EMIR Initial Margin: Intragroup transactions exemptions

United Kingdom

As derivative counterparties begin to look ahead to the implementation of Phase 5 and 6 of the EMIR initial margin rules in September 2020 and 2021 (respectively), there are a number of exemptions in relation to transactions entered into with an undertaking within the same “group” that may be relevant. Such exemptions remove the requirement to exchange initial margin amongst counterparties in the same group but require prior notification to the relevant competent authorities before being applied. Therefore, the timing of any such prior notification should be factored into any initial margin planning to ensure that counterparties are fully prepared for implementation before the relevant deadline.

Please see below for an overview of the intragroup transactions exemptions that are available under EMIR and the related regulatory technical standards. To discuss these exemptions in greater detail, or any other requirements that you may have in relation to initial margin more generally, please get in touch.

EMIR

Background

Requirement to exchange Initial Margin

Article 11(3) of EMIR[1] provides that:

  • Financial Counterparties (“FCs”) must have risk-management procedures in place requiring the timely, accurate and appropriately segregated exchange of collateral with respect to OTC derivative contracts entered into on or after 16 August 2012; and
  • Non-financial Counterparties (“NFCs”) must have the same risk-management procedures in place with respect to OTC derivative contracts that are entered into once the clearing threshold is exceeded.

Exemption for intragroup transactions

Article 11(5) of EMIR provides that the above requirement does not apply to intragroup transactions that are entered into by counterparties established in the same Member State, provided there is no current or foreseen practical/legal impediment to the prompt transfer of own funds or repayment of liabilities between counterparties.

Exemptions for NFCs

Definition of “intragroup transaction”

In relation to an NFC, an “intragroup transaction” is defined as an OTC derivative contract entered into with another counterparty which is part of the same group provided that:

  • both counterparties are included in the same consolidation[2] on a full basis and are subject to an appropriate centralised risk evaluation, measurement and control procedure; and
  • that counterparty is established in the EU or, if it is established in a third country, the European Commission has adopted an implementing act in respect of that third country.

Exemption (1): intragroup transaction entered into by two NFCs established in different Member States

This exemption applies provided that:

  • risk-management procedures of counterparties are adequately sound, robust and consistent with the level of complexity of the derivative transaction; and
  • there is no current or foreseen practical/legal impediment to the prompt transfer of own funds or repayment of liabilities between the counterparties.

Notification requirement: both NFCs must notify their intention to apply the exemption to the competent authorities responsible for supervision of each NFC. The exemption will be valid unless either of the notified competent authorities does not agree that the conditions have been fulfilled within 3 months of the date of notification.

Exemption (2): intragroup transaction entered into by an NFC established in the EU and a third country counterparty

This exemption applies provided that:

  • risk-management procedures of counterparties are adequately sound, robust and consistent with the level of complexity of the derivative transaction; and
  • there is no current or foreseen practical/legal impediment to the prompt transfer of own funds or repayment of liabilities between the counterparties.

Notification requirement: the NFC must notify its intention to apply the exemption to its competent authority. The exemption will be valid unless the notified competent authority does not agree that the conditions have been fulfilled within 3 months of the date of notification.

Exemption (3): intragroup transaction entered into by an NFC and an FC established in different Member States

This exemption will be a total or partial exemption provided:

  • risk-management procedures of counterparties are adequately sound, robust and consistent with the level of complexity of the derivative transaction; and
  • there is no current or foreseen practical/legal impediment to the prompt transfer of own funds or repayment of liabilities between the counterparties.

Notification requirement: the relevant competent authority responsible for supervision of the FC must notify any decision to the competent authority responsible for supervision of the NFC. The exemption is valid unless the notified competent authority does not agree that the conditions have been fulfilled. If there is any disagreement, ESMA may assist the relevant competent authorities to reach agreement.

Exemptions for FCs

Definition of “intragroup transaction”

In relation to an FC, an “intragroup transaction” is defined as either:

  1. an OTC derivative contract entered into with another counterparty from the same group provided that the following conditions are met:
  • the FC is established in the EU or, if it is established in a third country, the European Commission has adopted an implementing act in respect of that third country;
  • the other counterparty is an FC, a financial holding company, a financial institution or an ancillary services undertaking subject to appropriate prudential requirements;
  • both counterparties are included in the same consolidation on a full basis; and
  • both counterparties are subject to appropriate centralised risk evaluation, measurement and control procedures;
  1. an OTC derivative contract entered into with another counterparty where both counterparties are part of the same institutional protection scheme referred to in Article 80(8) of Directive 2006/48/EC (provided that the other counterparty is an FC, a financial holding company, a financial institution or an ancillary services undertaking, subject to appropriate prudential requirements);
  2. an OTC derivative contract entered into between credit institutions affiliated to the same central body or between such credit institution and the central body; or
  3. an OTC derivative contract entered into with an NFC which is part of the same group provided that 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 procedure and that counterparty is established in the EU or a third country jurisdiction in respect of which the European Commission has adopted an implementing act.

Exemption (4): intragroup transactions 1 – 3 that are entered into by counterparties established in different Member States

This exemption will be a total or partial exemption on the basis that: (1) both relevant competent authorities reach a positive decision; and (2) provided that:

  • risk-management procedures of counterparties are adequately sound, robust and consistent with the level of complexity of the derivative transaction; and
  • there is no current or foreseen practical/legal impediment to the prompt transfer of own funds or repayment of liabilities between the counterparties.

Notification requirement: if the relevant competent authorities don’t reach a positive decision within 30 calendar days of receipt of the application for exemption, ESMA can assist the relevant competent authorities in reaching a decision.

Exemption (5): intragroup transactions 1 – 4 that are entered into by an EU counterparty and a third country counterparty

This exemption will be a total or partial exemption on the basis that: (1) the relevant competent authority responsible for supervision of the EU counterparty reaches a positive decision; and (2) provided that:

  • risk-management procedures of counterparties are adequately sound, robust and consistent with the level of complexity of the derivative transaction; and
  • there is no current or foreseen practical/legal impediment to the prompt transfer of own funds or repayment of liabilities between the counterparties.

Margin RTS

Notification procedures

Article 32 of the Margin RTS[3] sets out the notification procedures a counterparty must follow when applying an exemption.

Receipt of notification

Notification of exemptions (1) – (5) above will be deemed to have been received when the competent authority receives all of the following:

  • all information necessary to assess whether the conditions specified in the relevant exemption have been fulfilled; and
  • supporting information evidencing that the conditions of Article 11(6) to (10) of EMIR have been fulfilled. Such information will include copies of documented risk management procedures, historical transaction information, copies of the relevant contracts between the parties and may include a legal opinion upon request from the competent authority.

If the competent authority decides that more information is needed to determine if the conditions have been met, it must submit a written request for information to the counterparty.

Timing

The competent authority must communicate its decision to a counterparty within 3 months of receipt of all of the above information.

Positive decision

Where a competent authority reaches a positive decision, it must communicate the decision to the counterparty in writing, specifying (at least):

  • whether the exemption is a full or partial exemption; and
  • in the case of a partial exemption, a clear identification of the limitations of the exemption.

Negative decision

Where a competent authority reaches a negative decision, it must communicate the decision to the counterparty in writing, specifying (at least):

  • which of the conditions have not been fulfilled; and
  • a summary of the reasons for considering that such conditions are not fulfilled.


[1] Regulation (EU) No 648/2012 of the European Parliament and at the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (as amended and/or supplemented from time to time).

[2] As defined in Article 3(3) of EMIR.

[3] Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty.