Intragroup transactions are defined in Article 3 of EMIR as OTC derivative contracts entered into with another counterparty which is part of the same group.

                  
               
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7 December 2022

Proposal for a Regulation of the European Parliament and the Council amending Regulations (EU) No 648/2012, (EU) No 575/2013 and (EU) 2017/1131 as regards measures to mitigate excessive exposures to third-country central counterparties and improve the efficiency of Union clearing markets

Commission Communication: A path towards a stronger EU clearing system, COM/2022/696 final

"EMIR provides for a framework exempting intragroup transactions (domestically and cross-border) from the clearing obligation under Article 4 and the margin requirements under Article 11 of that Regulation. In order to provide more legal certainty and predictability concerning the framework for intragroup decisions, the need for an equivalence decision is replaced by a list of jurisdictions for which an exemption cannot be granted. Article 3 should therefore be amended to replace the need for an equivalence decision with a list of third countries for which an exemption should not be granted and Article 13 should be deleted. These third countries should be those that are listed as a high-risk third country that has strategic deficiencies in its regime on anti-money laundering and counter terrorist financing, in accordance with Article 9 of Directive (EU) 2015/849 of the European Parliament and of the Council, and those listed in Annex I of the Union list of non-cooperative jurisdictions for tax purposes. The Commission is also empowered to adopt delegated acts to identify the third countries whose entities may not benefit from those exemptions despite not being identified in those lists, as being an entity from a third country identified in those lists is not necessarily the only factor that can influence risk, including counterparty risk or legal risk, associated with derivative contracts".


31 March 2021

ESMA EMIR Q&As updated:

- Answer TR 51m provides guidance on whether the intragroup EMIR reporting exemption can be used where the parent of the group is within a third country,

- Answer TR 51l provides guidance as to how to report when the intragroup EMIR reporting exemption ceases to apply.

  

 

Intragroup derivative transactions are usually carried out to hedge against certain market risks or aggregate such risks at the level of the group. With the exception of certain risk mitigation techniques, from which intragroup transactions are exempt under certain conditions, all other EMIR requirements, apply to intragroup trades in the same way as they do to all other transactions. It was also true for EMIR reporting requirement until 17 June 2019. The process for collecting submissions for intragroup exemption from margin requirements under the EMIR Regulation has already started. It may be useful in this context to summarise some main points with respect to exemptions available for intragroup transactions under EMIR.

The preliminary observation is that it would be practicable to consider the creation of a single centre of EMIR competence within a group. Such an exclusive point of contact (usually the group treasury) could be responsible, in particular, for reporting against the clearing threshold (which takes the global group derivatives position into account), but such a strategy have its merits also when fulfiling other EMIR requirements. Notably, for EMIR compliance purposes, a uniform, group-wide policy is necessary for defining hedging transactions and for the carefull monitoring of the level of non-hedging activity if trading is outside of this scope. It is recognised that intragroup transactions may be necessary for aggregating risks within a group structure and that intragroup risks are therefore specific.

There are two intragroup-transactions exemptions under the EMIR legal framework available: one relating to the clearing obligation, and the second regarding collateralisation requirement.

 

Nevertheless, the obligation to apply other than collateralisation risk mitigation techniques, in particular:

timely confirmation,

portfolio compression,

portfolio reconciliation,

dispute resolution;

- daily valuation;

are still relevant for intragroup transactions.

 

Moreover, intragroup transactions must also be included into calculations for the purposes of establishing whether a non-financial counterparty exceeds the clearing threshold (with the exception of risk-reducing transactions). Also the EMIR derivatives reporting requirements applied to intragroup transactions untill 17 June 2019.

Nevertheless, modifications in this regard have been envisioned by the Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories (COM(2017)208) of May 2017 (according to which intragroup transactions are to be excluded from EMIR reporting, if one of the counterparties is a non-financial counterparty).

 

intragroup exemption margin fca video

 

The Report of 23 May 2018 of the European Parliament’s Committee on Economic and Monetary Affairs (Rapporteur Werner Langen, (COM(2017)0208 – C8-0147/2017 – 2017/0090(COD)), PE 616.810v02-00) proposed to add the rule to the above proposal that the said exemption from the reporting requirement operates regardless of the place of establishment of the non-financial counterparty. This amendment really is a significant relief from bureaucratic burdens for intragroup transactions between non-financial counterparties.

On 28 May 2019 the Regulation (EU) 2019/834 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories (EMIR REFIT) has been published in the Official Journal of the EU (the date of entry into force on 17 June 2019‬). Recital 16 of this Regulation explains that intragroup transactions involving non-financial counterparties “represent a relatively small fraction of all OTC derivative contracts and are used primarily for internal hedging within groups. Those transactions therefore do not significantly contribute to systemic risk and interconnectedness, yet the obligation to report such transactions imposes significant costs and burdens on non-financial counterparties. Transactions between counterparties within a group, where at least one of the counterparties is a non-financial counterparty, should therefore be exempted from the reporting obligation, regardless of the place of establishment of the non-financial counterparty.”

 

The said Regulation adds the following requirements as regards intragroup reporting exemption:

“Notwithstanding Article 3, the reporting obligation shall not apply to derivative contracts within the same group where at least one of the counterparties is a non-financial counterparty or would be qualified as a non- financial counterparty if it were established in the Union, provided that:

(a) both counterparties are included in the same consolidation on a full basis;

(b) both counterparties are subject to appropriate centralised risk evaluation, measurement and control procedures; and

(c) the parent undertaking is not a financial counterparty.

 

Counterparties shall notify their competent authorities of their intention to apply the exemption referred to in the third subparagraph. The exemption shall be valid unless the notified competent authorities do not agree upon fulfilment of the conditions referred to in the third subparagraph within three months of the date of notification”. Derivatives reporting intragroup exemption is available, upon fulfilment of the above conditions, as from 17 June 2019 only (see below for more detailed comments on the specificities of this exemption).

 

It is noteworthy that under EMIR there are no other intra-group exemptions available, in particular from - other than collateral obligation - mandatory risk mitigation techniques (notably confirmations, portfolio reconciliation, portfolio compression, dispute resolution, marking-to-market or marking-to-model).

Firstly, it is, however, necessary to establish which contracts constitute intra-group transactions within the EMIR framework.

 

Definition of the "intra-group" transaction

 

OTC derivative contracts may be recognised within non-financial or financial groups, as well as within groups composed of both financial and non-financial undertakings, and if such a contract is considered an intragroup transaction in respect of one counterparty, then it should also be considered an intragroup transaction in respect of the other counterparty to that contract. Simply put, and subject to some exceptions, an intra-group transaction is a transaction between two undertakings which are included in the same consolidation on a full basis and are subject to appropriate centralised risk evaluation, measurement and control procedures (both conditions must be fulfilled cumulatively).

 

 

Article 2(16), (22) and (23) of EMIR

 

(16) ‘group’ means the group of undertakings consisting of a parent undertaking and its subsidiaries within the meaning of Articles 1 and 2 of Council Directive 83/349/EEC (see the text of Articles 1 and 2 of Council Directive 83/349/EEC) or the group of undertakings referred to in Article 3(1) and Article 80(7) and (8) of Directive 2006/48/EC;

 

(22) ‘parent undertaking’ means a parent undertaking within the meaning of Articles 1 and 2 of Council Directive 83/349/EEC;

 

(23) ‘subsidiary’ means a subsidiary undertaking within the meaning of Articles 1 and 2 of Directive 83/349/EEC, including any subsidiary of a subsidiary undertaking of an ultimate parent undertaking;

 

 

With respect to credit institutions other preconditions are additionally present, in particular the counterparties being part of the same institutional protection scheme or being credit institutions affiliated to the same central body. The detailed definition of intra-group transactions is contained in Article 3 of EMIR - being overly complicated provision, nevertheless not free from fatal flaws and contradictions (see for example point 5 of the EMIR Review Report no. 4 of 13 August 2015 - ESMA input as part of the Commission consultation on the EMIR Review (2015/1254).

 

When it comes to legal definitions of the "group", "subsidiary" and "parent undertaking" EMIR (Article 2(16), (22) and (22)) refers to Articles 1 and 2 of the Seventh Council Directive of 13 June 1983 based on the Article 54 (3) (g) of the Treaty on consolidated accounts (83/349/EEC) (OJ L 193, 18.7.1983, p. 1 as amended), which require the relevant update to Articles 2(11), 4(1)(32) and (33) of the Directive 2013/34/EU on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings (Accounting Directive), on occasion of approaching EMIR revamp. This technique would improve consistency between EMIR and MiFID II on the respective definitions.

 

Clearing obligation exemption

 

Pursuant to the recitals in the preamble to EMIR, since the submission of intra-group transactions to the clearing obligation may limit the efficiency of intragroup risk-management processes, an exemption of intra-group transactions from the clearing obligation may be beneficial, provided this exemption does not increase systemic risk. Consequently, derivative contracts that are intra-group transactions within the above-defined meaning can be freed from the clearing obligation (Article 4(2) of EMIR). 

 

 

Derivative contracts that are intra-group transactions are not subject to the clearing obligation, provided the notification/authorisation requirements are fulfilled.

 

 

It is noteworthy that the application of the exemption is dependent on the adequate notification be submitted to the competent authority on time. Exemption from the clearing requirement only applies where two counterparties established in the Union belonging to the same group have first notified their respective competent authorities in writing that they intend to make use of the exemption for the OTC derivative contracts concluded between themselves. The notification must not be made less than 30 calendar days before the use of the exemption. In the Q&A document on EMIR ESMA has indicated the 30 calendar day period starts on the calendar day following receipt of the notification by the relevant national competent authorities.

 

Within the said 30 calendar days after that notification has been received, the competent authorities may object to the use of this exemption if the transactions between the counterparties do not meet the respective conditions (laid down in Article 3 of EMIR), without prejudice to the right of the competent authorities to object after this period of 30 calendar days has expired, if those conditions are no longer met. If there is disagreement between the competent authorities, ESMA may assist those authorities in reaching a consensus.

This exemption only applies to OTC derivative contracts between two counterparties belonging to the same group which are established in the EU Member State and in a third country, where the counterparty established in the Union has been authorised to apply this exemption by its competent authority within 30 calendar days after it has been notified by this counterparty, provided that the conditions laid down in Article 3 of EMIR are met. The competent authority must notify ESMA of that decision.

In the Q&As on EMIR ESMA has, moreover, indicated that if a counterparty is established in a third country, the European Commission must have adopted an implementing act under Article 13(2) in respect of the relevant third country in order for transactions between this counterparty and the counterparty established in the Union within the same group to qualify as intragroup transaction transactions under Article 3.

 

Another ambiguity was the situation when counterparties established in two different European Union Member States applied for an intragroup transactions exemption from the clearing obligation to their national competent authorities (NCAs) under Article 4(2)(a) of EMIR and the NCAs disagreed on whether the conditions laid down in Article 3 were met. The issue was whether the counterparties could rely on the exemption. The ESMA's answer was in the negative. Where either counterparty is notified during the 30 calendar day period following application that one NCA objects to the exemption, firms should not rely on the exemption, whether during or after the 30 calendar day period. For the avoidance of doubt, if counterparties apply to their respective NCAs on different dates, they should wait until the end of the later of the two 30 calendar day periods before relying on the exemption (provided neither NCA objected). Counterparties may reapply for the intragroup exemption from the clearing obligation once they have addressed the objection(s) raised by the objecting NCA(s).

 

Intragroup transactions with a counterparty established in a third country

 

As was said above, in the Q&As on EMIR ESMA has indicated that if a counterparty is established in a third country, the European Commission must have adopted an implementing act under Article 13(2) of EMIR in respect of the relevant third country in order for transactions between this counterparty and the counterparty established in the European Union within the same group to qualify as intragroup transaction transactions under Article 3 of EMIR.

clip2   Links

  

EMIR – When are exemptions available for intragroup transactions?

 

Intragroup exemptions from margin requirements for non-cleared derivatives - FCA website

 

Intragroup exemptions from the clearing obligation - FCA website

 

FCA - EMIR Notifications Web Portal

The three Commission Delegated Regulations on the clearing obligation, i.e.:

- Commission Delegated Regulation (EU) 2015/2205,
- Commission Delegated Regulation (EU) 2016/1178 regarding interest rate derivative classes, and
- Commission Delegated Regulation (EU) 2016/592 regarding credit derivative classes,

include a provision related to intragroup transactions with a third-country group entity, under Article 3(2) of EMIR, which provides for a deferred date of application of the clearing obligation of up to three years for these transactions, in the absence of the relevant equivalence decision.

 

According to the Recitals of the said Regulations, the rationale for this temporary exemption is as follows:

“For OTC derivative contracts concluded between a counterparty established in a third country and another counterparty established in the Union belonging to the same group and which are included in the same consolidation on a full basis and are subject to an appropriate centralised risk evaluation, measurement and control procedures, a deferred date of application of the clearing obligation should be provided. The deferred application should ensure that those contracts are not subject to the clearing obligation for a limited period of time in the absence of implementing acts pursuant to Article 13(2) of Regulation (EU) No 648/2012 covering the OTC derivative contracts set out in the Annex to this Regulation and regarding the jurisdiction where the non-Union counterparty is established. Competent authorities should be able to verify in advance that the counterparties concluding those contracts belong to the same group and fulfil the other conditions of intragroup transactions pursuant to Regulation (EU) No 648/2012.”

 

The three Commission Delegated Regulations on the clearing obligation entered into force on three different dates, which means that the three year deadline expires on three different dates for each of them:

a. 21 December 2018 for the first Commission Delegated Regulation on IRS,
b. 9 May 2019 for the Commission Delegated Regulation on CDS, and
c. 9 July 2019 for the second Commission Delegated Regulation on IRS.

 

Given that: 

- the adoption by the European Commission of implementing acts on equivalence under Article 13 of EMIR (establishing that third-countries are considered as having legal, supervisory and enforcement frameworks equivalent to EMIR) is required for the exemption to clear derivatives subject to the clearing obligation for intragroup transactions with third-country group entities,
- as of July 2018, no such implementing act has been adopted, 

in the Consultation Paper No 6 of 11 July 2018 on the Clearing Obligation under EMIR (ESMA70-151-1530) ESMA proposed to prolong the above exemptions for a limited and short period of time only (by two years for Commission Delegated Regulation (EU) 2015/2205 regarding interest rate derivative classes denominated in the G4 currencies, i.e. until 21 December 2020), and, for simplicity, to align the date for the other two Commission Delegated Regulations (EU) 2016/1178 and (EU) 2016/592 to 21 December 2020 as well.

 

The submission's form

 

Clearing intra-group exemption

for counterparties established in the EU

 

Process type    =>  non-objection

Notification to =>  Member State National Financial Authority

 
There are two different processes for counterparties to benefit from the intragroup exemption from the clearing obligation, depending on whether the counterparty to the intragroup transactions is established in the European Union (non-objection process described under Article 4(2)(a)) of EMIR or in a third country in respect of which the European Commission has adopted an implementing act under Article 13(2) (authorisation process described under EMIR Article 4(2)(b)). It is to be stressed that counterparties' applications/notifications related to intragroup transactions exemption should be submitted to the respective competent authorities, and not to ESMA.

When a notification under Article 4(2)(a) of EMIR relates to intragroup transactions between counterparties established in different EU Member States, it is expected that similar information is sent to the respective competent authorities.

The issue that may rise some doubts is whether the separate notifications are required from entities forming parts of the group or a uniform submission in the name of the entire group may be made, for instance, by its head office.

 

Single notification across the group is not allowed.


It is important to note in that regard, the notification is performed per counterparty to the relevant competent authoritity and may cover all the intragroup OTC derivative contracts fulfilling the conditions, provided the relevant information is clearly provided per counterparty. Although the counterparty is responsible for the notification to the competent authority, it may delegate the performance of the notification to another entity such as its head office. It is not possible, however, to allow one notification across a group, as the group is made up of different legal entities which may be located in different jurisdictions and may be subject to a different framework.

The process of one notification across a group would not allow for the competent authority assessment (see ESMA's Final Report of 27 September 2012, ESMA/2012/600).

 

The submission's content and the scope for the competent authority discretion

 

One may ask what is the scope for the competent authority examination when considering whether to object to/authorise intra-group notifications/applications for clearing exemption. The express wording of the provisions at issue indicates that authorities should assess only whether the clear-cut intra-group transactions' preconditions (as stipulated in the aforementioned EMIR provisions) are fulfilled.

         
          
schedule icon
 

       

 

 

This indicates, the exercise of the discretion within the process on the part of the competent financial authority is rather limited, and when the notification/application:

- covers parent and subsidiary undertakings within the meaning of Articles 1 and 2 of Council Directive 83/349/EEC (referred to above), and

- undertakings within the group are subject to an appropriate centralised risk evaluation, measurement and control procedures, and

- with respect to counterparties established in a third country (outside the European Union) the European Commission has adopted an implementing act in respect of that third country;

there are no formal obstacles to making use of the clearing exemption.

 

However, it needs to be recalled, in accordance with Article 3 of EMIR, it is required the counterparties to an intragroup transaction are "subject to an appropriate centralised risk evaluation, measurement and control procedures", and here is the point for potential misunderstandings between the competent authorities and companies applying for exemption from mandatory clearing.

 

ESMA has supplemented the above, rather laconic, EMIR provisions in the Q&As. Accordingly, when applying for the intragroup exemption from the clearing obligation, the applicant counterparty should at least:
1. describe the risk management policies and controls and how they are centrally defined and applied;

2. demonstrate that senior management is responsible for risk management and that risk measurement is regularly reviewed;

3. demonstrate that regular and transparent communication mechanisms are established within the organisation, so that the management body, senior management, business lines, the risk management function and other control functions can all share information about risk measurement, analysis and monitoring;

4. demonstrate that internal procedures and information systems are consistent throughout the institution and reliable so that all sources of relevant risks can be identified, measured, and monitored on an aggregated basis and also, to the extent necessary, by entity, business line, and portfolio;

5. demonstrate that key risk information is regularly reported to the central risk management function to enable appropriate centralised evaluation, measurement and control risk across the relevant group entities.

 

This seems to indicate, counterparties without the sophisticated ERM system are hardly able to obtain from the EU competent authorities the exemption from mandatory clearing.

 

Timings

 

Another ambiguous issue - when the counterparties can start applying for the intragroup exemption from the clearing obligation - has been clarified by ESMA in a document of 20 March 2013. ESMA stated in that regard that notifications for the intragroup exemptions from the clearing obligation are not expected to be submitted before the first notification from national competent authority to ESMA of the authorised classes of OTC derivatives is received by ESMA i.e. the date on which the first class of OTC derivatives is notified to ESMA and published in the public register. ESMA added, however, "national regulatory authorities may facilitate the process of those applications at an early stage where they consider it needed according to the nature and dimension of their markets."

 

See more on the status of notifications from national competent authorities to ESMA of the authorised classes of OTC derivatives for the purposes of the clearing obligation.

 

Another aspect when it comes to timings is the determination whether it is fully functional to make a clearing exemption submission when the corporate group at issue is well below the clearing threshold or to start relevant preparations in the face of approaching danger only. In the latter case the second potential dilemma appears what should be the appropriate level triggering submissions for a clearing threshold exemption. There is no an unequivocal answer to such a question, it depends mainly on the preferable organisational culture and on the risk appetite issues.

 

For practical and prudential reasons, it seems the trigger initiating the relevant clearing exemption procedures on the corporate side should be placed somewhere between 50 and 90% of the clearing threshold. But, as was said above, there are neither mandatory provisions nor ESMA regulatory clarifications in that regard. ESMA has, however, explained another important issue involved with timings regarding  clearing exemption. It has clarified, if a counterparty enters into a contract during the frontloading period and is subsequently granted an exemption from the clearing obligation which covers this contract, it is not required to clear the contract when the clearing obligation takes effect, provided that the intragroup exemption is granted before the clearing obligation takes effect.

 

Collateralisation requirement exemption

 

Collateralisation (margin) requirement represents an element of the EMIR legal framework for mandatory risk-mitigation techniques designed for OTC derivative contracts not cleared by a CCP (Article 11 of EMIR). EMIR imposes the requirement on financial counterparties to have risk-management procedures that require the timely, accurate and appropriately segregated exchange of collateral with respect to OTC derivative contracts that are entered into on or after EMIR entry into force. The said obligation is analogous with respect to non-financial counterparties above the clearing threshold with this difference however that the requirement relates to OTC derivative contracts that are entered into on or after the clearing threshold is exceeded.

 

In accordance with Article 11(6) to (10) of the EMIR, intragroup transactions (in the meaning defined above) can be exempted from the requirement to exchange collateral if certain requirements on the risk-management procedures are met and there are no practical or legal impediments on the transferability of own funds and the repayment of liabilities. Pursuant to Article 11(5) EMIR the collateral requirement does not apply to an intragroup transaction that is entered into by counterparties which are established in the same Member State provided that there is no current or foreseen practical or legal impediment to the prompt transfer of own funds or repayment of liabilities between counterparties. The wording of the said provision indicates, when counterparties to the intragroup transaction are established within the same jurisdiction (the European Union Member State) and the above precondition of "lacking impediments" is fulfilled, such transaction is exempted from the EMIR collateral requirement without any further notification or authorisation processess. The intragroup collateral exemption has in this case an "automatic" character. In other instances there is either an approval or a notification process, depending on the type of counterparties and the place of establishment (see details in the attached FCA's video). 

 

 

Legal impediment

 

A legal impediment to the prompt transfer of own funds or repayment of liabilities between the counterparties exists where there are actual or foreseen restrictions of a legal nature including any of the following:
(a) currency and exchange controls;

(b) a regulatory, administrative, legal or contractual framework that prevents mutual financial support or significantly affects the transfer of funds within the group;

(c) any of the conditions on the early intervention, recovery and resolution as referred to in Directive 2014/59/EU of the European Parliament and of the Council are met, as a result of which the competent authority foresees an impediment to the prompt transfer of own funds or repayment of liabilities;

(d) the existence of minority interests that limit decision-making power within entities that form the group;

(e) the nature of the legal structure of the counterparty, as defined in its statutes, instruments of incorporation and internal rules.

 

Practical impediment

 

A practical impediment to the prompt transfer of own funds or repayment of liabilities between the counterparties exists where there are restrictions of a practical nature, including any of the following:
(a) insufficient availability of unencumbered or liquid assets to the relevant counterparty when due;
(b) impediments of an operational nature which effectively delay or prevent such transfers or repayments when due.

 

The scope for and the meaning of the phrase 'practical or legal impediment' have been made more comprehensible by the Consultation Paper of 14 April 2014 "Draft regulatory technical standards on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP under Article 11(15) of Regulation (EU) No 648/2012" (JC/CP/2014/03), which presented the preliminary thinking of European financial supervisory authorities. The said issue has been subsequently stipulated in Articles 33 and 34 of the Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty - see box.

 

Furthermore, specific requirements apply as regards intragroup transaction that is entered into by counterparties which are established in different Member States as well as intragroup transaction that is entered into by a counterparty which is established in the Union and a counterparty which is established in a third-country jurisdiction. These are specified in Article 11 (6) – (10) of EMIR and seem to be overly casuistic. Overall, the additional precondition for the risk-management procedures that are "adequately sound, robust and consistent with the level of complexity of the derivative transaction" is required in this case.

 

According to Recital 38 of the Commission Delegated Regulation 2016/2251 for a group to be deemed to have adequately sound and robust risk management procedures, a number of conditions have to be met.

The group should ensure a regular monitoring of the intragroup exposures, and the timely settlement of the obligations resulting from the intragroup OTC derivative contracts should be guaranteed based on the monitoring and liquidity tools at group level that are consistent with the complexity of the intragroup transactions.

 

Public disclosures of notional amounts covered by the collateral exemption

 

It should be noted that EMIR imposes a requirement on the counterparty of an intragroup transaction which has been exempted from the collateralisation obligation to publicly disclose information on the exemption. This is stipulated in Article 11(11) EMIR. Pursuant to the Commission Delegated Regulation (EU) No 149/2013 of 19 December 2012 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory technical standards on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, and risk mitigation techniques for OTC derivatives contracts not cleared by a CCP (RTS), the information on an intragroup exemption to be disclosed publicly includes:

(a) the legal counterparties to the transactions including their identifiers in accordance with Article 3 of Implementing Regulation (EU) No 1247/2012 (i.e. the LEI);

(b) the relationship between the counterparties;

(c) whether the exemption is a full exemption or a partial exemption;

(d) the notional aggregate amount of the OTC derivative contracts for which the intragroup exemption applies.

 

The purpose of the public dislosure is to ensure transparency in respect of market participants and potential creditors. As the Recital 37 of the said Regulation 149/2013 underlines, this is particularly important for the potential creditors of the counterparties in terms of assessing risks. The disclosure aims at preventing misperception that OTC derivative contracts are centrally cleared or subject to risk mitigation techniques when it is not the case.

It is noteworthy, the requiremt for public disclosure at issue applies equally to instances where the collateral intragroup exemption is subject to the application/notification requirements as well as where it has an "automatic" character (i.e. in the circumstances of Article 11(5) EMIR).

 

The application/notification content and timing

 

As was said above, the application/notification requirements are not used with respect to counterparties to the intragroup transaction established in the same EU Member State. When it comes to other instances, pursuant to the RTS, the application or notification to the competent authority of the details of the intragroup transaction for the purposes of the collateral exemption should include:

(a) the legal counterparties to the transactions including their identifiers in accordance with Article 3 of Implementing Regulation (EU) No 1247/2012 (i.e. the LEI),

(b) the corporate relationship between the counterparties;

(c) details of the supporting contractual relationships between the parties;

(d) the category of intragroup transaction as specified under paragraph 1 and points (a) to (d) of paragraph 2 of Article 3 of EMIR;

(e) details of the transactions for which the counterparty is seeking the exemption, including:

(i) the asset class of OTC derivative contracts (i.e. credit, equity, interest rate, foreign exchange, commodities, other);

(ii) the type of OTC derivative contracts;

(iii) the type of underlyings;

(iv) the notional and settlement currencies;

(v) the range of contract tenors;

(vi) the settlement type;

(vii) the anticipated size, volumes and frequency of OTC derivative contracts per annum.

 

Recital 36 of the RTS explains that the anticipated size, volumes and frequency of intragroup OTC derivative contracts may be determined on the basis of the historical intragroup transactions of the counterparties as well as the anticipated model and activity expected for the future. Furthermore, as part of the application or notification to the relevant competent authority, a counterparty is obliged to submit supporting information evidencing that the conditions for intragroup  exemption set by EMIR are fulfilled. The supporting documents include copies of documented risk management procedures, historical transaction information, copies of the relevant contracts between the parties and may include a legal opinion upon request from the competent authority.

Recital 37 of the Commission Delegated Regulation 2016/2251 underlines that when a counterparty notifies the relevant competent authority regarding its intention to take advantage of the exemption of intragroup transactions, in order for the competent authority to decide whether the conditions for the exemption are met, the counterparty should provide a complete file including all relevant information necessary for the competent authority to complete its assessment.

 

The aforementioned Consultation Paper of 14 April 2014 Draft regulatory technical standards on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP under Article 11(15) of Regulation (EU) No 648/2012 (JC/CP/2014/03) contains additional comments on the procedure before the competent authority. Firstly, the application will be deemed to have been received when it will be deemed complete by the competent authority. This includes a possibility for the competent authority to ask for more information. EMIR stipulates in Articles 11(6) - 11(10) that counterparties must submit applications or notifications to their respective competent authorities. Depending on the nature of the counterparties (financial counterparties, non-financial counterparties or third-country entities), the exemption will be subject to either a decision or a potential objection from the competent authorities.

Instead of refusing or objecting to an exemption on the grounds that the competent authority does not have the necessary information to verify that the relevant conditions have been fulfilled, the competent authority will have the option to go back to the applicant and in this respect provide more time and explanations, which should be to the benefit of the counterparties seeking the exemption. Another advantage is that the timeline within which the competent authorities are required to notify the counterparties of the outcome of the request for exemption will only start once the applications or notifications are deemed to be complete. Several requests for information may be sent, providing both the competent authorities and the counterparties with opportunities to reassess the files and complete the applications. This flexibility has, however, also shortcomings, the main disadvantage is the timing issue and the legal certainty. When counterparties apply for the exemption, they won't be able to determine the time required to obtain the exemption until their application is deemed complete. This may be particularly problematic under Articles 11(6), 11(8) and 11(10) where counterparties can only start using the exemptions after the decision has been taken by the competent authorities. The risk is that this phase of the application has no time-limit. The said drawback does not apply to an "automatic" exemption under Article 11(5) EMIR.

 

Also the non-financial counterparties may benefit from the exemption from collateral requirements as of the date of notification of their exemption to their competent authority. This exemption remains valid unless the competent authority considers that the conditions to benefit from this exemption are not met, within a period of three months after the notification.

 

The legal framework for intragroup exemptions from the margin requirements under EMIR has been completed by the Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty, which in Article 32 stipulated rules on relevant procedures for counterparties and competent authorities.

 

The crucial requirements of this set up are as follows:

1. The said Regulation acknowledged the principle that the application or notification from a counterparty to the competent authority is deemed to have been received when the competent authority receives all the information necessary to assess whether the applicable conditions have been fulfilled.

2. Where a competent authority determines that further information is required in order to assess whether the conditions are fulfilled, it submits a written request for information to the counterparty.

3. The time limit for the competent authorities to decide on the submission has been determined and it is most cases three months of receipt of all the information (with the reservation of Article 32(9) where it is two months).

4. Where a competent authority reaches a positive decision it communicates that positive decision to the counterparty in writing, specifying at least the following:
(a) whether the exemption is a full exemption or a partial exemption;
(b) in the case of a partial exemption, a clear identification of the limitations of the exemption.

5. In case of a negative decision or an objection to a notification the competent authority's communication specifies at least:
(a) the conditions that are not fulfilled;
(b) a summary of the reasons for considering that such conditions are not fulfilled. 

6. Counterparties that have submitted a notification or received a positive decision are required to immediately notify the relevant competent authority of any change that may affect the fulfilment of the applicable conditions. 

7. The competent authority may object to the application for the exemption or withdraw its positive decision following any change in circumstances that could affect the fulfilment of those conditions.

8. Where a negative decision or objection is communicated by a competent authority, the relevant counterparty may only submit another application or notification where there has been a material change in the circumstances that formed the basis of the competent authority's decision or objection.

 

The said set-up has been complemented by Commission Delegated Regulation (EU) of 20.1.2017 correcting Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty (C(2017) 149 final). 

 

The correcting delegated regulation amends the Delegated Regulation 2016/2251 and provides that the derogation for intragroup exemptions between EU and third country group entities is available (pursuant to review from the relevant national competent authorities) in relation to both variation and initial margin. Recitals 1 and 2 of the said Regulation state:

"(1) [...] where one of the two counterparties in the group is domiciled in a third country for which an equivalence determination under Article 13(2) of Regulation (EU) No 648/2012 has not yet been provided, the group has to exchange variation and appropriately segregated initial margins for all the intragroup transactions with the subsidiaries in those third countries. In order to avoid a disproportionate application of the margin requirements and taking into account similar requirements for clearing obligations, the Delegated Regulation provides for a delayed implementation of that particular requirement in order to allow enough time for completion of the process to produce the equivalence determination, while not requiring an inefficient allocation of resources to the groups with subsidiaries domiciled in third countries.
(2) In Article 37 of Delegated Regulation (EU) 2016/2251, the provision on applying the phase-in of the variation margin requirements to intra-group transactions in a way analogous to the provision in Article 36(2) (which relates to initial margin requirements) is missing. Two new paragraphs should therefore be added to Article 37, which is the Article specifying the phase-in schedule for variation margin requirements. Those paragraphs should be analogous to the existing paragraphs 2 and 3 of Article 36 so that where an intragroup transaction takes place between a Union entity and a third country entity, the exchange of variation margin is not required until three years after entry into force of the Regulation where there is no equivalence decision for that third country. Where there is an equivalence decision, the requirements should apply either four months after the entry into force of the equivalence decision, or according to the general timeline, whichever is later."

 

Emir intragroup exemption multiple pairs 

The submissions' acceptance process for intragroup exemptions from margin has started in January 2017 (for example, the UK FCA has started from 4 January 2017). UK FCA uses in practice two types of application form. The first form is a single pair application and should be used if the firm requires an exemption with just one other group entity. The second is a multiple pairs application form which can be used if the firm requires an exemption with multiple entities within your group and the details required are the same for all the entities within the application. The maximum of 20 intragroup pairs can be submitted within the multiple pairs application form (for details see Intragroup exemptions from margin requirements for non-cleared derivatives - FCA website)

 

Regulatory clarifications on clearing and collateralisation intragroup exemptions

 

The European Commission’s FAQ on EMIR No. II.8 and II.9 clarified the following issues:

 

When can counterparties start applying for the intragroup exemptions?

European Commission has made clear that as intragroup exemptions are exemptions to the clearing obligation and margin requirements they cannot be applicable before the date of application of the clearing obligation or risk mitigation techniques.

Thus counterparties may start applying for this exemption when the technical standards relevant to the intragroup exemptions enter into force.

In accordance with the procedures set out in Article 11 (7) and (9), non-financial counterparties may benefit from the exemption from margin requirements as of the date of notification of their exemption to their competent authority. This exemption should remain valid unless the competent authority considers that the conditions to benefit from this exemption are not met, within a period of three months after the notification.

 

Are intragroup transactions excluded from the calculation of the clearing threshold?

No, EMIR only excludes OTC derivatives that are directly related to the commercial activity or treasury financing activity of non-financial counterparties from the calculation of the clearing threshold. Therefore, if non-financial counterparties conclude intragroup transactions that do not fall within the hedging definition, as specified in RTS, those transactions would be counted for the purpose of the clearing threshold.

 

Another document published by ESMA ‘What does EMIR mean for non-financial counterparties?’ dated December 2012 brings also the answers to the following questions:

 

I enter into OTC derivative contracts with entities of the group I belong to, do I benefit from an exemption from the clearing obligation?

Non-financial companies may benefit from an exemption from the clearing obligation for intragroup OTC derivative contracts when certain conditions are met (including notification to, or authorisation by the relevant competent authority). Please see Article 4(2) of EMIR for the details.

 

I enter into intragroup OTC derivative contracts that are not centrally cleared, do I benefit from an exemption from the application of risk mitigation techniques?

Non-financial companies may benefit from an exemption from the obligation to exchange collateral when some conditions are met. Please see Articles 11 (5), (7), (9) and (10) of EMIR.

The other risks mitigation techniques, such as those related to timely confirmation, portfolio reconciliation, compression and dispute resolution apply in accordance with EMIR and as specified in the ESMA Technical Standards.

  

ESMA in the EMIR Q&As answered, moreover, to the following question:

"May a contract between a Financial Counterparty (FC) and another counterparty be eligible for an intragroup exemption if:

- the FC belongs to both a group of undertakings referred to in Article 3(1) or Article 80(7) and (8) of Directive 2006/48/EC (CRD), and another group referred to in Articles 1 and 2 of Directive 83/349/EEC, and

- the other counterparty merely belongs to the group under Articles 1 and 2 of Directive 83/349/EEC?"

ESMA's answer to the above issue was in the affirmative - in accordance with the definition of 'group' in Article 2(16), as well as Article 3(2)(d) of EMIR, such contract may be eligible for an intragroup exemption if the other counterparty, while not consolidated under the CRD, is part of the same consolidated non-financial group as the FC.

 


Joint ESAs Q&As on exchange of collateral, 18 March 2021

Intragroup transactions

1.1. Partial exemption

Question 1: [last update 18 March 2021]

Intragroup transactions can be exempt “totally or partially” from the requirement related to the exchange of collateral for OTC derivatives contracts not cleared by a CCP. What is the scope of this partial exemption?

Answer 1:

When making a decision on the exemption from the requirement to exchange collateral, the relevant competent authorities shall assess whether the “the risk-management procedures of the counterparties are adequately sound, robust and consistent with the level of complexity of the derivative transaction.” Competent authorities can conclude that the risk- management procedures of the counterparties are consistent with an exemption from initial margins, but not from variation margins. In this case, as it is foreseen in Article 32(4) of the Commission Delegated Regulation 2016/2251, competent authorities could grant a partial exemption, i.e. an exemption limited to the exchange of initial margins.

1.2. Application process for intragroup transactions between financial counterparties and non-financial counterparties

Question 2: [last update 18 March 2021]

In the process related to the intragroup exemption from the exchange of collateral, where a counterparty is a financial counterparty and the other counterparty is a non-financial counterparty and they are established in different Member States. Which competent authority should decide on the exemption?

Answer 2:

Only the financial counterparty should apply to its competent authority (as it is mentioned in Article 11(10) of EMIR). According to Article 32(9) of the Commission Delegated Regulation 2016/2251, the competent authority of the financial counterparty will make a decision and will communicate it to the competent authority of the non-financial counterparty.

 

 

Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty

 

CHAPTER III
INTRAGROUP DERIVATIVE CONTRACTS


SECTION 1
Procedures for counterparties competent authorities when applying exemptions for intragroup derivative contracts


Article 32
Procedures for counterparties and relevant competent authorities

 

1. The application or notification from a counterparty to the competent authority pursuant to paragraphs 6 to 10 of Article 11 of Regulation (EU) No 648/2012 shall be deemed to have been received when the competent authority receives all of the following information:

(a) all the information necessary to assess whether the conditions specified in paragraphs 6, 7, 8, 9 or 10, respectively, of Article 11 of Regulation (EU) No 648/2012 have been fulfilled;

(b) the information and documents referred to in Article 18(2) of Commission Delegated Regulation (EU) No 149/2013.

 

2. Where a competent authority determines that further information is required in order to assess whether the conditions referred to in paragraph 1(a) are fulfilled, it shall submit a written request for information to the counterparty.

 

3. A decision by a competent authority under Article 11(6) of Regulation (EU) No 648/2012 shall be communicated to the counterparty within 3 months of receipt of all the information referred to in paragraph 1.

 

4. Where a competent authority reaches a positive decision under paragraphs 6, 8, or 10 of Article 11 of Regulation (EU) No 648/2012, it shall communicate that positive decision to the counterparty in writing, specifying at least the following:

(a) whether the exemption is a full exemption or a partial exemption;

(b) in the case of a partial exemption, a clear identification of the limitations of the exemption.

 

5. Where a competent authority reaches a negative decision under paragraphs 6, 8, or 10 of Article 11 of Regulation (EU) No 648/2012 or objects to a notification under paragraphs 7 or 9 of Article 11 of that Regulation, it shall communicate that negative decision or objection to the counterparty in writing, specifying at least the following:

(a) the conditions of paragraphs 6, 7, 8, 9 or 10, respectively, of Article 11 of Regulation (EU) No 648/2012 that are not fulfilled;

(b) a summary of the reasons for considering that such conditions are not fulfilled.

 

6. Where one of the competent authorities notified under Article 11(7) of Regulation (EU) No 648/2012 considers that the conditions referred to in points (a) or (b) of the first subparagraph of Article 11(7) of that Regulation are not fulfilled, it shall notify the other competent authority within 2 months of receipt of the notification.

 

7. The competent authorities shall notify the non-financial counterparties of the objection referred to in paragraph 5 within 3 months of receipt of the notification.

 

8. A decision by a competent authority under Article 11(8) of Regulation (EU) No 648/2012 shall be communicated to the counterparty established in the Union within 3 months of receipt of all the information referred to in paragraph 1.

 

9. A decision by the competent authority of a financial counterparty referred to Article 11(10) of Regulation (EU) No 648/2012 shall be communicated to the competent authority of the non-financial counterparty within 2 months from the receipt of the all the information referred to in paragraph 1 and to the counterparties within 3 months of receipt of that information.

 

10. Counterparties that have submitted a notification or received a positive decision according to paragraphs 6, 7, 8, 9 or 10, respectively, of Article 11 of Regulation (EU) No 648/2012 shall immediately notify the relevant competent authority of any change that may affect the fulfilment of the conditions set out in those paragraphs, as applicable. The competent authority may object to the application for the exemption or withdraw its positive decision following any change in circumstances that could affect the fulfilment of those conditions.

 

11. Where a negative decision or objection is communicated by a competent authority, the relevant counterparty may only submit another application or notification where there has been a material change in the circumstances that formed the basis of the competent authority's decision or objection.

 

SECTION 2

Applicable criteria for applying exemptions for intragroup derivative contracts

 

Article 33

Applicable criteria on the legal impediment to the prompt transfer of own funds and repayment of liabilities

 

A legal impediment to the prompt transfer of own funds or repayment of liabilities between the counterparties as referred to in paragraphs 5 to 10 of Article 11 of Regulation (EU) No 648/2012 shall be deemed to exist where there are actual or foreseen restrictions of a legal nature including any of the following:

(a) currency and exchange controls;

(b) a regulatory, administrative, legal or contractual framework that prevents mutual financial support or significantly affects the transfer of funds within the group;

(c) any of the conditions on the early intervention, recovery and resolution as referred to in Directive 2014/59/EU of the European Parliament and of the Council (11) are met, as a result of which the competent authority foresees an impediment to the prompt transfer of own funds or repayment of liabilities;

(d) the existence of minority interests that limit decision-making power within entities that form the group;

(e) the nature of the legal structure of the counterparty, as defined in its statutes, instruments of incorporation and internal rules.

 

Article 34
Applicable criteria on the practical impediments to the prompt transfer of own funds and repayment of liabilities

 

A practical impediment to the prompt transfer of own funds or repayment of liabilities between the counterparties as referred to in paragraphs 5 to 10 of Article 11 of Regulation (EU) No 648/2012 shall be deemed to exist where there are restrictions of a practical nature, including any of the following:

(a) insufficient availability of unencumbered or liquid assets to the relevant counterparty when due;

(b) impediments of an operational nature which effectively delay or prevent such transfers or repayments when due.

 

 

 

Recitals 37 - 40 of the Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty

 

(37) When a counterparty notifies the relevant competent authority regarding its intention to take advantage of the exemption of intragroup transactions, in order for the competent authority to decide whether the conditions for the exemption are met, the counterparty should provide a complete file including all relevant information necessary for the competent authority to complete its assessment.

 

(38) For a group to be deemed to have adequately sound and robust risk management procedures, a number of conditions have to be met. The group should ensure a regular monitoring of the intragroup exposures, and the timely settlement of the obligations resulting from the intragroup OTC derivative contracts should be guaranteed based on the monitoring and liquidity tools at group level that are consistent with the complexity of the intragroup transactions.

 

(39) In order for the exemption for intragroup transactions to be applicable, it must be certain that no legislative, regulatory, administrative or other mandatory provisions of applicable law could legally prevent the intragroup counterparties from meeting their obligations to transfer monies or repay liabilities or securities under the terms of the intragroup transactions. Similarly, there should be no operational or business practices of the intragroup counterparties or the group that could result in funds not being available to meet payment obligations as they fall due on a day-to-day basis, or in prompt electronic transfer of funds not being possible.

 

(40) This Regulation includes a number of detailed requirements to be met for a group to obtain the exemption from posting margin for intragroup transactions. In addition to those requirements, where one of the two counterparties in the group is domiciled in a third country for which an equivalence determination under Article 13(2) of Regulation (EU) No 648/2012 has not yet been provided, the group has to exchange, variation and appropriately segregated initial margins for all the intragroup transactions with the subsidiaries in those third countries. In order to avoid a disproportionate application of the margin requirements and taking into account similar requirements for clearing obligations, this Regulation should provide for a delayed implementation of that particular requirement. This would allow enough time for completion of the process to produce the equivalence determination, while not requiring an inefficient allocation of resources to the groups with subsidiaries domiciled in third countries.

 

EMIR reporting exemption

 

Until 17 June 2019 there was no exemption available for intragroup trades from the EMIR reporting obligation, hence, until the said date they should be reported as any other trades. However, Article 9(1) of EMIR, as amended by the Regulation (EU) 2019/834 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories (EMIR REFIT) excluded intragroup transactions from EMIR reporting, if one of the counterparties is a non-financial counterparty - under certain conditions and subject to a specific procedure.

According to the above rules counterparties can benefit from an intragroup exemption from reporting for the derivative contracts within the same group where at least one of the counterparties is a non-financial counterparty or would be qualified as a non- financial counterparty if it were established in the Union and when the following conditions are met: “(a) both counterparties are included in the same consolidation on a full basis; (b) both counterparties are subject to appropriate centralised risk evaluation, measurement and control procedures; and (c) the parent undertaking is not a financial counterparty”.

ESMA detailed in the Consultation paper of 8 July 2021 (Draft Guidelines for reporting under EMIR, ESMA74-362-1893) some elements regarding the process to be followed in order to submit a notification to benefit from the exemption. In addition, ESMA provided clarifications with regards to the eligibility of counterparties to the exemption, including a guidance provided by the European Commission.

ESMA Final Report of 14 December 2022 (ESMA Guidelines for reporting under EMIR, ESMA74-362-2281) takes note of the respondent suggesting that the opportunity to submit anticipated notification should be considered in the Guidelines. ESMA agreed with this proposal and has added a paragraph in the Guidelines to allow counterparties to submit a notification even if the counterparties are not required to report at the time the notification is submitted but will be required to do so in the future (for example, because they do not engage in derivatives trading at all on the date of notification but plan to do so in the future) as long as all conditions to benefit from the exemption are met. As an example, ESMA considers the case where an NFC is acquired by a group during the financial year (i.e. between two annual reports), following the acquisition the NFC might be included in the consolidation on a full basis. Therefore, the notification for the IGT exemption from reporting can be submitted after the acquisition has been finalised, even if the new consolidated annual report has not yet been published and no derivative transactions have been concluded yet.

On 14 June 2019 ESMA updated the EMIR Q&As. The said ESMA’s document provides some clarifications regarding the implementation of EMIR Refit with respect to notifications to be made by market participants to their competent authorities to apply an intragroup exemption from EMIR reporting (TR Q&A 51 - see below).

 

Article 9(1) EMIR after Refit


Reporting obligation

 

1.  Counterparties and CCPs shall ensure that the details of any derivative contract they have concluded and of any modification or termination of the contract are reported in accordance with paragraphs 1a to 1f of this Article to a trade repository registered in accordance with Article 55 or recognised in accordance with Article 77. The details shall be reported no later than the working day following the conclusion, modification or termination of the contract.

 

The reporting obligation shall apply to derivative contracts which:
(a) were entered into before 12 February 2014 and remain outstanding on that date;
(b) were entered into on or after 12 February 2014.

 

Notwithstanding Article 3, the reporting obligation shall not apply to derivative contracts within the same group where at least one of the counterparties is a non-financial counterparty or would be qualified as a non-financial counterparty if it were established in the Union, provided that:
(a) both counterparties are included in the same consolidation on a full basis;
(b) both counterparties are subject to appropriate centralised risk evaluation, measurement and control procedures; and
(c) the parent undertaking is not a financial counterparty.

 

Counterparties shall notify their competent authorities of their intention to apply the exemption referred to in the third subparagraph. The exemption shall be valid unless the notified competent authorities do not agree upon fulfilment of the conditions referred to in the third subparagraph within three months of the date of notification.

 

  

 

Questions and Answers Implementation of the Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR), 14 June 2019, ESMA70-1861941480-5

 

TR Question 51 [last update 13 June 2019, applicable from 17 June 2019] Article 9(1) of EMIR – Reporting obligation

 

(a) When can counterparties start notifying the national competent authorities (NCAs) of their intention to apply the reporting exemption in accordance with Article 9(1) EMIR, as amended by Regulation 2019/834?

 

(b) On which day does the three-month period referred to in Article 9(1) EMIR, as amended by Regulation 2019/834, start?

 

(c) From and until when is the reporting exemption valid in accordance with Article 9(1) EMIR, as amended by Regulation 2019/834?

 

(d) Do the counterparties need to report during the three-month period?

 

(e) According to Article 9(1)(c) EMIR, as amended by Regulation 2019/834, the parent undertaking should not be a financial counterparty. How should the reference to “parent undertaking” be understood?

 

(f) Can the parent undertaking provide the notification for the group?

 

(g) When notifying of their intention to apply the exemption from the reporting obligation in accordance with Article 9(1) EMIR, as amended by Regulation 2019/834, what should the counterparties communicate to their NCAs in this respect?

 

(h) When counterparties of the same group established in at least two different EU member states notify their NCAs of their intention to apply a reporting exemption under Article 9(1) EMIR, as amended by Regulation 2019/834, do the NCAs need to agree on whether the conditions laid down in Article 9(1) EMIR, as amended by Regulation 2019/834, are met, and if not, what applies then?

 

(i) Is it necessary for the Commission to have adopted an implementing act (equivalence decision) under Article 13(2) EMIR in order for the reporting exemption under Article 9(1), as amended by Regulation 2019/834, to apply to derivatives entered into between a counterparty established in the Union and a counterparty established in a third country which would be an NFC if it were established in the Union?

 

(j) May a derivative contract between a Financial Counterparty (FC) and non-financial counterparty (NFC) be eligible for an intragroup exemption from reporting if:
- the FC belongs to both a group of undertakings referred to in Article 3(1) or Article 80(7) and (8) of Directive 2006/48/EC (CRD), and another group referred to in Articles 1 and 2 of Directive 83/349/EEC, and
- the NFC merely belongs to the group under Articles 1 and 2 of Directive 83/349/EEC?

 

(k) Once the reporting exemption is valid, what actions should counterparties that benefit from the ex-emption undertake with regards to derivatives that are still outstanding?

 

TR Answer 51

 

(a) Counterparties can notify of their intention to apply an exemption from the reporting obligation as soon as Regulation 2019/834 (REFIT) comes into force. However, some competent authorities may allow counterparties to notify ahead of that date.

 

(b) The three-month period starts on the later of the calendar day following receipt of the notification(s) by the relevant NCA(s) and the calendar day following the entry into force of EMIR, as amended by Regulation 2019/834.

 

(c) The exemption shall be valid from the date when the NCA(s) confirm(s) to the counterparty(ies) that the conditions to use the exemption are satisfied, or if no decision is notified by the NCA(s), it will be valid from the end of the three-month non-objection period. If the conditions, referred to in the third sub-paragraph of Article 9(1) EMIR, as amended by Regulation 2019/834, change, the counterparties need to inform the relevant NCAs. Without prejudice to the existing exemption, the NCA(s) can object to the use of the exemption due to the change in the conditions. From that point in time the exemption will not be valid.

 

(d) The counterparties need to report during the three-month period unless the NCA(s) notify(ies) the counterparty(ies) that they agree upon fulfilment of the conditions before the three-month period expires.

 

(e) The parent undertaking for the purpose of the requirements for the exemption under Article 9(1) EMIR, as amended by Regulation 2019/834, should be considered the ultimate parent undertaking of the group relevant for the consolidation on a full basis, centralised risk evaluation, measurements and control procedures with regards to the counterparties for which the exemption is notified. It is not necessary that these procedures are established at the level of the whole group of the ultimate undertaking, rather they should be applicable for the counterparties notifying the exemption from reporting.

 

(f) Counterparties will need to submit their notifications to their respective NCAs in accordance with the procedures adopted by those NCAs in each member state. If this is acceptable for the respective NCA, the parent undertaking may provide a single notification identifying each entity of its group situated within that member state for which exemption is requested. It is not necessary that the parent undertaking is a counterparty to a derivative contract, neither that it is located in the member state where it submits a notification.

 

(g) When notifying of their intention to apply the exemption from the reporting obligation in accordance with Article 9(1) EMIR, as amended by Regulation 2019/834, the notifying counterparty should state that it fulfils the conditions laid down in Article 9(1) EMIR, as amended by Regulation 2019/834 and, if applicable, should indicate the other NCA(s) that have been notified with regards to the counter-party(ies) included in the notification. The NCA may ask for additional information and/or documents to assess the fulfilment of the conditions referred to in the third subparagraph of Article 9(1) EMIR, as amended by Regulation 2019/834.

 

(h) Each NCA needs to consider whether the conditions laid down in Article 9(1) are met. NCAs may disagree on the fulfilment of these conditions. Where one of the NCAs considers that the conditions are not fulfilled, it shall notify the counterparty in its member state as well as the other NCA(s) within the three-month period of the receipt of the notification and specify the reasons. Counterparties may renotify of their intention to apply the reporting exemption under Article 9(1) EMIR, as amended by Regulation 2019/834, once they consider they have addressed the objec-tion(s) raised by the objecting NCA(s). For the avoidance of doubt, if counterparties notify their respective NCAs on different dates, they should wait until the end of the later of the two three-month periods before relying on the exemption (provided neither NCA objected) or until all relevant NCAs agree on the fact that the conditions laid down in Article 9(1) EMIR, as amended by Regulation 2019/834, are met. The reporting exemption for the derivative contracts concluded by the relevant counterparties is not valid, if one NCA has objected to it. Therefore, the derivatives concluded between the counterparties, that are included in the notification, should continue to be reported.

 

(i) No, this is not necessary.

 

(j) Yes. In accordance with the definition of ‘group’ in Article 2(16) EMIR, as amended by Regulation 2019/834, such a contract may be eligible for an intragroup reporting exemption if the NFC, while not consolidated under the CRD, is part of the same consolidated non-financial group as the FC. (k) Counterparties that benefit from the exemption should send reports with Action type “E = Error” for all the derivative contracts with the counterparties for which the reporting exemption is valid.

 

 

On 31 March 2021 another ESMA EMIR Q&As update took place:

  • Answer TR51 m provides guidance on whether the exemption can be used where the parent of the group is within a third country, and indicates that in many cases it may not be applied.
  • Answer TR 51 l provides guidance as to how to report when the exemption ceases to apply, see below.

 


amended* TR Question 51 [last update 31 March 2021] Article 9(1) of EMIR – Reporting obligation

(l) Once the reporting exemption ceased to be valid due to a change in any of the conditions, referred to in the third sub-paragraph of Article 9(1) EMIR, as amended by Regulation 2019/834, what actions should the concerned counterparties undertake with regards to the derivatives that are outstanding?

Answer

(l) The counterparties concerned should report the outstanding derivatives with Action type “N = New” and provide all the relevant details of those derivatives as they stand on the date when the exemp- tion ceases to be valid, and report all subsequent lifecycle events as they occur.

It is not necessary to report the modifications to the derivative that occurred between the date of conclusion of that derivative and the date when the exemption ceased to be valid.

If the outstanding derivatives were previously cancelled with Action type “E = Error” at the moment when the exemption was granted, the counterparties should report such derivatives with a new UTI so that the reports are not rejected in accordance with the EMIR validation rules (Validation for the field 2.93 Action type: “Only one report with the action type "New" for a given combination of Counterparty ID- ID of the other counterparty-Trade ID shall be accepted”. Available at: https://www.esma.europa.eu/sites/default/files/library/esma74-362-853_emir_validation_rules_for_revised_rts_its.xlsx).

(m) In the case of derivatives contracts where at least one of the counterparties is a non-financial counterparty: does the exemption of reporting obligation for intra-group transactions introduced in Article 9(1) of EMIR REFIT apply when the parent undertaking is established in a third country?

(m) Answer provided by the European Commission in accordance with article 16b(5) of the ESMA Regulation

The exemption contained in Article 9(1) of EMIR does not cover intragroup transactions for which the parent undertaking is established in a third country, even if the transaction occurs between two counterparties which are both established in the EU.

This conclusion is based on the following elements:

1. The definition of parent undertaking refers to an undertaking governed by the law of a Member State and nothing in EMIR indicates a will to modify that reference.

2. This interpretation fits the actual purpose of Article 13 of EMIR: deference is granted where there is equivalence with the jurisdiction hosting the parent undertaking.

3. This interpretation ensures a meaningful use and purpose of the transparency objective of Article 9 while limiting the exemption in article 9(1) to the minimum necessary.

 

 

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