenonecounterpartyisestablishedinanequivalentthirdcountry,Article13(3)EMIRprovidesthatthereshallbedeemed
compliancewiththeclearingobligation,thereportingobligation,therulesonNFCs+andtheriskmitigationrequirements
forunclearedtradessetoutinEMIR.ThefollowingdiagramsdevelopedbyESMAmakethispointclear:
DIAGRAM A
17 SeeArticle2(1)(a)and(b)RTS.18 SeeArticle2(2)RTS.19 SeeArticle3(1)RTS.20SeeArticle3(2)RTS.
915023617.1 10
counterparty is established in an equivalent third country, Article 13(3) EMIR provides that there shall be deemed equivalence with the clearing obligation, the reporting obligation, the rules on NFCs+ and the risk mitigation requirements for uncleared trades set out in EMIR. The following diagrams developed by ESMA make this point clear: Diagram A
Diagram B
Both counterparties are established in a third
country A
Third country A is declared
equivalent for the purpose of EMIR
Counterparties are deemed to comply with the clearing obligation/
reporting obligation/ rules on NFCs+/ risk mitigation requirements in EMIR
Counterparty A established in third country X
Country X declared equivalent
Counterparty A is deemed to comply with the clearing obligation/
reporting obligation/ rules on NFCs+/ risk mitigation requirements in EMIR
Counterparty B established in third country Y
Country Y not declared equivalent
Counterparty B is deemed to comply with the clearing obligation/ reporting
obligation/ rules on NFCs+/ risk mitigation requirements in EMIR for the
purpose of this transaction only
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DIAGRAM B
What is an equivalence decision?
31. ThepurposeoftheRTSistosetoutwhenEMIRhasextraterritorialeffectbutEMIRitselfalreadyforesawthepossibility
ofduplicativeandconflictingrequirements.It,asreferencedabove,containsamechanisminArticle13whichisintended
toavoidduplicativeorconflictingrulesonclearing,reportingandriskmitigationrequirements.Themechanisminvolves
theEuropeanCommissionmakingan“equivalencedecision”inrespectofathirdcountryjurisdiction.Thismeansthatthe
Commissionissatisfiedthat:
(a) therulesonclearing,reporting,theclearingthresholdsandriskmitigationinthatthirdcountryareequivalentto
thoseinEMIR;
(b) thethirdcountryhasequivalentprovisionsonprofessionalsecrecy;and
(c) therulesareeffectivelyappliedandenforcedsoastoensureeffectivesupervisionandenforcement.
32. Once(orif)theCommissionhasdecidedthatathirdcountryjurisdictionisequivalent,counterpartiesenteringinto
transactionswithinthescopeofEMIRshallbedeemedtohavecompliedwiththeprovisionsofEMIRifatleastoneof
thecounterpartiesisestablishedinthatthirdcountry21.ThefollowingtablessetoutthescopeofapplicationofEMIR
tothirdcountryentitiespursuanttotheRTSandArticle13ofEMIR.Inadditiontothepointsraisedinthetables(andas
explained at paragraphs 28 and29above),EMIRwillalsoapplytoOTCderivativecontractsthatareenteredintobyspecific
counterpartieswiththeprimarypurposeofavoidingtheapplicationoftheclearingobligationoroftheriskmitigation
requirementssetoutinEMIR.
21 SeeArticle13(3)EMIRandrecital2RTS.
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counterparty is established in an equivalent third country, Article 13(3) EMIR provides that there shall be deemed equivalence with the clearing obligation, the reporting obligation, the rules on NFCs+ and the risk mitigation requirements for uncleared trades set out in EMIR. The following diagrams developed by ESMA make this point clear: Diagram A
Diagram B
Both counterparties are established in a third
country A
Third country A is declared
equivalent for the purpose of EMIR
Counterparties are deemed to comply with the clearing obligation/
reporting obligation/ rules on NFCs+/ risk mitigation requirements in EMIR
Counterparty A established in third country X
Country X declared equivalent
Counterparty A is deemed to comply with the clearing obligation/
reporting obligation/ rules on NFCs+/ risk mitigation requirements in EMIR
Counterparty B established in third country Y
Country Y not declared equivalent
Counterparty B is deemed to comply with the clearing obligation/ reporting
obligation/ rules on NFCs+/ risk mitigation requirements in EMIR for the
purpose of this transaction only
915023617.1 10
counterparty is established in an equivalent third country, Article 13(3) EMIR provides that there shall be deemed equivalence with the clearing obligation, the reporting obligation, the rules on NFCs+ and the risk mitigation requirements for uncleared trades set out in EMIR. The following diagrams developed by ESMA make this point clear: Diagram A
Diagram B
Both counterparties are established in a third
country A
Third country A is declared
equivalent for the purpose of EMIR
Counterparties are deemed to comply with the clearing obligation/
reporting obligation/ rules on NFCs+/ risk mitigation requirements in EMIR
Counterparty A established in third country X
Country X declared equivalent
Counterparty A is deemed to comply with the clearing obligation/
reporting obligation/ rules on NFCs+/ risk mitigation requirements in EMIR
Counterparty B established in third country Y
Country Y not declared equivalent
Counterparty B is deemed to comply with the clearing obligation/ reporting
obligation/ rules on NFCs+/ risk mitigation requirements in EMIR for the
purpose of this transaction only
mayer brown 9
EU Firm (including branches
established in Third Countries)
Equivalent Third Country
EU Branch Third Country Firm
EU Firm (including branches
established in Third Countries)
EMIRapplies. EMIRappliestoEUfirm(and
clearingobligationmayapply
tobothparties)butcanbe
disappliedifpartiescomplywith
thirdcountryregimeratherthan
EMIR.
EMIRappliestoEUfirm(and
clearingobligationmayapply
tobothparties)butcanbe
disappliedifpartiescomplywith
thirdcountryregimeratherthan
EMIR.
Non Equivalent
Third Country
EUBranch EMIRappliestoEUfirm.*
Clearingobligationmayapplytoboth
counterpartiesdependingontheir
EMIRcategorisation.
DeemedcompliancewithEMIR:
EMIRdoesnotapply.
DeemedcompliancewithEMIR:
EMIRdoesnotapply.
Third
Country
Firm
EMIRappliestoEUfirm.*
Clearingobligationmayapplytoboth
counterpartiesdependingontheir
EMIRcategorisation.
DeemedcompliancewithEMIR:
EMIRdoesnotapply.
DeemedcompliancewithEMIR:
EMIRdoesnotapply.
EU Firm (including branches
established in Third Countries)
Non-Equivalent Third Country
EU Branch Third Country Firm
EU Firm (including branches
established in Third Countries)
EMIRapplies. EMIRappliestoEUfirm.*
Clearingobligationmayapplyto
bothcounterpartiesdepending
ontheirEMIRcategorisation.
EMIRappliestoEUfirm.*
Clearingobligationmayapplyto
bothcounterpartiesdepending
ontheirEMIRcategorisation.
Non Equivalent
Third Country
EUBranch EMIRappliestoEUfirm.*
Clearingobligationmayapplytoboth
counterpartiesdependingontheir
EMIRcategorisation.
EMIRapplies–clearing
obligationandriskmitigation
requirementsapply.
EMIRappliesifatleastone
counterpartyhasasubstantial
guaranteefromEUFC-clearing
obligationandriskmitigation
requirementswouldapply.
Third
Country
Firm
EMIRappliestoEUfirm.*
Clearingobligationmayapplytoboth
counterpartiesdependingontheir
EMIRcategorisation.
EMIRappliesifatleastone
counterpartyhasasubstantial
guaranteefromEUFC-clearing
obligationandriskmitigation
requirementswouldapply.
EMIRappliesifatleastone
counterpartyhasasubstantial
guaranteefromEUFC-clearing
obligationandriskmitigation
requirementswouldapply.
*MaybepressurefromEUcounterpartyonnon-EUcounterpartytocomplywithEMIRsoastofacilitateitsowncompliance.
10 mayer brown
Third country CCPs and trade repositories
33. AnequivalencedecisionisalsonecessarybeforethirdcountryCCPscanprovideclearingservicestoclearingmembers
whichareestablishedintheEU22andbeforeEUcounterpartiesareabletosatisfytheirreportingobligationunderEMIRby
reportingtoathirdcountrytraderepository23.ESMAmust“recognise”theCCPsandtraderepositories.ACCPwillonlybe
recognisedifallthefollowingcriteriaaremet:
(a) theCCPisauthorisedinthethirdcountryandsubjecttoeffectivesupervisionandenforcement;
(b) thereisacooperationagreementinplacebetweenESMAandtherelevantregulatorinthethirdcountry;
(c) thereareequivalentrulesonanti-moneylaunderingandfinancingofterrorisminthethirdcountry;
(d) theCommissionhasmadeanequivalencedecision;
(i) determiningthatthelegalandsupervisoryarrangementsforCCPsinthethirdcountryareequivalenttoEMIR;
(ii) thattheCCPsaresubjecttoeffectivesupervisionandenforcement;and
(iii) thatthethirdcountryprovidesforaneffectiveequivalentsystemfortherecognitionofCCPsinthird
countries.
34. TherehasbeenongoingdebateaboutwhethertheEUequivalenceprocessisasnuancedastheSEC’ssubstituted
compliancemechanism,whichhasbeendescribedasanoutcomes-basedapproach.TheEUCommissionerforfinancial
services,MichelBarnier,hasmadeclearanumberoftimesthat,inhisopinion,theequivalencemechanismalsoinvolvesan
outcomes-basedapproachand,inthecontextofEMIR,theCommissionrecentlyconfirmedthattheassessmentisoutcome-
focusedandwill,asmuchaspossible,takeaccountofthespecificitiesoftheregulatorycontextinthethirdcountry.Yet
thereciprocityprovisionin(d)(iii)abovecouldpreventarecognitiondecisionfrombeingmadeandappearstobeamove
awayfromanoutcomes-basedapproachinthecontextoftherecognitionofCCPsatleast.Suchreciprocityprovisionsare
becominganincreasingfeatureofEUequivalencedecisions.
35. SimilarrequirementsareimposedontraderepositoriesbeforetheycanberecognisedbyESMA,althoughthereisnotthe
samereciprocityprovision.Non-EUtraderepositorieswillstillbepermittedtoprovideservicestoEUmembersevenifthey
arenotrecognisedunderEMIRbutimportantlythoseEUmemberswillnotbeabletosatisfytheirreportingobligationunder
EMIRbyreportingtothattraderepository.
What did ESMA advise the Commission?
36. ESMAhascomparedcertainthirdcountryruleswithEMIRrequirementsincludingthoserelatingtoNFCscentralclearing,
reporting,CCPs,traderepositoriesandclearingthresholdsaswellasriskmitigationtechniquesforunclearedtrades.Ithas
not,however,consideredalltheseaspectsinrespectofallthethirdcountrieswhoseregimesithasassessed.
37. On3September2013ESMApublisheditsfirstsetofadvicetotheEuropeanCommissionontheequivalenceofthe
regulatoryregimesforOTCderivativesclearing,CCPS,andtraderepositoriesofnon-EUcountrieswithEMIR.ESMA
assessedtheequivalenceoftheregulatoryregimesofAustralia,HongKong,Japan,Singapore,SwitzerlandandtheUSbut,
somewhatsurprisingly,didnotfindcompleteequivalenceevenintheUS.
38. On2October2013ESMAsupplementeditstechnicaladvicewithcompleteequivalencefindingsonAustralia,Canada,Hong
Kong,India,Singapore,SouthKoreaandSwitzerland.On30January2014ESMAgaveadvicetotheEuropeanCommissionin
respectoftheequivalencebetweentheJapaneseregulatoryregimeforcommodityCCPsandtheregulatoryregimeforCCPs
underEMIR.
22SeeArticle25EMIR.23 SeeArticle77EMIR.
mayer brown 11
39. ThefollowingtablesetsoutwhatESMAhasconsideredtodate:
CCPs TRs Conflicting/duplicative rules
US 3 3 3
Japan 3 3 3
Australia 3 3 3
Canada 3
Hong Kong 3 3 3
India 3 TBD
Singapore 3 3 TBD
South Korea 3 TBD
Switzerland 3 TBD 3
Rest of World
40. ESMAfoundtheregulatoryregimesofAustraliaandSwitzerlandforCCPsequivalenttoEUrules.IftheCommissionadopted
ESMA’sadviceinthisregard,onlyAustralian24andSwissCCPswouldbeabletosatisfyESMA’srequirementsforrecognition
sothattheycouldremaingloballyactiveandcontinuetoprovideservicestotheirclearingmembersestablishedinthe
EU.ESMAalsofoundtheregimeforAustraliantraderepositoriesequivalenttothatintheEU.Ifthisadvicewereaccepted,
EUcounterpartiescouldonlysatisfytheirreportingrequirementsunderEMIRbyreportingtoEUandAustraliantrade
repositories.
41. ESMA’slackofequivalencefindings,saveasdetailedabove,issignificantandconcerning,particularlyinrespectofthe
clearingobligation.Asnotedatparagraph23above,iftwocounterpartiesestablishedindifferentjurisdictionsenterinto
atradethatissubjecttoaclearingobligationundertheirrespectivelegislation,itwillnotbepossibleforbothpartiesto
complywiththeirobligationswithoutanequivalencedecisioninrespectoftheirrespectiveCCPs:atradecannotbecleared
twice.ThelackofequivalenceinrespectofCCPsandtheclearingobligationcould,therefore,discouragecross-border
trades.ESMA’sfindingsinrespectoftheotherEMIRrequirementsareoflessimmediateconcernas,forexample,itwouldbe
possible–ifonerous,time-consuming,costlyandpotentiallyconfusing–foratradetobereportedtwicetodifferenttrade
repositoriesandforthepartiestocomplywithtwosetsofriskmitigationrequirements.
42. Itisworthnotingthat,atthetimeofthelastupdateon29April2014,33CCPshaveappliedtoESMAforrecognitionunder
Article25EMIRandagreedtohavethefactoftheirapplicationmadepublic.OnthebasisofESMA’sadvicetodate,only
theAustralianandSwissapplicantsarelikelytosatisfyESMA’srequirementsforrecognitionwithoutadoptingadditional
legallybindinginternalpolicies,procedures,rules,modelsandmethodologies.SomeapplicantCCPsareestablishedin
jurisdictions,suchasMexico,Brazil,Dubai,NewZealand,MalaysiaandSouthAfrica,theequivalenceofwhichESMAhas
notconsideredandsoinrelationtowhicharecognitiondecisionisnotpossibleinthenearfuture.OtherapplicantCCPs
areestablishedincountriessuchasCanadaandIndiawhichESMAhasadvisedwillnot,atpresent,satisfytherequirements
necessaryforrecognition.
24AlthoughESMAdidnotfindequivalenceinrespectoftheASXlistedequitiesmarket.
12 mayer brown
US
43. Insummary,on1September2013ESMAadvisedthatCCPsauthorisedintheUSaresubjecttoeffectivesupervisionand
enforcementonanon-goingbasis.Itwentontofind,however,thatUSlegalandsupervisoryarrangementsthemselvesdonot
ensurethatUSCCPscomplywithlegallybindingrequirementswhichareequivalenttotherequirementslaiddowninEMIRand
ESMAwouldonlyconsiderthoserequirementstobemetifthoseCCPsthemselvesadoptedadditionallegallybindinginternal
policies,procedures,rules,modelsandmethodologieswhichareequivalent.ThismeansthatUSCCPswillnotautomaticallymeet
thecriteriathatESMArequiresbeforetheycanberecognisedtoprovideservicestoEUcounterparties.
44. ESMAseemedtofindthattheUSsatisfiedthereciprocityrequirement.ItadvisedtheCommissiontoconsiderthattheUS
doeshaveanequivalentsystemfortherecognitionofthirdcountryCCPsbutitnotedthattheUSauthoritiesdonotusethe
equivalentsystemonalong-termbasis.ESMApointedoutthatinpracticetheUSauthoritiesrequirethatCCPsauthorised
outsideoftheUSbecomesubjecttothedirectjurisdictionoftheSECandCFTCandtheapplicationoftwosetsofrulesand
notedthatthisrepresentsadeparturefromthethirdcountryCCPregimeprescribedinEMIR.Thereisthusapossibilitythat
theCommissionwillnotfindthereciprocityconditionsatisfiedinrespectoftheUS.
45. ESMAmadethesamesortofconditionalfindingofequivalenceregardingtheUSregimefortheregulationoftrade
repositories,theclearingobligation,timelyconfirmationsandportfolioreconciliation.Forexample,ESMAadvisedthe
CommissiontofindthattheregimeisequivalentonlyiftheproductsubjecttotheclearingobligationintheEUisalsosubject
totheclearingobligationintheUSandthecounterpartyintheUSisanon-exemptedentityor,ifexempted,itwouldbenefit
fromanequivalentexemptionifestablishedintheEU.ESMAplacedsimilarconditionsonanequivalencedecisioninrespect
oftimelyconfirmationandportfolioreconciliation.Itdidfindequivalenceregardingportfoliocompression.
46. Thereare,however,anumberofareaswhereESMAsimplyfoundthattheUSregimeisnotequivalent.ItfoundthattheUS
legal,supervisoryandenforcementarrangementsarenotequivalenttotherequirementslaiddowninEMIRinrespectofthe
reportingobligation.Thisfinding,ifadoptedbytheCommission,wouldnotpreventEUcounterpartiesfromusingUStrade
repositoriesbutitwouldmeanthattheycouldnotsatisfytheirreportingobligationunderEMIRbyreportingtothem.
47. ESMAalsofoundthattheUSregimefordisputeresolutionisnotequivalenttothatofEMIRandsoEUcounterparties
transactingwithUScounterpartieswouldnotsatisfyalltheriskmitigationrequirementsofEMIRbycomplyingwithUSlaw.
ItdidnotconsideritpossibletomakeanequivalencedecisionregardingNFCsgiventhedifferentapplicationoftheEUandUSregimes.
Japan
48. Initsadviceof1September2013ESMAdidnotconsidertheJapaneseregimefortraderepositoriesbecauseJapanesetrade
repositoriesdonotintendtoapplyforrecognitionwhichmeansthatthereisnopossibilityofEUcounterpartiesbeingable
tosatisfythereportingobligationinEMIRbyusingJapanesetraderepositories.AswiththeUS,ESMA’sfindingsinrespect
ofCCPswereof‘conditionalequivalence’.ItalsoadvisedthatJapansatisfiedthereciprocityrequirement.Itmadeasimilar
conditionalfindingtotheUSinrespectoftheJapaneseregimeinrespectoftheclearingobligation.
49. IntheabsenceofJapaneserequirementsequivalenttotheriskmitigationobligationsinEMIR,ESMAadvisedtheCommission
thatitwasnotpossibletomakeanequivalencedecisionthatwouldallowEUcounterpartiestosatisfytherequirementsof
Article11EMIRbycomplyingwithJapaneselaw.
50. InitsSeptember2013advice,ESMAadvisedonlyinrespectoftheregulatoryregimeinJapanforCCPswhichclearderivatives
transactionsconductedonFinancialInstrumentsExchangesandOTCderivativestransactionsrelatingtosecurities,currencies,
interestrates,credit,weather,GDPandotherindices.Subsequenttodeliveringthisadvice,ESMAbecameawarethatthereisa
separateregulatoryregimeinJapanforCCPswhichclearcommoditiesderivativestransactionsandOTCcommoditiesderivatives
transactions.ThisregulatoryregimeisgovernedbydifferentlegislationandtheCCPsaresubjecttosupervisionbydifferent
regulatoryauthorities.ThusESMAconsidereditnecessarytodeliversupplementaladvicetotheCommissioninrespectof
commoditiesCCPs.ESMAdelivereditsadviceon30January2014andmadethesamefindingofconditionalequivalenceinrespect
oftheJapanesecommoditiesCCPsasitdidinrespectoftheotherJapaneseCCPsinSeptember2013.
mayer brown 13
Australia
51. ESMAfoundthattheregulationofCCPsinAustraliawasequivalenttoEMIRstandards,savefortheASXlistedequities
market,on1September2013.ItalsoadvisedtheCommissiontoconsiderthereciprocityrequirementsatisfied:Australia
hasaneffectiveequivalentsystemfortherecognitionofthirdcountryCCPsinrespectoftheAustralianderivativemarkets
(includingbothexchange-tradedandOTCderivativemarkets),theAustraliandebtmarkets,andtheAustraliancash-equity
marketsbutnottheASXlistedequitiesmarket.Thisfinding,shouldtheCommissionendorseit,wouldenableAustralian
CCPs,saveinrespectoftheASXlistedequitiesmarket,tosatisfyESMA’srequirementsforrecognitionandenablethemto
continuetoremaingloballyactiveandserviceEUclearingmembers.
52. On2October2013ESMAgavetheCommissionfurtheradviceinrespectofwhethertheAustralianregimeisequivalent
totheEMIRprovisionsrelatingtotheclearingobligation,riskmitigationrequirementsforunclearedtradesandtrade
repositories.
53 Inrelationtotraderepositories,ESMAadvisedthattheCommissiondecidethattraderepositoriesauthorisedinAustralia
docomplywithlegallybindingrequirementswhichareequivalenttothosesetoutinEMIR.ItalsoadvisedtheCommission
toconsidertheAustralianlegal,supervisoryandenforcementarrangementsfortraderepositoriesandtheguaranteesof
professionalsecrecyinAustraliaequivalenttotheEUregime.IftheCommissionagreeswiththisadvice,thiswouldmean
thatEUcounterpartiescansatisfytheirreportingrequirementsunderEMIRbyreportingtoAustraliantraderepositories.
54. ESMA’sfindingsinrelationtowhethertheAustralianregimeisequivalenttotheEMIRclearingobligationandriskmitigation
requirementsforunclearedtradeswerelesspositive.
55. AswithJapanandtheUS,ESMAadvisedthattheCommissiononlyfindtheAustralianregimeequivalentasrespectsthe
clearingobligationiftheproductsubjecttotheclearingobligationintheEUisalsosubjecttotheclearingobligationin
AustraliaandthecounterpartyinAustraliaisanon-exemptedentityor,ifexempted,itwouldbenefitfromanequivalent
exemptionifestablishedintheEU.
56. DuetotheabsenceoflegallybindingrequirementsequivalenttotheriskmitigationtechniquesforeseeninEMIRinthe
Australianregime,ESMAdidnotconsideritpossibletomakeanequivalencedecisionthatwouldpermittheEMIRrisk
mitigationrequirementsforunclearedtradestobedisapplied.
Canada
57. ESMAdeliveredareporttotheCommissionon2October2013inwhichitsaidthatitwasnotinapositiontoperforma
conclusiveanalysisanddeliveradviceastowhethertheCanadianregimeisequivalenttotheEUrequirementsrelatingtothe
clearingobligation,NFCsandriskmitigationtechniquesforunclearedtradesasCanadaisstillintheprocessoffinalisingits
regulatoryregime.ESMAisreadytoassesstheCanadianregimeoncefurtherprogresshasbeen.
Hong Kong
58. ESMAconsideredtheequivalenceoftheregulationofCCPsinHongKongandmadethesameconditionalfindingasinthe
USandJapaninitsadviceof1September2013.ItalsofoundthatHongKongsatisfiedthereciprocityrequirement.ESMA
deliveredafurtherreporttotheEuropeanCommissionon2October2013.Itconcludedthatitwasnotinapositionto
performaconclusiveanalysisanddeliveradviceinrespectoftheclearingobligation,NFCs,riskmitigationtechniquesfor
unclearedtradesandtraderepositoriesasHongKongisstillintheprocessoffinalisingitsregulatoryregime.ESMAsaidthat
itisreadytoreceiveanewmandatefromtheCommissiontoprovideadviceoncefurtherprogresshasbeenmadetowards
theadoptionoftherelevantHongKongregulatoryregime.
14 mayer brown
India
59. On1October2013ESMAmadethesamefindingofconditionalequivalenceasregardsIndianCCPsasitdidinrespectof
USandJapaneseCCPs:ESMAadvisedthatitwouldonlygrantrecognitiontoaCCPauthorisedinIndiaifithadadopted
legallybindinginternalpolicies,procedures,rules,modelsandmethodologieswhichincorporateprovisionsthatare
broadlyequivalenttothelegallybindingrequirementsforCCPsunderEMIR.ESMA,however,advisedtheCommissionto
considerthatIndiadoesnotmeetthereciprocityrequirement:itdoesnothaveaspecificregimefortherecognitionofCCPs
authorisedunderthelegalregimeofathirdcountry.IftheCommissionagreeswithESMA’sfindingsinbothrespects,Indian
CCPswouldnotbeabletosatisfyESMA’srequirementsforrecognitionandsowouldnotbeabletoprovideclearingservices
toEUclearingmembers.
Singapore
60. InSeptember2013ESMAconsideredtheequivalenceoftheregulationofCCPsinSingaporeandmadethesameconditional
findingasintheUS,JapanandIndia.ESMAalsoconcludedthatSingaporesatisfiedthereciprocityrequirement.
61. ESMAdeliveredfurtheradvicetotheCommissioninrelationtotraderepositorieson2October2013andmadeanother
findingofconditionalequivalence.ESMAadvisedtheCommissiontoconsiderthattraderepositoriesauthorisedin
Singaporearesubjecttoeffectivesupervisionandenforcementonanon-goingbasis.ESMAalsoadvisedtheCommissionto
considerthatthelegalandsupervisoryarrangementsofSingaporeensurethattraderepositoriesauthorisedinSingapore
complywithlegallybindingrequirementswhichareequivalenttotherequirementslaiddowninTitleVIIofEMIRbutonlyin
respectofthosetraderepositoriesthathaveadoptedadditionallegallybindinginternalpolicies,proceduresandrulesthat
equatetotheEMIRrequirementsfortraderepositories.
South Korea
62. Inareportdated1October2013ESMAmadeanotherfindingofconditionalequivalenceregardingSouthKoreanCCPs.It
alsoadvisedtheCommissiontoconsiderthatSouthKoreasatisfiedthereciprocityrequirementinrespectofCCPsproviding
clearingservicestotheOTCderivativemarketsofSouthKoreabutnotforCCPsprovidingclearingservicesinrespect
offinancialinstrumentsthatarenotOTCderivatives.Thismeansthat,iftheCommissionacceptsESMA’sadvice,South
KoreanCCPswhichadoptadditionallegallybindinginternalpolicies,procedures,rules,modelsormethodologywhichare
equivalenttotherequirementssetoutinEMIRcouldsatisfyESMA’srequirementsforrecognition.Theywouldthenbeable
toprovideclearingservicestoEUcounterparties.
Switzerland
63. On1September2013ESMAfoundthattheregulationofCCPsinSwitzerlandwasequivalenttoEMIRstandards.Italsofound
thatSwitzerlandsatisfiedthereciprocityrequirement.IftheCommisionendorsedthesefindings,thiswouldenableSwiss
CCPstosatisfyESMA’srequirementsforrecognitionandenablethemtocontinuetoremaingloballyactiveandserviceEU
clearingmembers.
64. Inasupplementalreportdated1October2013ESMAconcludedthatitwasnotinapositiontoperformaconclusive
analysisanddeliveradviceastowhethertheSwissregimeisequivalenttotherequirementsinEMIRrelatingtotheclearing
obligation,NFCsandriskmitigationtechniquesforunclearedtradesasSwitzerlandisstillintheprocessoffinalisingits
regulatoryregimeintheseareas..ESMAsaidthatitisreadytoreceiveanewmandatefromtheCommissiontoadvicewhen
progresshasbeentowardstheadoptionoftherelevantSwissregulatoryregime.
mayer brown 15
ODRG Report
65. On12September2013theOTCDerivativesRegulatorsGroup(“ODRG”)publishedareporton“AgreedUnderstandings
toResolvingCross-BorderConflicts,Inconsistencies,GapsandDuplicativeRequirements”.Thereportrepresentsthe
understandingsoftheauthoritieswithresponsibilityfortheregulationoftheOTCderivativesmarketsinAustralia,Brazil,the
EuropeanUnion,HongKong,Japan,Ontario,Quebec,Singapore,SwitzerlandandtheUnitedStates.
66. Thereport’sconclusionsincludethefollowingwhichareintendedtoimprovethecross-borderimplementationofOTC
derivativesreforms:
(a) Earlyandcomprehensiveconsultationamongtherelevantauthoritieswhenequivalenceorsubstitutedcompliance
assessmentsarebeingundertakenisessential;
(b) Aflexible,outcomes-basedapproachshouldformthebasisoffinalassessmentsregardingequivalenceorsubstituted
compliance;
(c) Astricterruleapproachwouldapplytoaddressgapsinmandatorytradingorclearingobligations;
(d) ThereisanIOSCOframeworkforconsultationonmandatoryclearingdeterminations25;
(e) Jurisdictionsshouldremovebarrierstoreportingtotraderepositoriesbymarketparticipantsandtoaccesstotrade
repositorydatabyauthorities;and
(f) Thereshouldbeappropriateintermediarymeasuresandareasonablebutlimitedtransitionperiodforforeign
entitiestoimplementOTCderivativesreforms.
67. UnderthereporttheauthoritiesagreedtodealpragmaticallythroughtheODRG,othermultilateralgroups,and/oron
bilateralbases,asneeded,withaviewtoensuringthatG20goalsaremetwhilealsoaimingtominimisedisruptionandlegal
uncertainty.ESMA’sfindingsonequivalence,however,suggestthattheEUhasnotpaidmuchheedtothereporttodate,
althoughithascertainlyconsultedwiththethirdcountryauthorities,butitremainstoseewhethertheCommissionwilltake
adifferentapproach.
Next steps
68. TheextraterritorialreachofEMIRhassomelogictoit:thefocusisontransactionsorcounterpartieswhichhaveadegree
ofnexustotheEU.Theapproachtoequivalenceis,however,concerning.ItissurprisingthatESMAhasnotfoundthatany
jurisdiction,eventhoseofotherG20countrieswhichareimplementingthesame2009G20commitmentastheEU,iswholly
equivalenttoEMIR.Perhaps,despiteBarnier’sclaimstothecontrary,theEUapproachtoequivalenceismorerule-than
outcome-based.Suchanapproachfailstohaveregardtothefactthatdifferentapproachestailoredtodifferentmarketscan
stillhave,andmeet,thesameobjective.
69. ESMA’sadvicetotheCommissionisnotbindingandsoshouldnotberegardedasdefinitive.Ontheotherhand,itisunlikely
thattheCommissionwouldwhollycountermandESMA’sadviceasitwillnothaveundertakenthesamedetailedassessment
asESMAnorhavethesameexpertsuponwhichtorely.TheCommissioncouldaskESMAtoreconsidersomeofitsfindings
ortoinvestigatefurther.Thiswould,however,takemoretimeandincreasetheuncertaintythatgloballyactivefinancial
marketparticipantsarealreadyexperiencingastheyfaceduplicativeandconflictingruleswhichironicallyseektoimplement
thesamesupranationalobligation.Actualcoordinationamongstglobalregulatorsisstillurgentlyneeded,particularly
toaddresstherealriskthatcross-bordertradessubjecttoduplicativeclearingobligationswillbediscouragedwithout
agreementonhowthecounterpartiessubjecttothoseobligationsareexpectedtocomply.
25 IOSCOReportonRequirementsforMandatoryClearing(February2012).
16 mayer brown
Ifyouhaveanyquestionsaboutanyoftheissuesraisedinthisupdate,pleasecontactyourusualcontactoroneofthelawyers
listedbelow:
LONDON:
Alexandria CarrOfCounsel(EmployedBarrister)
T:+442031303398
Mark ComptonPartner
T:+442031303388
David SahrPartner
T:+442031303496
Chris ArnoldPartner
T:+442031303610
Edmund “Ed” ParkerPartner
T:+442031303922
Marcin PerzanowskiSeniorAssociate
T:+442031303306
GERMANY:
Andreas LangePartner
T:+496979411941
BELGIUM:
Charles-Albert HelleputteCounsel
T:+3225515982
FRANCE:
François-Régis GononPartner
T:+33153534343
US:
Joshua CohnPartner
T:+12125062539
Curtis DotyPartner
T:+12125062224
mayer brown 17
EMIR: Timeline for Implementation
Date Event
16.08.2012 EMIRenteredintoforcebutmostprovisionsonlyapplyatalaterdate.
16.08.12 Reportingobligationbackdatedtoderivativecontractswhichwereenteredintobefore16August2012andremained
outstandingatthatdateandtoderivativecontractsenteredintoonorafter16August2012.
15.03.2013 Thefollowingrequirementsapply:
• Non-financialcounterpartymustnotifyNCAandESMAifexceeding(andnolongerexceeding)theclearing
threshold;
• Timelyconfirmations;
• Marktomarketormarktomodelrequirements;and
• Reportingofunconfirmedtrades.
Inaddition:
• TraderepositoriescanstartapplyingforregistrationtoESMA;
• ThirdcountrytraderepositoriescanstartapplyingforrecognitiontoESMA.
15.09.2012 Thefollowingrequirementsapply:
• Portfolioreconciliation;
• Portfoliocompression;and
• Dispute resolution.
15.09.2013 PreviouslyexistingEUCCPsauthorisationandthirdcountryCCPsrecognitionapplicationdeadline.
September2013 PublicationofthefinalreportbyIOSCOandBCBSdefiningcommoninternationalrequirementsonmargin
requirementsfornon-centrallyclearedderivatives.
07.11.2013 Adoptionoftheregistrationdecisionofthefirsttraderepositories.
12.02.2014 Reportingstartdateforallassetclasses.
18.03.2014 FirstEUCCPauthorised(NASDAQ-OMX)–startofthefrontloadingwindow.
FirstnotificationfortheclearingobligationunderArticle5.
21.03.2014 TheRegulatoryTechnicalStandards(“extraterritorialRTS”)specifyingthecontractsthatareconsideredtohave
“direct,substantialandforeseeable”effectwithintheEUorwhicharenecessarytopreventtoevasionofrulesand
obligationsforthepurposesofEMIRarepublished.
10.04.2014 ExtraterritorialRTSapplies(saveforArticle2).
14.04.2014 EBA,ESMAandEIOPApublishedconsultationpaperonrequirementtoexchangemarginonnon-centrallyclearedOTC
derivatives.Consultationcloseson14.07.2014.
18.09.2014 ESMAtosubmitfirstdraftRTSontheclearingobligation.
10.10.2014 Article2ofextraterritorialRTS(Contractswithadirect,substantialandforeseeableeffectwithintheUnion)applies.
Q4 2014
Possibledate
ESMAexpectstosubmitdraftlegislationonmarginrequirementsfornon-centrallyclearedOTCderivatives.
?beforeapplicationof
clearingobligation
Applicationsforexemptionsfromclearingforintragrouptransactions(Art4)andpensionschemearrangements(Art
89(2)).
Early2015
Possibledate
Clearingobligationexpectedtocomeintoforce.
15.08.2015 Pensionschemearrangementsexemptionfromclearingobligationends.
01.12.2015–01.12.2019
Possibledate
Proposedthatmarginrequirementsonnon-centrallyclearedOTCderivativeswillcomeintoforce:
• phased-inover4yearsdependingoncounterparties’aggregatemonth-endaveragenotionalamountofnon-
centrallyclearedderivatives.
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0701finJune 2014
