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EMIR 2.0- indirect, possibly unintended, certainly consequential

Published in the OJ on 28 May, EMIR Refit entered into force on 17 June. Aimed at simplifying requirements and making obligations on smaller counterparties more proportionate, the Regulation is comprehensively summarised here. This short note focusses on one aspect of EMIR Refit’s key changes- its expansion of the scope comprised by “financial counterparty”.

“Financial Counterparty” is defined by Article 2(8) of EMIR. The category comprises the following regulated entities: credit institutions, investment firms, insurance companies, certain pension scheme arrangements (PSAs) and alternative investment funds (AIFs) managed by alternative investment managers (AIFMs) authorised or registered under the AIFMD. EMIR Refit expands this definition to include an AIF (as defined Art 4(1)(a) AIFMD) which is itself established in the EU, irrespective of the registration\authorisation of its manager(s)[1].

This relatively minor change is more consequential in its second-order effect. Under EMIR 1.0 a non-EU AIF managed by a non-EU AIFM would have been classified as a third country hypothetical Non-Financial Counterparty (NFC). By contrast, under EMIR Refit, applying the test “What would this entity be if it were established in the EU?”- the same non-EU AIF/non-EU AIFM will be categorised as a third country hypothetical FC. As a hypothetical NFC and below the clearing thresholds, the AIF was exempt from margin requirements in transactions with EU FCs[2]. As a fellow (albeit hypothetical) FC, the exemption no longer applies. For example- you are an AIF established in Jersey and managed by an AIFM regulated in Guernsey (both third countries under EMIR), you transact swaps with EU-regulated dealers (FCs); under EMIR 1.0 you were exempt from margin regulations, under EMIR Refit you are now in indirect scope.

While some elements of EMIR Refit are phased-in, the re-definition of FCs came into force on 17 June with immediate effect. Although, by virtue of size, it is unlikely that any of these newly-in-scope AIFs will be subject to IM, the obligation to exchange VM does apply. In the absence of an executed VM CSA, duly uploaded to relevant systems, EU dealers will be in breach of EMIR if they trade derivatives with a previously-exempt third country AIF.


[1] Exemptions exist in respect of AIFs exclusively established to serve one or more employee share purchase plans, or an AIF that is a securitisation special purpose entity (as referenced by Art. 2(3)(g) AIFMD).

[2] Except in the unlikely event that a transaction will trigger EMIR’s extraterritoriality provision by having a “direct, substantial and foreseeable effect” within the EU

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