Regulations

To prevent a new financial crisis, the G20 asked regulators in each country to draft new regulations on OTC derivatives. It was decided that all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements. The scope of each new regulation depends on regulations already existing in each country.

European Market Infrastructure Regulation (‘EMIR’) is the portion of the European response that covers clearing, reporting and risk mitigation requirements including the collateralisation of non cleared trades.

SCOPE

EMIR is applicable to European Economic Area (EU + 3 countries): Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom, Iceland, Liechtenstein, Norway

EMIR classifications

All derivatives counterparties will (subject to limited exceptions) have to be classified in one of three categories:

• – Financial Counterparties
• – Non-Financial Counterparties (NFCs) and
• – NFCs that are over the so-called “clearing threshold” (NFC+s)

Clearing thresholds computation

A NFC becomes an NFC+ if, on any given day, the aggregate gross notional of outstanding uncleared OTC derivatives transactions that it (and all other NFCs in the same group) has in any given asset class (excluding “hedging” transactions as per EMIR definition) exceeds the relevant threshold.

Clearing thresholds

• – EUR 1 billion for each of credit and equity derivatives
• – EUR 3 billion for each of interest rate and FX derivatives
• – EUR 3 billion for commodity and other derivatives collectively

Once a counterparty is over the threshold for one asset class, it will be classified as an NFC+ for all transactions.

Product Range

All derivatives in all asset classes are in scope (including listed derivatives for trade reporting obligations). Spot transactions, irrespective of the asset class, have however been excluded.

OBLIGATIONS

Mandatory clearing – of OTC derivatives (FC/NFC+ only)

Risk management – of non-cleared OTC derivatives transactions

• – Daily MtM / MtModel (FC/NFC+ only)
• – Timely confirmation, portfolio compression, portfolio reconciliation and dispute resolution (FC and all NFC)
• – Collateralisation of non-cleared OTC derivative transactions (FC/NFC+ only)

Trade Reporting – of all derivatives transactions (FC, all NFC and some exempted entities)

BNP Paribas does not provide legal or regulatory advice and, in all cases, recipients should conduct their own investigation and analysis of the information contained in this document and should consult their own professional advisers.