European Market Infrastructure Regulation (EMIR)

Counterparty classification
EMIR Refit introduces the term 'small financial counterparty' (FC-). This is A financial counterparty whose positions in OTC derivative transactions do not exceed the clearing threshold. Unlike non-financial counterparties (NFCs), counterparties that fall under the FC category are not allowed to exclude their hedging transactions when calculating their positions. When an FC reaches the clearing threshold, the clearing obligation applies to all classes of OTC derivative transactions. For NFCs, on the other hand, this obligation only applies to the category of derivatives for which that threshold is exceeded.

All counterparties will be classified as one of the following categories

• FC+: financial counterparties that exceeds the clearing threshold;
• FC-: financial counterparties that do not exceed the clearing threshold;
• NFC+: non-financial counterparties that exceeds the clearing threshold; and
• NFC-: non-financial counterparties that do not exceed the clearing threshold.

Definition financial counterparty
The definition of financial counterparty has been extended by EMIR Refit to include additional entity types which are perceived to be a systemic risk for the financial system. These are the (i) Alternative investment firms (AIF's) irrespective of the location of their alternative investment fund manager (AIFM) and the (ii) Central securities depositaries (CDSs).

Exemption of the clearing obligation
EMIR Refit has changed the scope of the clearing obligation for financial counterparties and non-financial counterparties.

• Where a financial counterparty or a non-financial counterparty does not to calculate its positions against the clearing thresholds, it will become subject to the clearing obligation for all OTC derivative transactions relating to any class of OTC derivatives for which the clearing obligation is applicable.
• Where a financial counterparty calculates its positions and the result of that calculation exceeds the clearing threshold, the FC will become subject to the clearing obligation for all OTC derivative transactions.
• Where a non-financial counterparty calculates its positions and the result of that calculation exceeds the clearing threshold, the non-financial counterparty will become subject to the clearing obligation only for the OTC derivative transaction in asset classes for which the result of the calculation exceeds the clearing threshold.

If the positions of the financial counterparty and the non-financial counterparty exceed the clearing threshold or if they do not perform the required calculation for these asset classes, the national competent authority and the European Securities and Markets Authority (ESMA) must be informed.

Clearing thresholds
Every 12 months, a financial counterparty taking positions in OTC derivative transactions may calculate its aggregate month-end average position for the previous 12 months. In calculating the positions, the financial counterparty shall include all OTC derivative transactions entered into by that financial counterparty or entered into by other entities within the group to which that financial counterparty belongs. The average position must be compared to the applicable clearing thresholds below.

EMIR applies to OTC derivatives transactions and ETD transactions such as:

• Equity derivatives
• Interest rate derivatives
• FX derivatives (except FX spot products)
• Commodities derivatives (except energy spot products)

If you have any questions regarding the counterparty classification or possible amendments that apply to you, please contact our FX specialists . We also want to advise you to consult an external party on the rules and obligations of EMIR that apply to you. For the specific EMIR rules, please refer to  EMIR  and  EMIR Refit .