Entities classified as financial counterparty (FC) under EMIR
Financial counterparties (FCs) under the EMIR Regulation (Article 2(8)) are properly authorised:
- credit institutions;
- insurance undertakings;
- assurance undertakings;
- reinsurance undertakings;
- a UCITS and, where relevant, its management company,;
- an institution for occupational retirement provision;
- an alternative investment fund managed by AIFMs.
EMIR Refit added to this catalogue central securities depositories (authorised in accordance with Regulation (EU) No 909/2014 of the European Parliament and of the Council).
According to the European Commission's interpretation, the list of financial counterparties in Article 2(8) of the EMIR Regulation is a closed list.
In practice, FCs have on average portfolios of around 1,000 trades, representing EUR 25,000mn of notional (Commission Staff Working Document of 4 May 2017, Impact Assessment, COM(2017) 208 final, p. 28).
Regarding the number of FCs subject to EMIR per country, according to ESMA 3rd Annual Report of 8 July 2021 on supervisory measures and penalties under EMIR (ESMA70-156-4563, p. 13) numbers vary significantly depending on the country and range from 28 FCs in Estonia to around nine thousand in Luxembourg.
Moreover, 11 countries have less than 300 supervised FCs in their jurisdiction, 17 countries supervise 300 or more FCs.
Germany, Ireland and Luxembourg are the countries with the highest numbers of entities subject to EMIR.
The EMIR definition of financial counterparty evokes some interpretational issues in terms of references to non-EU entities.
This is particularly true in Article 3, which deals with the definition of the intragroup transaction in the context of intra-group transactions exemption.
Article 3(2)(a)(i) mentions "the financial counterparty is established in the Union or "if it is established in a third country".
The definition of financial counterparties introduces some cross-references to various European regulations (e.g. MiFID, UCITS, and AIFMD). As a result, some entities, which would generally be considered as financial counterparties in light of their activity (e.g. hedge funds meeting certain criteria, pension funds operating on a national basis, securitisation vehicles), may actually be classified as non-financial counterparties.
ESMA had already identified that certain AIFs would not meet the FC definition in EMIR because this definition only captures AIFs that are "managed by AIFMs authorised or registered in accordance with Directive 2011/61/EC", leaving aside a number of AIFs not meeting this definition.
As a consequence, the activity of certain groups of counterparties (typically hedge funds) would artificially be spread between the groups of FC and NFC, depending on whether they meet the definition of Article 2(8) or 2(9) of EMIR, even though, in practice, those counterparties undertake similar types of activity irrespective of their EMIR classification.
In addition to AIFs, the analysis of TR data indicates that other types of vehicles (e.g. securitisation instruments), which are generally understood to be financial counterparties although not as per the EMIR definition, do not meet the definition of FC and are therefore subject to the same requirement as NFCs.
EMIR Review Report no. 1 of 13 August 2015 - Review on the use of OTC derivatives by non-financial counterparties (2015/1251)
As the European Securities and Markets Authority (ESMA) points out in the EMIR Review Report no. 4 of 13 August 2015 - ESMA input as part of the Commission consultation on the EMIR Review (2015/1254), the reading of Article 3 together with the definitions of financial counterparties provided in Article 2(8) reveals a contradiction, since Article 2(8) of EMIR defines financial counterparties with references to various European legislations, with the outcome that most financial counterparties will be established in the Union.
As a result, ESMA suggests in the above report that third-country entities are referred to either with the wording "counterparties (or entities) established in a third country" or, if it is necessary to introduce a reference to the financial nature of the third country counterparties, to use the wording "counterparties that would qualify as financial counterparties if they were established in the Union", consistently with Regulation (EU) no 285/2014 on direct, substantial and foreseeable effect of contracts within the Union and to prevent the evasion of rules and obligations.
Sovereign wealth funds
Pursuant to the European Securities and Markets Authority (ESMA) opinion, sovereign wealth funds established in third countries are not exempted from the scope of EMIR. An exemption which is designed for entities established in the Union cannot be extended to equivalent entities established in third countries.
A sovereign wealth fund will qualify as financial counterparty under EMIR where it meets the definition of an AIF and it would be subject to Directive 2011/61/EU (AIFMD) if it was established in the Union.
However, where a sovereign wealth fund does not meet the definition of an AIF and is out of scope of the AIFMD, such a soverign wealth fund shall be treated as non-financial counterparty in accordance with Article 10 of EMIR.
This would typically be the case e.g. where a sovereign wealth fund has a single investor or supports the social security and pension systems of a third country.
Taxonomy of financial counterparties for EMIR reporting purposes
Classification of financial counterparties for EMIR reporting purposes is as follows (Table 1 of the Annex to the Commission Implementing Regulation (EU) 2017/105 of 19 October 2016 amending Implementing Regulation (EU) No 1247/2012 laying down implementing technical standards with regard to the format and frequency of trade reports to trade repositories according to Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories:
A = Assurance undertaking authorised in accordance with Directive 2009/138/EC of the European Parliament and of the Council,
C = Credit institution authorised in accordance with Directive 2013/36/EU of the European Parliament and of the Council,
F = Investment firm authorised in accordance with Directive 2004/39/EC of the European Parliament and of the Council,
I = Insurance undertaking authorised in accordance with Directive 2009/138/EC,
L = Alternative investment fund managed by Alternative Investment Fund Managers (AIFMs) authorised or registered in accordance with Directive 2011/61/EU of the European Parliament and of the Council,
O = Institution for occupational retirement provision within the meaning of Article 6(a) of Directive 2003/41/EC of the European Parliament and of the Council,
R = Reinsurance undertaking authorised in accordance with Directive 2009/138/EC,
U = Undertakings for the Collective Investment in Transferable Securities (UCITS) and its management company, authorised in accordance with Directive 2009/65/EC of the European Parliament and of the Council.
EMIR reporting, moreover, requires to fill in the field "Nature of the reporting counterparty" (Field 7 in the Table 1 (Counterparty Data) of the Annex to the aforementioned Regulation), where for financial counterparties the format "F" is envisioned.
Financial counterparties' register
Given the difficulties in the financial counterparties' classification in the trade repositories data and building on the different registers of financial counterparties that already exist, as well as the increasing use of LEIs, ESMA in its EMIR Review Report no. 1 of 13 August 2015 - Review on the use of OTC derivatives by non- financial counterparties (2015/1251) called for "further reflection on the creation of a central and unique register of financial counterparties, which would alleviate the burden of reporting counterparties while increasing the transparency to both regulators and participants in the financial markets and, as a result, fostering supervisory convergence".
EMIR reform propositions on financial counterparties - May 2017
Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories, COM(2017)208 published by the European Commission in May 2017 put forward some important modifications with respect to FCs' legal regime.
1. Small financial counterparties, such as small banks or funds, below the clearing threshold:
are free from the requirement to clear centrally,
remain subject to the requirement to exchange collateral.
2. The excess of the clearing threshold for at least one class of OTC derivative by a small financial counterparty trigger the clearing obligation for all classes of OTC derivatives.
3. Transactions between a financial counterparty and a small non-financial counterparty reported by the financial counterparty on behalf of both counterparties.
EMIR did not differentiate so far between (very) small and larger financial counterparties. However, through the means of the aforementioned legislative initiative this is going to be changed.
Recital 6 of the said Proposal of May 2017 reads:
"Financial counterparties with a volume of activity in OTC derivatives markets that is too low to present an important systemic risk for the financial system and is too low for central clearing to be economically viable should be exempted from the clearing obligation while remaining subject to the requirement to exchange collateral to mitigate any systemic risk. The excess of the clearing threshold for at least one class of OTC derivative by a financial counterparty should however trigger the clearing obligation for all classes of OTC derivatives given the interconnectedness of financial counterparties and the possible systemic risk to the financial system that may arise if those derivative contracts are not centrally cleared."
The second subparagraph of the new Article 4a(1) of the draft sets clearing thresholds for contracts concluded by financial counterparties by referring to the clearing thresholds set out by virtue of point (b) of Article 10(4), thus the clearing thresholds are the same as for non-financial counterparties.
Point (b) of the second subparagraph of the new Article 4a(1) specifies that the excess of one of the values set for a class of OTC derivatives triggers the clearing obligation for all asset classes.
The new Article 4a(1) furthermore explains the way the clearing thresholds are calculated.
A financial counterparty becomes subject to the clearing obligation if its aggregate month-end average position for the months March, April and May exceeds the clearing thresholds.
This corresponds to the calculation of clearing thresholds by non-financial counterparties.
Finally, in order to ensure that the definition covers all entities which due to the nature of their activities are financial counterparties, Article 1(1) brings into the definition of a financial counterparty contained in EMIR Article 2 alternative investment funds registered under national law that are currently considered non-financial counterparties under EMIR, Central Securities Depositories, and Securitisation Special Purpose Entities.
These entities will thus be treated as financial counterparties under EMIR.