Review of EMIR thresholds by ESMA

As the European Securities and Markets Authority (ESMA) collates feedback to its request for responses to its important review of the European Market Infrastructure Regulation (EMIR) Refit thresholds by asset class, and the definition of hedging (as opposed to trading) for excluding financial transactions from the threshold’s calculation, corporate treasurers should continue to be cautious. They must also ensure they read and understand the ESMA EMIR Q&A in due course and the EC’s report later this year. EMIR is now accepted by all and, in general, respected. Changing rules may cause trouble if they become even more restrictive.

ESMA has recently decided to review the thresholds fixed for each asset class for EMIR obligations of collateralization. This issue of the clearing threshold for NFCs ( non-financial counterparties) is an important one. It is vital to bring it to the attention of treasurers. ESMA has launched a consultation to review the current clearing thresholds of OTC (over-the-counter) derivatives for financial counterparties (FCs) and NFCs under EMIR Refit. This exercise is mandated under EMIR Refit to periodically assess the appropriateness of thresholds and update these if necessary. In addition, this report also evaluates the impact Brexit has had on OTC derivatives and clearing thresholds. The deadline for feedback was set for 19 January 2022. In its assessment of the existing clearing thresholds, ESMA expressed to be overall satisfied with the feedback. In particular:

• Ensuring effective and proportional thresholds – which indicates that thresholds for FCs adequately capture sufficient OTC derivatives without unnecessarily burdening smaller counterparties. This is ESMA’s first assessment since the introduction of exemptions for FCs, which established the category of FC, and signals continuation of the current framework.
  
  
• Deeming useful the hedging exemption for NFCs – as OTC derivatives to hedge commercial risk have proven their purpose and assured a proportionate impact of the threshold.
  
  
• Maintaining current thresholds – based on ESMA’s calculations, which suggest that slight alterations of the thresholds do not have any significant impact on the number of counterparties and notional captured by the thresholds.
  
  
• Fact-finding exercise for relevant considerations and data – on the coverage of clearing thresholds and the functioning of the EMIR framework in general and on additional aspects to be mentioned in relation to the hedging exemption. ESMA offers the possibility to submit additional evidence in a series of open questions.

In relation to consequences drawn from Brexit, ESMA seeks to assure clarity and stability despite the change of status of UK markets. ESMA is searching for solutions beyond equivalence decisions – since third-country markets are not recognized under the EMIR regime and trades therefore contribute to the overall OTC position towards the clearing threshold. In this context, ESMA expresses openness towards exploring solutions and alternatives to the lack of an equivalence decision (Article 2a of EMIR) to alleviate concerns. It also highlighted the importance of maintaining regulatory stability – to be ensured by minimizing market disruption. For this aim, ESMA is collecting examples and supporting data on practical issues related to the calculation of thresholds including fungible exchange traded derivatives (ETDs) and OTC derivatives, transactions that do not qualify as hedging and views on the functioning of the EMIR framework.

In addition, ESMA is seeking feedback on the need for further clarifications related to certain topics, notably including:

• Hedging positions of NFCs and FCs within the same group – related to a question raised to the European Commission on whether hedge trades by an NFC count towards the clearing thresholds when calculating the positions of an FC within the same group. Clarifications on this issue will be included in the ESMA EMIR Q&A in due course.
  
  
• Third-country counterparties – which would be considered FCs or NFCs when located in the EU, count towards the calculation of clearing thresholds.

The responses collected by the 19 January deadline will be subsequently consolidated into a follow up report to the European Commission later in 2022 and, in parallel, ESMA will add clarifications to the EMIR Q&A. In addition, responses to this consultation will feed into an upcoming ESMA review report, due in June 2023, covering the level of clearing, data quality, changes to the EMIR reporting framework and the accessibility of the reporting framework.

By François Masquelier, Chair, EACT