Non-financial counterparty (NFC) / Non-financial entity (NFE)
European Union Electricity Market Glossary

 


 

 

Non-financial counterparty (NFC) under the EMIR Regulation is an undertaking established in the European Union other than a financial counterparty (FC) or a CCP.

 

The term "non-financial counterparty" is defined within Article 2(9) EMIR.

 

Frequently used internal differentiation within the NFCs' applies the criterion of being above or below the clearing threshold, which differentiates this category into NFCs+ and NFCs-.

 

Under MiFiD II a similar, but slightly different term is used, namely a "non-financial entity" (NFE), for instance, disapplication of position limits for risk-reducing purposes relating to commercial activity under Article 57(1) MiFID II is only available to persons that are a "non-financial entity", however, this term is not defined within the MiFID II itself.

 

The regulators' view (Discussion Paper MiFID II/MiFIR, ESMA/2014/548) is both: "a non-financial counterparty" under EMIR and "a non-financial entity" under MiFID are the inverse of a financial counterparty and are to be understood in the uniform way.

 

Consequently, both categories encompass the same scope - i.e. natural or legal persons that do not qualify as:

 

- an investment firm authorised in accordance with Directive 2004/39/EC (MiFID),

 

- a credit institution authorised in accordance with Directive 2006/48/EC (BCD),

 

- an insurance undertaking authorised in accordance with Directive 73/239/EEC (First Non-Life Directive),

 

- an assurance undertaking authorised in accordance with Directive 2002/83/EC (Consolidated Life Directive),

 

- a reinsurance undertaking authorised in accordance with Directive 2005/68/EC (Reinsurance Directive),

 

- a UCITS and, where relevant, its management company, authorised in accordance with Directive 2009/65/EC (UCITS IV Directive),

 

- an institution for occupational retirement provision within the meaning of Article 6(a) of Directive 2003/41/EC (Occupational Pension Funds Directive),

 

- an alternative investment fund managed by AIFMs authorised or registered in accordance with Directive 2011/61/EU (Alternative Investment Fund Managers Directive).

 

The relevant clarifications have been included in the recitals to the MiFID II secondary legislation.

 

 

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NFCs in numbers     

 

 

 

In the Letter of 27 January 2017 to the European Commission on the EMIR Review and ESMA sanctioning powers under EMIR and CRAR (ESMA70-708036281-19) ESMA argues that "there is a need to review the definition of NFCs in EMIR, as for the moment, many counterparties fall in the NFC definition, although they are of a more financial activity nature, they would fit more adequately in the FC category. This would further help to ensure that the requirements are properly calibrated for FCs and NFCs respectively and according to their profiles."

 

On the other hand, NFCs' characteristics is, in many important aspects, different from financial counterparties, for example NFCs have a low level of interconnectedness with the financial system as they transact with very few counterparties across the markets; an average of 1-2 per entity compared with financial counterparties which have an average of 31 counterparties per entity (Report from the Commission to the European Parliament and the Council under Article 85(1) of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories COM(2016) 857 final of 23.11.2016, p. 9).

 

Non-financial counterparties that are active in derivatives markets are numerous (64 295), and represent 72% of all counterparties (Commission Staff Working Document Impact Assessment, Accompanying the document 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 final} {SWD(2017) 149 final}, 4.5.2017 SWD(2017) 148 final, p. 28).

 

According to ESMA data, only 2% of the notional value of the OTC derivatives markets is made up of NFC activity.

 

This accounts for EUR 9.5 trillion outstanding volumes as measured by notional amount out of a grand total of EUR 608 trillion, including both financial counterparties and non-financial counterparties.

 

ESMA also indicates that on average, NFCs have portfolios of around 30 trades, representing EUR 150mn of notional.

 

Therefore, the positions of NFCs in the OTC derivatives market appear to be very limited when compared to the group of financial counterparties.

 

In addition, NFCs tend to transact with less than 6 other market participants, which suggests not only a lack of interconnectedness across the system, as far as NFCs are involved, but also a lower level of risk than financial counterparties' risk (as the latter hold much larger volumes of derivatives and have a far higher level of interconnectedness).

 

It highlights that non-financials generally tend to sit at the periphery of the market, while CCPs, clearing members and banks appear at the core, with many connections between them.

 

This shows the systemic relevance of most of the NFCs is very limited.

 

ESMA concluded the said Impact Assessment of May 2017 that the only asset classes in which NFCs may have some systemic relevance, measured as the number of contracts (trade counts) or as the number of counterparties, are the commodity and "other" asset classes and the FX asset classes.

 

When it comes to MiFID II interlinkages, MiFID II aims at reclassifying large non-financial commodities traders as financial counterparties, putting an 'ancillary activity test' that determines how much non-hedging (or speculative) commodity derivative trading non-financial firms can conduct before this activity is no longer deemed 'ancillary to the main business' of the firm and the firm be obliged to seek a MiFID authorisation.

 

Hence the largest non-financial counterparties (NFC) active on commodity markets will be obliged to seek a MiFID authorisation.

 

This development will lead to largest NFCs being subject to the clearing obligation under EMIR.

 

 

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    Non-EU entities   

 

 

The EMIR definition of non-financial counterparty evokes some interpretational issues in terms of references to non-EU entities.

 

This is particularly true in Article 3, which deals with the definition of the intragroup transaction in the context of intra-group transactions exemption.

 

Article 3(2)(d) refers to a "non-financial counterparty (…...) established in the Union or in a third country jurisdiction".

 

As ESMA points out in the EMIR Review Report no. 4 of 13 August 2015 - ESMA input as part of the Commission consultation on the EMIR Review (2015/1254), the reading of Article 3 together with the definitions of non-financial counterparties provided in Article 2(9) reveals a contradiction, since Article 2(9) of EMIR specifies that non-financial counterparties are undertakings established in the European Union.

 

As a result, ESMA suggests in the above report that third-country entities are referred to either with the wording "counterparties (or entities) established in a third country" or, if it is necessary to introduce a reference to the non-financial nature of the third country counterparties, to use the wording "counterparties that would qualify as non-financial counterparties if they were established in the Union", consistently with Regulation (EU) no 285/2014 on direct, substantial and foreseeable effect of contracts within the Union and to prevent the evasion of rules and obligations.

 

 

 taxonomy  

    Taxonomy of non-financial counterparties for EMIR reporting purposes   

 

 

Classification of non-financial counterparties for EMIR reporting purposes is as follows (Table 1 of the Annex to the Commission Implementing Regulation (EU) 2017/105 of 19 October 2016 amending Implementing Regulation (EU) No 1247/2012 laying down implementing technical standards with regard to the format and frequency of trade reports to trade repositories according to Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories):

 

1 = Agriculture, forestry and fishing,

 


2 = Mining and quarrying,

 

3 = Manufacturing,

 

4 = Electricity, gas, steam and air conditioning supply,

 

5 = Water supply, sewerage, waste management and remediation activities,

 

6 = Construction,

 

7 = Wholesale and retail trade, repair of motor vehicles and motorcycles,

 

8 = Transportation and storage,

 

9 = Accommodation and food service activities,

 

10 = Information and communication,

 

11 = Financial and insurance activities,

 

12 = Real estate activities,

 

13 = Professional, scientific and technical activities,

 

14 = Administrative and support service activities,

 

15 = Public administration and defence; compulsory social security,

 

16 = Education,

 

17 = Human health and social work activities,

 

18 = Arts, entertainment and recreation,

 

19 = Other service activities,

 

20 = Activities of households as employers; undifferentiated goods – and services –producing activities of households for own use,

 

21 = Activities of extraterritorial organisations and bodies.

 

The above categories correspond to the main sections of Statistical classification of economic activities in the European Community (NACE) as defined in Regulation (EC) No 1893/2006 of the European Parliament and of the Council.

 

Where more than one activity is reported, the prescribed way of reporting is to list the codes in order of the relative importance of the corresponding activities, separating them with a "-".

 

EMIR reporting, moreover, requires to fill in the field "Nature of the reporting counterparty" (Field 7 in the Table 1 (Counterparty Data) of the Annex to the aforementioned Regulation), where for non-financial counterparties the format "N" is envisioned.

 

 

 

Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38

 

Question [Last update: 07/07/2017]


Can a person that is not authorised as an investment firm but meets the requirements of Article 53(3) of MiFID II be a member or participant of a regulated market or an MTF?

 

Answer

 

Yes. Article 53(3) of MiFID II provides that an entity that is not an investment firm or a credit institution can be a member of a regulated market under certain conditions, this rule being extended to MTFs by Article 19(2) of MiFID II.

 

ESMA considers that this provision should be read in conjunction with the requirements of Article 2(1). Under this provision, a person falling under any of the categories listed in Article 2(1) would not have to be authorised as an investment firm.

 

However, pursuant to Article 2(1)(d) (ii) of MiFID II, when a person dealing on own account in financial instruments other than commodity derivatives or emission allowances or derivatives thereof and not providing any other investment services or performing any other investment activities in such instruments is also a member of or a participant in a regulated market or an MTF, it falls under the scope of MiFID II, and should accordingly be authorised as an investment firm unless:

 

- it is exempted under points (a), (i) and (j); or

 

- it is a non-financial entity which executes transactions on a trading venue which are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of that non-financial entity or its group.


As a consequence, the reference in Article 53(3) to persons other than investment firms and credit institutions only relates to entities that are exempted from authorisation under Article 2(1), such as insurance companies or collective investment undertakings, as long as their own regulatory framework permits them to do so.


This Q&A does not address the issue of non-EEA firms being a member or participant of an EEA trading venue.

 

 

 

 

 

 

 

IMG 0744

    Documentation    

 

 

 

 

 

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, May 2017, Recital 7, Article 1(8)

 

Commission Staff Working Document Impact Assessment, Accompanying the document 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 final} {SWD(2017) 149 final}, 4.5.2017 SWD(2017) 148 final, p. 26-29

 

EMIR Regulation, Article 2(9)

 

Commission Implementing Regulation (EU) 2017/105 of 19 October 2016 amending Implementing Regulation (EU) No 1247/2012 laying down implementing technical standards with regard to the format and frequency of trade reports to trade repositories according to Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories

 

Report from the Commission to the European Parliament and the Council under Article 85(1) of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories COM(2016) 857 final of 23.11.2016

 

ESMA/2014/548 Discussion Paper MiFID II/MiFIR

 

EMIR Review Report no. 4 of 13 August 2015 - ESMA input as part of the Commission consultation on the EMIR Review (2015/1254)

 

ESMA's Letter of 27 January 2017 to the European Commission on the EMIR Review and ESMA sanctioning powers under EMIR and CRAR, ESMA70-708036281-19

 

Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38

 

 

 

 

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    Links    

 

 

 

 

EMIR's regime for non-financial counterparties (NFCs)

 

 

 

 

 

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Last Updated on Saturday, 18 November 2017 21:34
 

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