Notification deadline of 17 June for counterparties subject to the UK EMIR clearing requirement

UK counterparties to derivatives transactions should note that there is an upcoming filing deadline under UK EMIR.

Counterparties subject to UK EMIR are required to assess whether the volume of their over-the-counter (OTC) derivatives transactions exceed certain "clearing thresholds" under UK EMIR and, where applicable, will need to notify the UK Financial Conduct Authority (FCA) of such calculations.

The first notification to the FCA must be made by no later than 17 June 2021, using the relevant FCA forms on the FCA's Connect platform, even if the counterparty had already delivered a similar notification to the FCA under EU EMIR prior to the end of the Brexit withdrawal implementation period.

Does the notification requirement apply to you?

The notification requirement applies to all UK financial and non-financial counterparties that exceed the clearing thresholds or that have chosen not to conduct the calculations. "Financial counterparties" or "FCs" include banks, investment firms, pension schemes and alternative investment funds (AIFs). "Non-financial counterparties" or "NFCs" are parties to derivatives transactions who do not fall within any of the categories of FC.

Where an FC or an NFC has exceeded at least one of the clearing thresholds outlined below it will be treated as a large FC or an NFC+, respectively. Small FCs and NFC-s are those FCs and NFCs who do not exceed these thresholds. Note that where NFCs exceed a threshold, the clearing obligation will apply only in respect of the class of derivatives for which the threshold is exceeded (whereas the margin obligation will apply in respect of all classes of derivatives).

Overview of the calculations to be conducted under UK EMIR

A counterparty to derivatives transactions will need to calculate its aggregate month-end average notional position of OTC derivatives transactions ("AANA") for the previous twelve (12) months in order to establish if it is above or below the clearing thresholds. The AANA calculation is generally to be conducted on a group-wide basis. The clearing thresholds are as follows:

Clearing thresholds (in each case, gross national value):

• OTC credit derivatives: €1 billion
• OTC equity derivatives: €1 billion
• OTC interest rate derivatives: €3 billion
• OTC foreign exchange derivatives: €3 billion
• OTC commodity derivatives and other OTC derivatives not listed above: €3 billion

When calculating AANA, an NFC will only look at non risk-reducing OTC derivatives transactions entered into by that NFC (and all other NFCs within its group), whereas an FC must include all OTC derivatives transactions (regardless of whether they are risk-reducing transactions) entered into by that FC (and all other entities within its group where applicable). Note that "risk-reducing transactions" are those which are objectively measurable as reducing risks directly related to the commercial activity or treasury financing activity of the NFC, as set out in technical standards published by the FCA.

Application to pension schemes

Certain pension scheme arrangements currently benefit from a time-limited temporary exemption from the clearing obligation under UK EMIR where they enter into derivatives transactions that are objectively measurable as reducing investment risks directly relating to the financial solvency of that pension scheme. HM Treasury has extended this exemption under UK EMIR for certain pension schemes until at least June 2023 and included both UK and EEA pension schemes within its scope. The categories of pension scheme arrangements that benefit from this exemption are set out on the FCA website here.

As pension schemes that benefit from the exemption are not subject to the clearing obligation, they are not required to assess whether the volume of their OTC derivatives transactions exceed any of the clearing thresholds nor notify the FCA of such calculations.

Note that the FCA has also stated that it will continue to apply non-legislative guidelines and recommendations such as ESMA's Q&As on UK-onshored EU legislation following the end of the Brexit withdrawal implementation period. ESMA has confirmed in its Q&As that relevant pension schemes are not required to calculate their positions nor notify relevant national competent authorities as long as they benefit from a temporary exemption from the clearing obligation. We expect the FCA's approach to the notification requirement under UK EMIR to be consistent with this guidance.

Application to funds

Usually, AANA must be calculated by an FC at group level, based on the accounting group to which a counterparty belongs. However, by way of derogation from this, where the FC is an AIF or an Undertaking for Collective Investment in Transferable Securities (UCITS), the AANA calculation may be made at the individual fund level. Alternative investment fund managers which manage more than one AIF and UCITS management companies which manage more than one UCITS must be able to demonstrate to the FCA that the calculation of positions at the fund level does not lead to: (a) a systematic underestimation of the positions of any of the funds they manage or the positions of the manager; and (b) a circumvention of the clearing obligation.

Should you have any questions in relation to this note, please contact one of the Derivatives & Structured Products team, or your usual Travers Smith contact.

This briefing reflects the position under UK EMIR as at the date of publication and further regulatory developments as a result of Brexit are likely. Please contact us for advice on specific situations.