Circular NBB_2016_30 / Intragroup derivative transactions exemption procedure from the clearing and the risk-mitigation technique obligations arising from Regulation (EU) No 648/2012 of 4 July 2012

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BanqueNationaleBank
DE BELGIQUE VAN BELGIË
Eurosystem

Circular

Brussels, 17 June 2016

Reference: NBB_2016_30

Contact person:
Claire Renoirte
Phone +32 2 221 53 50 – fax +32 2 221 31 04 claire.renoirte@nbb.be

Intragroup derivative transactions exemption procedure from the clearing and the risk-mitigation technique obligations arising from Regulation (EU) No 648/2012 of 4 July 2012 on OTC derivatives central counterparties and trade repositories ('EMIR regulation')

Scope
This circular is applicable to the Belgian financial and non-financial counterparties subject to the supervision of the NBB, as defined in article 2 of the Regulation (EU) No 648/2012 of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (hereinafter referred to as the EMIR regulation) which have intragroup OTC derivative transactions.

This includes Belgian credit institutions, Belgian insurance and reinsurance undertakings, Belgian stockbroking firms (sociétés de bourse), hereinafter referred to as "the institutions".

Summary/Objectives
Following the entry into force of the first delegated regulation (RTS) on the clearing obligation¹ arising from the EMIR regulation and its supplementary Delegated Regulations of 19 December 2012, which requires institutions subject to this obligation to centrally clear some standardized OTC interest rate derivatives contracts starting from 21 June 2016, this circular clarifies the procedure that those institutions have to follow in order to notify or apply for the exemption of their intragroup derivative transactions from this clearing obligation, in accordance with the article 4(2) of the EMIR regulation. This circular also specifies, in an annex, the content of the file that institutions are required to submit in this respect to the NBB.

This circular will be updated after the entry into force of the RTS on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP in order to clarify the NBB's requirements and procedure for exempting the intragroup derivative transactions from this exchange of collateral obligation.

Structure

1. Main principles of the central clearing and the exchange of collateral obligations and the related exemptions for the intragroup derivatives transactions
2. NBB's guidelines regarding the notification/application procedure for the exemption of the intragroup derivative transactions from the clearing obligation.

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¹ Delegated Regulation (EU) 2015/2205 of 6 August 2015.

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Dear Madam,
Dear Sir,

This circular complements the joint NBB-FSMA communication NBB-2013-07 of 17 July 2013 which covered the obligations arising from the entry into force of the Delegated Regulations of 19 December 2012 supplementing the EMIR regulation (EU) No 648/2012 of 4 July 2012 on OTC derivatives, central counterparties and trade repositories.

In order to implement article 4(2) of the EMIR regulation after the entry into force of the first delegated regulation subjecting some standardized contracts to the central clearing obligation and which requires institutions subject to this obligation to centrally clear these contracts² starting from 21 June 2016, this circular specifies the procedure that Belgian institutions subject to the supervision of the NBB have to follow and the content of the file that they are required to submit to the NBB in order to notify or apply for the exemption from the central clearing obligation for their intragroup derivative transactions.

This circular reconfirms the guidelines that the NBB sent earlier³ to the institutions which clarified the process that the institutions have to follow and the content of the notification/application file that they have to provide to the NBB. This circular also clarifies some specificities of the NBB's intragroup transactions' exemption procedure for national and international groups including financial as well as non-financial counterparties that are subject to the supervision of other European national competent authorities, including the FSMA in Belgium. It clarifies notably the current procedure for significant credit institutions directly supervised by the European Central Bank (ECB).

Section 1: Main principles of the central clearing and the exchange of collateral obligations and related exemptions for the intragroup derivative transactions.

Under EMIR, the central clearing obligation requires that some OTC derivative contracts between financial counterparties and/or non-financial counterparties exceeding the clearing threshold⁴ are cleared in CCPs that are authorised or recognised under EMIR.

The OTC derivative contracts that are subject to this obligation are and will be specified in several delegated regulations (hereinafter referred to as "RTS") by category of OTC derivatives. These RTSs will implement the central clearing obligation according to a phase-in plan⁵. ESMA keeps on its website a regularly updated public register of the classes of OTC derivatives subject to the central clearing obligation, the CCPs authorised or recognised to clear these classes, and the dates from which the central clearing obligation takes effect⁶.

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² Commission delegated regulation (EU) 2015/2205 of 6 August 2015 subjects some standardised fixed-to-float interest rate swaps (also known as plain vanilla); float-to-float swaps (also known as basis swaps); forward rate agreements; and overnight index swaps denominated in the G4 currencies (EUR, GBP, JPY and USD), starting from 21 June 2016. For credit default swaps, see Commission delegated regulation (EU) 2016/592 of 1 March 2016. ³ Respectively on 4 September 2015 (for credit institution and stockbroking firms) and 10 September 2015 (for insurance and reinsurance undertakings). ⁴ EMIR distinguishes between financial counterparties and non-financial counterparties. Non-financial counterparties will only become subject to the central clearing obligation if they exceed the clearing threshold set out in Art. 10 of the EMIR regulation and its delegated acts (art.11 of the delegated act (EU) No 149/2013 of 19 December 2012). Non-financial counterparties that may become subject to the central clearing obligation and that are subject to the supervision of the NBB comprise Belgian financial holdings, Belgian payment institutions, Belgian electronic money institutions, Belgian settlement institutions and institutions equivalent to settlement institutions. ⁵ The phase-in plans will depend on the category the institution belongs to. 4 categories of institutions are defined in article 2 of the first RTS on central clearing obligation for interest rate derivatives (delegated regulation ((EU) 2015/2205 of 6 August 2015):
⁶ Available via https://www.esma.europa.eu/regulation/post-trading/otc-derivatives-and-clearing-obligation

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The EMIR regulation recognizes however that the submission of intragroup transactions to the central clearing obligation may limit the efficiency of the intragroup risk management processes. Accordingly, intragroup derivative transactions can be exempted from the central clearing obligation, provided that this exemption does not increase systemic risks and that the following conditions are fulfilled (article 4(2) of the EMIR regulation):

• The transactions comply with the definition of intragroup transactions specified in article 3 of EMIR: "both counterparties are included in the same consolidation on a full basis and they are subject to an appropriate centralised risk evaluation, measurement and control procedures".
• The pairs of counterparties have notified their respective competent authority in writing that they intend to make use of the exemption for the OTC derivative transactions concluded between each other.
• The notification is made not less than 30 calendar days before the use of the exemption
• None of the two competent authorities object to the notification within 30 calendar days following the notification.
• For a counterparty established in an equivalent third country⁷, the entity established in a Member State must send an application and receive the approval of its competent authority within 30 calendar days.

The remaining bilateral, non-centrally cleared OTC derivatives will be subject to bilateral risk mitigation techniques (exchange of collateral for initial margins and variation margins) between counterparties according to rules that will be specified in a future RTS (RTS on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP under article 11(15) of Regulation (EU) No 648/2012)).

The EMIR regulation also allows exemption from this obligation for intragroup derivative transactions. Procedural elements regarding the intragroup exemption for the future collateral obligation for non-centrally cleared OTC derivatives are set out in art. 18 to 20 of Delegated Regulation 149/2013 of 19 December 2012, implementing art. 11, 14 (c) and (d) of EMIR.

This circular is currently only addressing the exemption from the central clearing obligation for intragroup derivative transactions.

Further clarifications on the NBB procedure and requirements for exempting the intragroup derivative transactions from the exchange of collateral obligation will be provided after the publication of the RTS on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP.

For the exemption from the central clearing obligation for intragroup derivative transactions that involves counterparties that are subject to the supervision of different competent authorities, a separate notification/application must be transmitted to each relevant supervisory authority. The file must be submitted to each authority no later than 30 calendar days before the starting date of the central clearing obligation for the relevant category of derivatives and the respective pair of counterparties.

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⁷ The counterparty of the 'applicant entity' cannot be located in a non-equivalent third country.

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For significant credit institutions subject to direct supervision by the ECB, the respective national competent authorities (NCAs) remain the relevant authorities in this context until further notice. The NCAs involved will inform the ECB about their decisions regarding the exemption files. Consequently, significant credit institutions are required to comply with the respective exemption procedures and requirements determined by the local banking NCA of the counterparties involved in the intragroup derivative transactions. All Belgian credit institutions, including those subject to direct supervision by the ECB, should therefore comply with the NBB requirements and guidelines specified in this circular.

Section 2: NBB guidelines regarding the notification/application procedure for the exemption of the intragroup derivative transactions from the central clearing obligation.

Each institution notifying/applying for the intragroup derivative exemption from the central clearing obligation according to article 4(2) of EMIR should provide the NBB with a file (in line with the related answers to Frequently Asked Questions (FAQ)⁸ developed by ESMA in this context).

The NBB accepts a unique file established at the parent company level or at the Belgian sub consolidated level⁹ covering exemption notifications of all related entities included in the scope of consolidation, provided that it includes an exhaustive list of all the pairs of counterparties covered by the file, with a clear distinction of pairs including a Belgian counterparty. This unique file should comply with the NBB requirements as specified in this circular, possibly with additional documents addressing NBB's requirements.

When a pair of counterparties within a group however includes an entity located in an equivalent third country¹⁰, a separate application file should be provided to the NBB.

The institutions may notify/apply for intragroup derivative exemption from the central clearing obligation at once for all their intragroup derivative activities, irrespective of whether the classes of derivatives for which they apply for are included or not in the currently enforceable RTS(s) on clearing obligations.

For groups composed of institutions subject to the supervision of different European supervisory authorities and which intend to apply for intragroup derivatives' clearing exemption, the NBB asks the Belgian institutions, the Belgian parent companies or the Belgian entity at the highest level of consolidation, to report the notifications submitted to other relevant supervisory authorities whenever they include a Belgian institution subject to NBB supervision. This will enable the NBB to facilitate the coordination with the other relevant European supervisory authorities.

The NBB requirements regarding the content of the notification/application files are listed in the annex to this circular.

In order to prepare the intragroup derivatives' clearing exemption procedure, the NBB recommends that the Belgian institutions contact the NBB informally in advance. A draft file could also be provided in order to ensure that it will be complete when submitted officially.

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⁸ See https://www.esma.europa.eu/press-news/esma-news/esma-updates-its-emir-qa-0 for the latest ESMA EMIR implementation FAQ, dated 4 April 2016 .This ESMA FAQ is regularly updated.
⁹ A Belgian parent company which has subsidiaries in Belgium should preferably ensure that the information related to all their Belgian subsidiaries is included in this unique file. If that is not feasible, the missing Belgian subsidiaries should provide the NBB with their own files.
¹⁰ Equivalent third countries are listed in the implementing acts under article 13(2) of EMIR; see also http://www.esma.europa.eu/page/Third-non-EU-countries.

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If you have questions the contact persons are Philippe.Dubois@nbb.be (for credit institutions), Alain.Degroide@nbb.be (for insurance undertakings) and Claire.Renoirte@nbb.be.

If the FSMA is the competent authority for a counterparty, the relevant contact person at the FSMA is Didier Niclaes (Didier.Niclaes@fsma.be).

A copy of this circular will be forwarded to the certified auditor(s) of your institution.

Yours faithfully

[Signature]

Jan Smets
Governor

Annex: Content of the notification/application file to be transmitted to the NBB.

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