Home / Regulatory Developments / Circular C243 (New amendments in the EU framework Regulation No 648/2012 (“EMIR”) governing the Over the Counter (“OTC”) Derivatives, Central Counterparties (“CCPs”) and Trade Repositories (“TRs”))

Circular C243 (New amendments in the EU framework Regulation No 648/2012 (“EMIR”) governing the Over the Counter (“OTC”) Derivatives, Central Counterparties (“CCPs”) and Trade Repositories (“TRs”))

Following Circular C115 relating to EMIR, CySEC informs the Cypriot Investment Firms, UCITS and Management Companies, AIFs managed by AIFMs and Non-Financial Counterparties (“the Regulated Entities”), on the amendments made in the EU regulatory framework regarding EMIR; particularly in respect of the:

  1. Clearing obligation

A number of delegated regulations were published by the EU Commission (“the Commission”) in the past which determine the classes of over-the-counter (“OTC”) derivatives subject to clearing obligation as well as the dates from which the clearing obligation takes effect. Subsequently, a new delegated regulation, the Commission Delegated Regulation (EU) 2017/751, has been published which amends some of these dates.

The applicable delegated regulations are laid down in points 1 to 3 below. The amended dates are marked as (“new”).

  1. Commission Delegated Regulation (EU) 2015/2205:
  1. Mandatory clearing applies for the following interest rate OTC derivatives classes, denominated in the G4 currencies (GBP, EUR, JPY, USD):
  • Basis swaps classes.
  • Fixed-to-float interest rate swaps classes (known as “plain vanilla” interest rate derivatives).
  • Forward rate agreement classes.
  • Overnight index swaps classes.
  1. The dates from which the clearing obligation takes effect in relation to the above interest rate OTC derivatives classes differ depending on the category of counterparty (as defined in Article 2 of the Commission Delegated Regulation (EU) 2015/2205).
Counterparties Dates from
Category 1 21 June 2016
Category 2 21 December 2016
Category 3 21 June 2019 (new)
Category 4 21 December 2018

 

  1. Commission Delegated Regulation (EU) 2016/592:
  1. It provides for mandatory clearing of the following two iTraxx Index credit default swaps (“CDS”):
  • Untranched iTraxx Index CDS (Europe Main, 5 year tenor, series 17 onwards, with EUR as the settlement currency) and
  • Untranched iTraxx Index CDS (Europe Crossover, 5 year tenor, series 17 onwards, with EUR as the settlement currency).
  1. The dates from which the clearing obligation takes effect in relation to the above CDS differ depending on the category of counterparty (as defined in Article 2 of the Commission Delegated Regulation (EU) 2016/592).
Counterparties Dates from
Category 1 9 February 2017
Category 2 9 August 2017
Category 3 21 June 2019 (new)
Category 4 9 May 2019

 

  1. Commission Delegated Regulation (EU) 2016/1178:
  1. It provides for mandatory clearing of the following interest rate OTC derivatives classes, denominated in non G4 currencies (NOK, PLN, SEK):
  • Fixed-to-float IRS denominated in Norwegian Krone (NOK), Polish Zloty (PLN) and Swedish Krona (SEK) and
  • FRAs denominated in NOK, PLN and SEK.
  1. The dates from which the clearing obligation takes effect in relation to the above interest rate OTC derivatives classes differ depending on the category of counterparty (as defined in Article 2 of the Commission Delegated Regulation (EU) 2016/1178).
Counterparties Dates from
Category 1 9 February 2017
Category 2 9 July 2017
Category 3 21 June 2019 (new)
Category 4 9 July 2019

 

  1. Clearing obligation

From 01.11.17 onwards, several amendments have been made in the reporting requirements under EMIR (particularly as per Article 9 of EMIR, Commission Delegated Regulation (EU) No 148/2013 and Commission Implementing Regulation (EU) No 1247/2012), as these are laid down in points 1 to 2 below.


  1. Commission Delegated Regulation (EU) 2017/104 (amends Delegated Regulation (EU) No 148/2013):
  1. Derivative contracts composed of a combination of derivative contracts (“complex product”)

According to Article 1 of Regulation 2017/104, in case the fields in the report do not allow for the effective reporting of the complex product, the details and information of the complex product shall be reported in separate reports. The number of the reports shall be agreed by the counterparties.

  1. Cleared trades
  • According to Article 2(1) of Regulation 2017/104, existing contracts subsequently cleared by a CCP shall be reported as terminated and the new contract resulting from clearing shall be reported.
  • According to Article 2(2) of Regulation 2017/104, where a contract is both concluded on a trading venue and cleared on the same day, only the contracts resulting from clearing shall be reported.
  1. Reporting of exposure

According to Article 3 of Regulation 2017/104:

Detailed information on collateral shall be reported.

Not only posted but also received collateral shall be reported.

  1. Credit default swaps (“CDS”)

A new class of derivatives is introduced, the CDS, with several reporting fields (Section 2j of Table 2 of the Annex of Regulation 2017/104).

  1. Commission Implementing Regulation (EU) 2017/105 (amends Implementing Regulation (EU) No 1247/2012)
  1. Identification of counterparties and other entities

According to Article 1(1) of Regulation 2017/105, legal entity identifiers (“LEIs”) shall be the only means allowed for the purpose of identification of legal entities.

  1. Counterparty side

According to Article 1(2) of Regulation 2017/105, the counterparty side to the derivative contract shall be determined depending on the different asset classes.

  1. Specification, identification and classification of derivatives

According to Article 1(3) of Regulation 2017/105, derivatives shall be specified on the basis of contract type and asset class. They shall be identified by International Securities Identification Number (“ISIN”) or Alternative Instrument Identifier (“AII”). The OTC derivative contracts will be identified by their types. Two (2) new contract types are added:

  1. spreadbets and
  2. swaptions.

In view of ongoing financial innovation giving rise to new types of derivatives contracts, it is important to ensure that any new types of derivative contracts that do not fall within an existing classification can nevertheless be reported, in the category “other” in the classification of types of derivatives contracts (Field 1, Section 2a of Table 2 of the Annex of Regulation 2017/105).

  1. Unique trade identifiers (“UTIs”)

According to Article 1(4) of Regulation 2017/105, criteria are established for the generation of UTIs so as to avoid counting the same transaction twice.

  1. Venue of execution

According to Article 1(4) of Regulation 2017/105, clear rules are set for identifying the venue of execution.

  1. Backloading

According to Article 1(5) of Regulation 2017/105 and given the resulting complexity of reporting terminated trades and the fact that such trades do not increase systemic risk, the period for reporting terminated trades shall be extended from 3 years to 5 years from the commencement date for reporting (i.e. from 12.02.17 to 12.02.19).

  1. Risk mitigation techniques for OTC derivatives contracts not cleared by a CCP (non-centrally cleared OTC derivatives)

A new delegated regulation has been published, the Commission Delegated Regulation (EU) 2017/323 which amends the Commission Delegated Regulation (EU) 2016/2251, the amendments are referred to the timely, accurate and appropriately segregated exchange of collateral for OTC derivatives not cleared by a CCP; and entered into force on 04.01.17.

CySEC’s expects that:

Regulated Entities must ensure that they:

  1. Consider the products used to identify which of them are (or will be) subject to clearing obligation.
  2. Put in place relevant clearing arrangements as soon as possible.
  3. Determine their counterparty category and identify which of their counterparties will also be within scope.
  4. If wishing to use an exemption from the clearing obligation in accordance with article 4(2) of EMIR, assess compliance with conditions and consider the relevant notification / application process need to be fulfilled.

 

For reporting obligation, Regulated Entities are advised to:

  1. Amend their systems and procedures in order to report transactions in accordance with the amended reporting requirements.
  2. Obtain LEIs if they do not already have and ensure that all their clients, which are legal entities, have also obtained LEIs (i.e. by 01.11.17).

For risk-mitigation techniques for OTC derivative contracts not cleared by a CCP, Regulated entities must ensure that appropriate procedures and arrangements are in place for the timely, accurate and appropriately segregated exchange of collateral.

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