Regulatory Insights
NWM: get in training for EMIR REFIT

Remember EMIR... well ESMA has been "summer cutting" the all encompassing regulation.  Known as "EMIR REFIT", it is more tweaks to the existing rules than anything more substantial that you need to get in shape for, but there are a few "gotchas" firms should be aware of.   


Many of the changes come into force on 17th June (20 days from being published in the Official Journal), giving the market almost no time to prepare if they do need new documentation etc. 


The aim of the review of EMIR was to make the requirements simpler and more proportionate, particularly for smaller firms.


  • AIFs become FCs - Alternative Investment Funds (AIFs) that previously classified themselves as NFCs will be classed as FCs from 17th June.  That means margin requirements kick in immediately, and you will need a VM (and potentially IM) compliant CSA to continue trading derivatives bi-laterally. Mandatory Clearing rules would also apply, though there is a stay of execution until October to allow time to make the SFC assessment (and prepare for mandatory clearing if necessary). 


  • New 'SFC' classification - they are introducing a new Small Financial Counterparty (SFC) EMIR classification for FCs under the clearing threshold (which is currently only relevant for NFCs).  Mandatory Clearing rules will not apply to SFCs, and there is a grace period of 4 months from when your classification changes to establish clearing arrangements.


  • Clearing threshold calculation - they have changed the way that the clearing threshold is calculated for determining when an NFC- becomes NFC+ and when an FC is downgraded to the new SFC category. Now it is the average of the open notional of bi-lateral derivatives at each month end over the last 12 months. For NFCs, it is still the case that only non-hedging trades are counted


  • Trade reporting changes - in 12 months time ESMA will mandate that all FCs report on behalf of their NFC- counterparties (unless those NFC-s elect to continue reporting themselves). Good for corporates, less good for broker / dealers.  In addition, effective immediately NFCs can stop reporting intragroup transactions. 


Mandatory clearing for Category 3 FCs is now delayed until mid October (from 21st June), so those FCs not going for the SFC get out need CDEA docs signed and access to a CCP to continue trading in scope derivatives by then. 


And of course phase 4 of Initial Margin rules is still set to kick in on 1 September 2019 for those FCs & NFC+s that breach those thresholds.   


See below for more details on all these changes.



Definition of an FC includes AIFs


REFIT has expanded the definition of an FC to include EU incorporated AIFs managed by a 3rd country AIFM, and 3rd Country AIFs effective immediately. All NFC AIFs (whether +/-) must be amended to FC status upon REFIT go-live. This will require negotiation of variation margin documentation and potentially require clearing and initial margin documentation which seems less than likely for the industry to achieve by June 17. Has ESMA unintentionally created difficulty for US funds?  



Reporting Obligation


Effective immediately, ESMA has removed the requirement to backload transactions completed prior to 12 Feb 2014 – a move welcomed by all. It has also removed the obligation to report intragroup transactions where one party is an NFC and introduced the requirement for AIF managers to report on behalf of AIFs. 



Clearing Obligation


Introducing the mighty ‘SFC’ – FCs that do not meet the clearing threshold in all asset classes can classify themselves as SFCs and exempt themselves from mandatory clearing.


New Clearing Clearing Classification (SFC) 

Credit derivatives                                     €1 billion

Equity derivatives                                    €1 billion

Interest rate derivatives                            €3 billion

Foreign exchange derivatives                   €3 billion

Commodity and other derivatives            €3 billion


The Pension Scheme Arrangement (PSA) clearing exemption is also renewed for at least a further two years and also covers the period between August 2018 and June 2019. The final CRR2 text, like CRR, references this exemption and thus maintains the CVA exemption until at least June 2021.  Cat 3 clearing is now delayed until mid October though counterparties that meet the REFIT SFC criteria will be exempt as of 17th June.


NFCs that are above the clearing threshold (NFC+) will only need to clear the asset class in which the threshold has been exceeded (as opposed to all asset classes under the current EMIR rules).


All firms (including corporates) are expected to calculate their positions on a month-end average basis for the previous 12 months and notify their regulator and ESMA if their positions exceed clearing thresholds or if they have not calculated their position at all using the new methodology. The first notification to the relevant national regulator and ESMA has to be performed before or on the 17th June 2019. FCs are expected to notify their NCA annually even though they will clearly exceed the clearing threshold year on year – an odd expectation. Please see ESMA public statement for more details.


Those who have not calculated their positions (to demonstrate they are below the threshold) will be forced to clear, and have a 4 month grace period to either establish clearing arrangements or complete the calculation. Is the expectation of an unsophisticated NFC- to notify ESMA that they have not calculated and thus subject themselves to clearing arrangements realistic?   


ISDA continues to work with the industry to lobby for forbearance for Cat 3 clearing and risk mitigation requirements particularly in respect of third country AIFs being treated as FCs under REFIT.



Other Changes


Further changes to clearing noted below:


  • The Clearing frontloading obligation has been removed

  • CCPs to provide clearing members with tools to simulate initial margin requirements within 6 months of  REFIT go-live

  • FRANDT principle - Clearing members and clients that provide clearing services are expected to do so on Fair, Reasonable, Non-Discriminatory and Transparent terms. Within 24 months the Commission will adopt a delegated act to specify what is meant by FRANDT including transparency of fees and contract terms.

  • SFCs are expected to be exempt from the Derivatives Trading Obligation (DTO) under MiFID II. However, they must still comply with EMIR Risk Mitigation requirements (including margin for non-cleared)

REFIT, whilst reducing burdens for smaller firms has created what the industry believes to be unintended consequences.


With publication to the Journal complete and REFIT go live set for 17th June, the industry remains uncertain on the logistics of how immediate requirements are expected to be delivered given their complexity.


This is Non-Independent Research, as defined by the Financial Conduct Authority.This material should be regarded as a marketing communication and may have been produced in conjunction with the NatWest Markets Plc trading desks that trade as principal in the instruments mentioned herein. All data is accurate as of the report date, unless otherwise specified.


This communication has been prepared by NatWest Markets Plc, and should be regarded as a Marketing Communication, for which the relevant competent authority is the UK Financial Conduct Authority.   Please follow the link for the following information   


Where communicated in Singapore, this communication may be deemed an advertisement. This advertisement has not been reviewed by the Monetary Authority of Singapore.  


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Phil Lloyd, NWM Sales

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Phil Lloyd
Head of Market Structure & Regulatory Customer Engagement
+44 20 7085 1271


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