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Non-financial counterparties (NFCs)

Non-financial counterparties (NFCs)

EMIR sets obligations and requirements applicable to both financial and non-financial counterparties (NFC) that enter into derivative contracts.

If you are a NFC and enter into derivative contracts, EMIR does apply to you. However, some NFCs may benefit from some exemptions and some obligations and requirements may not apply to all NFCs.

Reporting

You have to report your derivative contracts to a TR.

What do I need to report?
The minimum reporting details are specified in ESMA's Regulatory Technical Standards

How much time do I have to report?
New contracts, changes to existing contracts, and termination of contracts need to be reported no later than the working day following the relevant event (execution/modification/termination).

Do I need to report to the TR myself?
Not necessarily. You may also delegate the reporting to your counterparty or to a third party. 

How should I choose my TR?
You will need to choose a TR that is registered or recognised by ESMA and that accepts the type contracts you need to report. 

Do I have to centrally clear my OTC derivative contracts?
Yes, if you exceed the clearing threshold, you need to centrally clear those of your OTC derivative contracts that are subject to the clearing obligation.

Please note that pension funds were exempted from central clearing until 15 August 2015.

What is the Clearing Threshold?
The Clearing Threshold is an amount set by class of OTC derivative contracts. It is set by regulatory technical standards and will be reviewed on a regular basis following public consultation.

Value of the clearing thresholds :

EUR 1 billion* Credit derivative contracts  
EUR 1 billion* Equity derivative contracts  
EUR 3 billion* Interest rate derivative contracts  
EUR 3 billion* Foreign exchange derivative contracts  
EUR 3 billion* Commodity derivative contracts and others  

* in gross notional value

NFCs need to inform ESMA both when exceeding the clearing threshold (NFC+) and when no longer exceeding it (NFC-).
The same notifications need to be made to a NFC’s national regulator, using the template which, for ESMA, should be sent to
EMIR-notifications@esma.europa.eu
•    notification of exceeding the clearing threshold
•    notification of no longer exceeding the clearing threshold

How do I apply the clearing threshold? 
Not all OTC derivative contracts count towards the clearing threshold.
Those OTC derivative contracts entered into in order to reduce risks relating to the commercial or treasury financing activity of the NFC, or of NFCs of the group it belongs to, are excluded from the calculation of the clearing threshold. Criteria to determine those contracts are specified in regulatory technical standards. All other OTC derivative contracts entered into by the NFC or other NFC entities of the group shall be taken into account for the calculation of the clearing threshold. When the amount for one class of OTC derivative contracts is surpassed, you exceed the clearing threshold.

Example of application of the clearing threshold (in gross notional value):

 

Non-financial company A:                               

Total credit derivative contracts 2 billion  
Hedging 1.8 billion  
Non-hedging 0.2 billion  

Company A does not exceed the clearing threshold. Its non-hedging credit derivative contracts i.e. 0.2 billion is below the value of the clearing threshold for that class of OTC derivatives i.e. 1 billion.

 

Non-financial company B

 

Total equity derivative contracts 1.5 billion  
Hedging 1.2 billion  
Non-hedging 0.3 billion   
Total interest rate derivative contracts 3.5 billion  
Hedging 0  
Non-hedging  3.5 billion  

Company B exceeds the clearing threshold. Its non-hedging activity in interest rate derivative contracts is above the value of the clearing threshold for that class of OTC derivatives i.e. 3 billion.
     

I enter into OTC derivative contracts with entities of the group I belong to, do I benefit from an exemption from the clearing obligation? 
Under Article 4(2) of EMIR, NFCs may benefit from an exemption from the clearing obligation for intragroup OTC derivative contracts when certain conditions are met (including notification to, or authorisation by the relevant competent authority).

Risk mitigation techniques (non cleared OTC derivatives)

When I do not centrally clear my OTC derivative contracts, do I have to apply risk mitigation techniques?
Yes, you need to apply risk mitigation techniques for OTC derivative contracts that are not centrally cleared, unless you benefit from an exemption.

I enter into intragroup OTC derivative contracts that are not centrally cleared, do I benefit from an exemption from the application of risk mitigation techniques?
NFCs may benefit from an exemption from the obligation to exchange collateral when some conditions set in Articles 11 (5), (7), (9) and (10) of EMIR are met.

The other risks mitigation techniques, such as those related to timely confirmation, portfolio reconciliation, compression and dispute resolution apply in accordance with EMIR and as specified in
the regulatory technical standards.

I do not exceed the clearing threshold, do I need to apply risk mitigation techniques?
Yes, risks mitigation techniques apply to non-financial companies even if they do not exceed the clearing threshold. However, the applicable rules may differ depending on whether the non-financial company exceeds the clearing threshold or depending on the size of its portfolio.