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EMIR: energised

No, not really. But a hat tip to yesterday’s article in Risk, questioning energy companies’ (perhaps rash) assumption that they will be classified as NFC- under EMIR. The regulation designates an entity as NFC- only if its 30-day rolling average position fails to trigger any of five gross notional thresholds- crossing any of which will incur the extra burdens mandated by NFC+ status[1]. NFC+ entities are obliged to clear all OTC derivatives, including “hedges”, with the eventual phased-in attendant costs of: collateralisation margin, reporting and infrastructure et al.[2] The magazine makes a forceful case that many companies may be nearer to the line than they might be prepared for. A commodity derivatives trading firm may stay under the NFC+ limit in its “primary business”, but may exceed the threshold in other derivatives activity- FX/IRS/CDS. The situation is exacerbated by uncertainty over exactly what constitutes a hedge (uncounted in the notional sum) and whether physical forwards will form part of the notifiable total[3]. It seems likely that a number of large energy firms will qualify as NFC+ (RWE, EDF, Trafigura and others) on the basis of their commodity business alone.

The NFC classification has been the subject of much debate- mainly critical. It is a dynamic measure (not least by commodity price fluctuation) which imposes its own reporting restrictions on market participants regardless of status- yet ESMA has refused to set up a central NFC+ registry, on the grounds that the database would require constant updating. Aside from (entirely valid) criticisms of the regulatory regime, the article’s points apply equally to all corporate users of derivatives- airlines, food, chemical, mining companies and others.  It is to be hoped that they are better prepared than some of their counterparts in the energy sector.

[1] Threshold reminder-(i) credit derivatives and (ii) equity derivatives =  EUR 1bn.

(i) interest rate derivatives, (ii) foreign exchange derivatives and (iii) commodity

derivatives and other OTC derivatives transactions = EUR 3bn. One breach triggers notification of all.

[2] Inclusive of subsidiaries and intragroup deals.

[3] MiFiD I does not include physical forwards as derivatives, the final definition in MiFid II may do so. Given Mifid/EMIR concordance, and that the vast majority of energy co. trades are of this type, the decision will have significant implications.

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