How SA Counterparties are Impacted by EMIR
An SA entity with no presence in the EU would not be subject to EMIR. However, if that SA entity trades with an EU counterparty, then the EU counterparty would need to change the way in which it transacted with the SA entity in order for the EU entity to be EMIR compliant. If the EU counterparty did trade with the SA entity in a way which was not compliant with EMIR, the EU counterparty would be liable. The likelihood is though that if the SA entity cannot trade in an EMIR compliant way with the EU entity, the EU entity would have to cease trading with the SA entity.
EMIR does 3 main things:
Changes the way in which derivatives business is conducted to make it ‘less risky’
Introduces mandatory reporting of transactions to a trade repository
Mandatory clearing of standardized OTC derivatives instruments
In order to ascertain which of these requirements will impact the trading relationship with the SA entity, the EU entity will have to ask the SA entity how they are classified:
FC (Financial Counterparty)
NFC+ (Non Financial Counterparty which trades in derivatives above the Threshold Amount)
NFC- (Non Financial Counterparty which trades in derivatives below the Threshold Amount)
Third Country Entity (Entity with no place of business in Europe)
Threshold Amounts: whether the entity’s group rolling average position over 30 working days exceeds the threshold in repsect of one asset class.
Credit: EUR 1 billion gross notional
Equity: EUR 1 billion in gross notional
Interest Rate: EUR 3 billion in gross notional
FX: EUR 3 billion in gross notional
Any entity which is classified as an FC or NFC+ will be required to clear its OTC derivative transactions.
Pure hedging transactions are excluded from the calculation of the threshold amount. This means if you are classified as an NFC and you are only ever entering into OTC derivatives for pure hedging purposes, then you will not be required to clear.
A Third Country Entity is an entity which is not established in the EU, but if it were established in the EU, would be considered to be an FC or NFC+. If a Third Country Entity is a) dealing with an EU established FC or NFC+ or b) dealing with another Third Country Entity that would be an FC or NFC, and the contract has a direct and substantial effect within the EU, the trade would be subject to clearing.
The counterparty classification status can simply be communicated to your EU counterparty in an email. It is not necessary to sign up to the NFC Protocol (but this is an option available).
Other EMIR Risk Mitigation Requirements:
Timely confirmations: requirement to confirm transactions within T+1
Portfolio Reconciliation and Dispute Resolution: Agree upfront with your counterparty how you will verify and reconcile data regarding your trades. To this end one needs to elect whether to send your data to your counteparty or whether you wish your counterparty to send data to you. As a data receiving entity it would require that you check reports of trades and report back on any discrepancies. This would need to be done either annually, or quarterly if you have 100 or more outstanding contracts with a counterparty.
Portfolio Compression would apply if the NFC has 500 or more uncleared contracts outstanding with an EU counterparty.
Reporting: Reporting all derivatives to an EMIR approved Trade Repository. Under EMIR both parties have to report their trades. One can elect for your EU Bank to report on your behalf. It may be a service that the EU bank will charge for. This can be negotiated via email with the EU Bank, and no additional representations are required in the ISDA®.
For more information on EMIR, register now for the DeriviDoc course:
Regulatory Update - How the Financial Markets Act, EMIR and Dodd Frank affect OTC Derivatives for SA Entities
Book now for:
Johannesburg - 10 November 2016
Or contact us for further information.