The European Securities and Markets Authority (ESMA) recently published its EMIR consultation: “Contracts having a direct, substantial and foreseeable effect within the Union and non-evasion of provisions of EMIR” (ESMA/2013/892). The consultation gives market participants a first look at proposals containing the criteria for extending obligations under the European Markets and Infrastructure Regulation (EMIR) to derivatives trading entities outside of the European Union (EU).
EMIR introduces three sets of compliance obligations for all derivative counterparties:
Currently, EMIR rules apply to only derivative counterparties (both financial and non-financial entities which trade derivatives) established in the EU. But the EMIR primary legislation contains principles for extending certain obligations to derivative trading entities established outside the EU, when transactions have a “direct, substantial and foreseeable effect in the Union” or are conducted under arrangements designed to avoid EMIR rules.
ESMA proposes that transactions falling under the “direct, substantial and foreseeable” principle would be only those conducted by non-EU derivatives counterparties which are guaranteed by an EU regulated financial firm (over certain cumulative thresholds) or transactions conducted between EU branch offices of non-EU entities. Whilst the proposals are more narrow than expected it is important for derivative market participants outside of the EU to understand these proposals and consider whether they are likely to become subject to EMIR
Regarding anti-avoidance, ESMA proposes an approach which looks to the primary purpose of the transaction, not just its form, and provides a list of factors which may indicate avoidance. Both EU and non-EU derivative traders should consider their trading arrangements, and any indirect trading arrangements (where an EU counterparty retains a business or economic interest) in light of the anti-avoidance factors.
Our Regulatory Briefings track the EU’s recent international discussions on extending EMIR rules outside of the EU and provide more details of ESMA’s proposals.