The European Markets and Infrastructure Regulation (“EMIR”) requires European domiciled counterparties to (i) report all transactions in derivatives to a trade repository (including life-cycle events such as any modification and termination); (ii) clear certain derivatives through a central counterparty (“CCP”); and (iii) employ risk-mitigation techniques for derivatives that are not cleared through a CCP.
EMIR does not generally apply to persons who are not domiciled in the EU (albeit that there may be an indirect effect when a European broker requires a non-EU counterparty to agree to certain EMIR compliant terms). However, EMIR will apply directly when two counterparties, neither of whom is domiciled in the EU or a country which the EU has deemed to have equivalent derivative trading regulation1 (a “third country entity”), enter into an OTC derivative contract that has a direct, substantial and foreseeable effect within the EU and therefore be subject to the clearing and risk mitigation obligations under EMIR.
The European Securities and Markets Authority (“ESMA”) has now issued draft regulatory technical standards (the “Draft RTS”) in which it confirms that an OTC derivative contract will be considered to have a “direct, substantial and foreseeable effect” within the EU where:
Guarantees by an EU financial counterparty
An OTC derivative contract shall be considered as having a direct, substantial and foreseeable effect within the EU when at least one third country counterparty benefits from a guarantee provided by an EU financial counterparty which covers all or part of its liability resulting from that OTC derivative contract, to the extent that the guarantee meets both following conditions:
It is expected that the Draft TRS will be endorsed by the Commission and implemented within the next three months.
If you would like assistance in understanding how EMIR may impact your trading ability, please do not hesitate to contact any of the authors of this alert or your usual Bingham contact.
This article was originally published by Bingham McCutchen LLP.