Implementation of EMIR

CIRCULAR:
6/2017

DATE:
04.07.2017

THE CIRCULAR APPLIES TO:
Banks
Holding companies
Financing companies
Credit institutions
Insurance companies
Management companies for securities funds
Securities companies
Infrastructure companies
Listed companies
Auditors
Audit firms
Companies trading in derivatives

THE FINANCIAL SUPERVISORY AUTHORITY
P.O. Box 1187 Sentrum
0107 Oslo

Implementation of EMIR

2 | The Financial Supervisory Authority

Contents

1 What is EMIR? 3
2 Reporting to transaction registers 4
3 Clearing of OTC derivatives and risk-mitigating techniques 5 4 Transaction registers 5 5 Central counterparties 6 6 Equivalence decisions regarding third-country legislation, supervision, etc. 7 7 Undertakings exempt from EMIR 8

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1 What is EMIR?

EMIR1 is a set of rules that primarily concerns three matters:

First, rules are given for those who trade in derivatives. Requirements are introduced, among others, for the reporting of derivative contracts, so-called clearing obligations for certain derivatives, and requirements that parties take risk-mitigating techniques for derivative contracts that are not cleared. The purpose of these rules is to reduce risk in the market and to improve information about derivative contracts. This part of EMIR is relevant for all who enter into derivative contracts.

Second, EMIR provides rules for so-called central counterparties. These are companies that ensure that trades in listed shares, derivatives, etc., are settled ("clearing"). They step into the contracts in such a way that the company becomes the seller for the buyer and the buyer for the seller. The parties to the contract are thus not dependent on each other for the contract to be fulfilled. This is intended to contribute to reducing risk in the market.

Third, EMIR contains provisions on transaction registers. These are registers that can receive reports on derivative contracts.

EMIR has been implemented in the Securities Trading Act Section 13-1, first paragraph. The rules enter into force on 1 July 2017. Changes to EMIR made after 2012 have not yet been incorporated into the EEA Agreement. The same applies to the European Commission's supplementary provisions to EMIR.

The Financial Supervisory Authority will not enforce rules that have already been amended in the EU, for example regarding definitions, which time limits should apply for the introduction of new obligations, and which information should be reported to transaction registers.

It is important to be aware that the European Commission may adopt new legal acts on an ongoing basis. All relevant legal acts are, or will be, published in the Official Journal of the European Union.

Information about EMIR rules is available on the European Commission's website2 and on ESMA's website3.

The Financial Supervisory Authority's website contains more information about EMIR and its implementation in Norway. An updated overview of the supplementary legal acts will also be published here.

In point 2, the reporting requirements to transaction registers are described. Point 3 contains information about rules on clearing of OTC derivatives. In point 4, rules applicable to transaction registers are discussed.

The Financial Supervisory Authority expects that undertakings under supervision and other relevant actors will, as a general rule, adhere to the rules as they apply in the EU at any given time, and will base their supervisory follow-up on this regulatory framework.
The reporting requirements will be enforced from 1 January 2018.

1 "European Market Infrastructure Regulation", Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (link to the latest consolidated version here: http://eur-lex.europa.eu/legal-content/EN/AUTO/?uri=CELEX:02012R0648-20170401&qid=1496901407859). 2 https://ec.europa.eu/info/business-economy-euro/banking-and-finance/financial-markets/post-trade-services/derivatives-emir_en 3 https://www.esma.europa.eu/regulation/post-trading#title-paragrah-1

Implementation of EMIR

4 | The Financial Supervisory Authority

In point 5, information is provided about rules applicable to central counterparties, while point 6 lists so-called equivalence decisions adopted by the European Commission that are, or will be, applicable in Norway4. Certain exemptions from EMIR are reproduced in point 7.

2 Reporting to transaction registers

The reporting obligation applies to all derivative contracts entered into by financial counterparties, non-financial counterparties, and central counterparties. Financial counterparties include, among others, credit institutions, securities companies, insurance companies, and securities funds. Non-financial counterparties are other undertakings than financial counterparties and central counterparties.

The reporting obligation applies regardless of clearing obligations or the duty to take risk-mitigating techniques, cf. point 3 below. Although the reporting obligation formally enters into force on 1 July 2017, the Financial Supervisory Authority will not enforce the obligation before 1 January 2018.

Commission Regulation 148/2013 (amended by Commission Regulation 2017/104) covers what information the reporting should contain for different types of derivatives. The reporting should contain information about who are the counterparties to the derivative contract. If there are others than the counterparties who have rights and obligations under the contract (e.g., where the counterparty has acted on behalf of several actors who are the actual beneficial owners), these must also be specified. Furthermore, the main characteristics of the contract must be provided, including type of contract, underlying asset, maturity, nominal value, price, and settlement date. Detailed information requirements are set out in the annex to the regulation. According to Article 3 of the regulation, information on all collateral provided must be given in accordance with Table 1 in the regulation. If a counterparty does not provide collateral on a transaction-by-transaction basis, collateral provided on a portfolio basis must be reported.

Commission Regulation 1247/2012 (amended by Commission Regulation 2017/105) regulates the format and frequency of reporting. All reporting must be done in the format specified in the annex to the regulation. In all reporting, a Legal Entity Identifier (LEI) and a unique product identifier for the identification of derivative contracts must be used. This is further regulated in Articles 3 and 4.

It follows from Article 2 of the regulation that certain actors must daily report to the transaction register the valuation of contracts reported to a transaction register, either according to the market value principle or the model value principle. The reporting obligation applies to financial actors and non-financial actors subject to clearing obligations.

Commission Regulation 2017/105 changes the format to be reported. In the EU, this regulation enters into force on 1 November 2017.

4 Equivalence decisions are decisions that legislation in third countries (USA, Japan, etc.) is equivalent to what follows from EMIR in the EU. These decisions form the basis for the European Securities and Markets Authority (ESMA) to allow companies from these countries to conduct business in the EU. These equivalence decisions are not central for Norwegian actors.

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3 Clearing of OTC derivatives and risk-mitigating techniques

OTC derivatives are derivative contracts that are not traded on a regulated market in the EEA area. According to Regulation (EU) 2015/2365 (SFTR), regulated markets in third countries can be considered equivalent to regulated markets in the EU after a specified process in EMIR Article 2a.

EMIR sets clearing obligations for certain OTC derivatives. For OTC derivatives that are not cleared, there is a requirement that parties take risk-mitigating techniques. These are also specified in more detail in Commission regulations.

It is possible to apply for exemption from clearing obligations and requirements for risk-mitigating techniques for intragroup transactions. The application form will be made available on the Financial Supervisory Authority's website at the end of August 2017.

Commission Regulation 149/2013 provides detailed rules on the scope of the clearing obligation and risk-mitigating techniques for OTC derivatives that are not subject to clearing obligations. The regulation provides rules for calculating the threshold values for clearing obligations for non-financial counterparties and rules for determining which derivative contracts should be cleared. Which derivative classes should be cleared is set in Commission regulations (following proposals from ESMA). This means that the scope of the clearing obligation may change continuously. ESMA maintains a register of which derivative classes are currently subject to the clearing obligation.5

The regulation also includes supplementary rules on, among others, confirmation, portfolio reconciliation, dispute resolution, and calculation of market values.

Commission Regulations 2015/2205, 2016/592, and 2016/1178 (all amended by Commission Regulation 2017/751) set clearing obligations for different derivative classes. The regulations also contain provisions on when the clearing obligation takes effect for different categories of counterparties. In the regulations, there is a division into four different counterparty categories.

Commission Regulation 285/2014 provides detailed rules for cases where EMIR's requirements for OTC derivatives have effects outside the EU. This is done, among other things, to prevent regulatory arbitrage.

Commission Regulation 2016/2251 (amended by Commission Regulation 2017/323) provides supplementary rules on risk-mitigating techniques for OTC derivatives that are not cleared.

4 Transaction registers

EMIR sets requirements for the operation of transaction registers for derivative contracts. As of June 2017, no transaction register has been established in Norway.

5 https://www.esma.europa.eu/sites/default/files/library/public_register_for_the_clearing_obligation_under_emir.pdf

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Commission Regulation 1248/2012 contains the application form for transaction registers seeking registration with ESMA.

Detailed information requirements related to the application for registration of a transaction register follow from Commission Regulation 150/2013.

EMIR requires that transaction registers regularly publish aggregated positions per derivative class. Commission Regulation 151/2013 provides detailed rules on such publication.

Transaction registers must update information on their website at least once a week regarding aggregated open positions, transaction volume, and value distributed across the following derivative classes: commodities, credit, currency, equities, interest rates, and other derivatives.

The Commission regulation specifies in more detail which authorities should have access to information from the transaction registers, and what information they should receive.

Commission Regulation 1003/2013 provides detailed rules on fees that transaction registers must pay for registration and supervision. The fees belong to ESMA and should cover their costs in carrying out the various tasks.

Commission Regulation 667/2014 provides detailed procedural rules for ESMA where ESMA has the competence to impose fines or periodic penalty payments.

5 Central counterparties

EMIR regulates central counterparties in financial instruments. This is a general regulation of central counterparties and is not limited to either OTC derivatives or derivatives as such. As of June 2017, there are no central counterparties with their headquarters in Norway.

Commission Regulation 1249/2012 sets more detailed requirements on how central counterparties should store the information and documentation they are required to have according to EMIR.

Commission Regulation 152/2013 sets more detailed requirements on the capital that central counterparties must have.

Commission Regulation 153/2013 sets more detailed organizational requirements for central counterparties. Among other things, there is a requirement that central counterparties have separate heads for risk management, compliance control, and IT. The heads must be employed by the company. The regulation also sets requirements for the various functions and reporting lines. Reference is made to Chapter 3 of the regulation. Chapter 4 provides more detailed requirements on record-keeping and retention obligations. More detailed rules on disaster preparedness, including the content of disaster preparedness plans, follow from Chapter 5. Further conditions for calculating margin collateral requirements are set in Chapter 6 of the regulation.

Commission Regulation 2016/822 amends Commission Regulation 153/2013 regarding conditions for calculating margin collateral.

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Commission Regulation 876/2013 sets requirements for the supervisory colleges for central counterparties. The regulation is intended to ensure consistent and coherent supervision. It contains detailed rules on the composition, governance, and activities of the supervisory colleges.

Commission Regulation 484/2014 provides detailed rules on how and at what times a central counterparty must calculate "hypothetical capital". This is a figure used when a credit institution, etc., must calculate its exposure to a central counterparty. "Hypothetical capital" is included in the calculation basis for the capital adequacy of credit institutions and securities companies.

6 Equivalence decisions regarding third-country legislation, supervision, etc.

The European Commission may make so-called equivalence decisions, which mean that specific marketplaces in third countries (countries outside the EU) can be treated as equivalent to regulated markets in the EU, which has significance for whether a derivative contract is considered to be traded OTC ("over-the-counter") or not.

The equivalence decisions can also mean that a third country's legislation and supervision can be treated as equivalent to EMIR's provisions on clearing obligations, reporting of derivatives, definition of non-financial counterparties, and risk-mitigating techniques. If such a decision exists for a specific country, it will imply certain relaxations in the obligations of a counterparty in the EU that enters into a derivative contract with a counterparty in this third country.

The European Commission can further decide that the regulation and supervision of central counterparties and transaction registers from third countries satisfy the requirements under EMIR. These decisions are a prerequisite for ESMA to again recognize central counterparties and transaction registers from third countries.

The equivalence decisions will be implemented in Norwegian law on an ongoing basis, by regulation issued by the Financial Supervisory Authority after the decisions have been incorporated into the EEA Agreement.

Overview of equivalence decisions as of June 2017 regarding specific marketplaces:
2016/1073 USA, 2016/2270 Singapore, 2016/2271 Japan, 2016/2272 Australia, and 2016/2273 Canada.

Overview of equivalence decisions as of June 2017 regarding rules for central counterparties:
2014/752 Japan, 2014/753 Singapore, 2014/754 Hong Kong, 2014/755 Australia, 2015/2038 South Korea, 2015/2039 South Africa, 2015/2040 Canada, 2015/2041 Mexico, 2015/2042 Switzerland, 2016/377 USA, 2016/2269 India, 2016/2274 New Zealand, 2016/2275 Japan, 2016/2276 Brazil, 2016/2277 Dubai International Financial Centre, and 2016/2278 United Arab Emirates.

As of June 2017, no equivalence decisions have been made regarding third-country rules on clearing obligations, etc., nor regarding such countries' provisions on transaction registers.

Implementation of EMIR

8 | The Financial Supervisory Authority

It is expected that the European Commission will make more equivalence decisions in the future. For an updated overview of equivalence decisions, reference is made to the European Commission's website6.

Which central counterparties and transaction registers ESMA has recognized on the basis of these equivalence decisions appear in ESMA's register7.

7 Undertakings exempt from EMIR

Commission Regulation 1002/2013 expands the list of undertakings that are exempt under EMIR Article 1. EMIR does not apply to members of the European System of Central Banks and institutions that have similar tasks to these members. Norges Bank falls under this provision. The exemption also covers such institutions in Japan and the USA. The Bank for International Settlements (BIS) is also exempt from the regulation.

Anne Merethe Bellamy
Director for Market Supervision

Gry Evensen Skallerud
Section Chief

6 As of June 2017: https://ec.europa.eu/info/emir-equivalence-decisions_en 7 As of June 2017: https://www.esma.europa.eu/databases-library/registers-and-data

THE FINANCIAL SUPERVISORY AUTHORITY
P.O. Box 1187 Sentrum
0107 Oslo

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