EMIR – intra-group transactions exemption - Page 2

 


 

 

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)

 

 

What about other EMIR requirements

 

 

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

 

 

Regulatory clarifications on intragroup exemption

 

 

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.

 

 

 

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.

 

 

 

 

 

 

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Last Updated on Thursday, 27 July 2017 12:17
 

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