15 June 2016

EMIR: Clearing And Margin Rules Update

This alert was updated on 21 July 2016 to incorporate the dates referred to in the final version of the mandatory clearing determination, which was published in the Official Journal on 20 July 2016.

Which derivatives are subject to mandatory clearing?

On 10 June 2016, the European Commission made a third mandatory clearing determination under EMIR. The relevant delegated regulation was published in the Official Journal on 20 July 2016, and will extend mandatory clearing to the interest rate swaps (“IRS”) set out in its annex. This includes certain fixed-to-floating interest rate swaps and forward rate agreements denominated in the following currencies:

  • Norwegian Krone (NOK);
  • Polish Zloty (PLN); and
  • Swedish Krona (SEK).

The first mandatory clearing determination introduced the clearing obligation to certain IRS in G-4 currencies, which is being phased in from 21 June 2016. The second extended the obligation to certain credit default swaps, which will be phased in from 9 February 2017 (see our earlier update).

When does the clearing obligation take effect for these IRS?

The obligation to clear these IRS will take effect as follows:

  1. Category 1 (clearing members for at least one of the classes of OTC IRS subject to clearing): 9 February 2017.
  2. Category 2 (financial counterparties ("FCs") and alternative investment funds ("AIFs") that exceed a threshold of Euro 8 billion aggregate month-end average outstanding gross notional amount of all non-centrally cleared derivatives for January, February and March 2016 (the "Threshold"[1])): 9 August 2017.
  3. Category 3 (FCs and AIFs that are not clearing members and that do not exceed the Threshold): 9 February 2018.
  4. Category 4 (non-financial counterparties whose rolling average position over a 30 working day period in OTC derivatives (net of their commercial and treasury financing hedges) exceeds a relevant clearing threshold (known as an NFC+)): 9 August 2019.

Please see our earlier Technical Update for further details on counterparty classification.

Where an IRS is entered into between two counterparties in different categories, the date from which the clearing obligation takes effect for that contract will be the later of the two dates applicable to the counterparties.

There is a temporary three year reprieve for intra-group derivative transactions between an EU FC and a third country entity which would be an FC if established in the EU, without the need for an equivalence decision by the Commission in respect of the third country (provided that all the other conditions of the intra-group exemption are met). This three year reprieve may be cut short if the Commission subsequently makes an equivalence decision for the third country prior to the end of the three year period.

Consequences of failing to clear

Member States can apply their own rules on penalties for a counterparty breaching the rules in EMIR. The UK Financial Conduct Authority has the power to impose unlimited fines and to issue a public warning.

Margin for non-cleared trades

Although it seems that the phasing in of mandatory clearing is gathering pace, the same momentum has not been displayed in relation to the initial and variation margin requirements for non-cleared derivatives entered into between qualifying counterparties (i.e. FCs and NFC+s) (see our previous update). These rules were expected to be phased in from 1 September 2016, starting with the initial margin requirements for trades between the most active qualifying counterparties.  

The Commission is, however, yet to finalise the rules and it now appears that it will not be in a position to do so before the end of 2016, with a view to the initial margin rules being phased in from around the middle of 2017.  Other prospective dates, including those for the introduction of the variation margin requirements, are also expected to change, although it is not yet clear what the revised dates will be.

This delay may not signal a reprieve for the largest EU derivatives counterparties, as they may still be caught by rules in other jurisdictions (for example, when they trade with counterparties in the US, as the US margin rules are currently still expected to apply from 1 September 2016).

Looking ahead, in the absence of global "equivalence decisions" or "substituted compliance determinations", there is a risk that derivatives counterparties will be subject to two different margin regimes in relation to the same derivatives contract (for example, when an EU counterparty trades with a US counterparty).


If you require assistance, please do not do not hesitate to contact us.

[1]Where the counterparty is an AIF or a UCITS, the Threshold calculation should only apply at the Fund level.


A Guide to Doing Business in China

We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

Doing Business in China
Share on LinkedIn Share on Facebook Share on Twitter
    You might also be interested in

    Wallis Trading Inc v Air Tanzania Co Ltd [2020] EWHC 339 (Comm)

    07 July 2020

    As one element of a package of measures intended to assist UK businesses with coping with economic difficulties brought about by the coronavirus

    05 June 2020

    In an effort to alleviate the impact of COVID-19 on UK businesses and encourage the supply of essential goods and services during the pandemic

    05 June 2020

    Morley (t/a Morley Estates) v Royal Bank of Scotland Plc [2020] EWHC 88 (Ch)

    16 April 2020

    Legal services for your business

    This site uses cookies to enhance your experience and to help us improve the site. Please see our Privacy Policy for further information. If you continue without changing your settings, we will assume that you are happy to receive these cookies. You can change your cookie settings at any time.

    For more information on which cookies we use then please refer to our Cookie Policy.