Read more about non-financial counterparties under EMIR, which are defined in Article 2(9) of the EMIR regulation (see our EMIR legislative library).
Non-financial counterparties that only enter into derivative contracts that are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of the non-financial counterparty, may be exempt from certain requirements under EMIR.
However, for transparency, non-financial counterparties must comply with requirements to report to trade repositories (TRs) and certain requirements for risk-management procedures in relation to non-cleared OTC derivative contracts.
In cases where derivatives are not objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of a non-financial counterparty and a certain clearing threshold is exceeded, the EMIR requirements apply to these non-financial counterparties in the same way as they apply to financial counterparties under EMIR.
Reporting to trade repositories
As a result of EMIR, the details of all derivative contracts have to be reported to a trade repository (TR), which centrally stores reports of derivative transactions.
Access to this data enables authorities to have a better picture of the derivatives market. TRs also publish a weekly overview of aggregate derivatives positions per asset class.
The reporting obligation applies to all derivatives, including:
- over-the-counter (OTC) derivatives; and
- exchange traded derivatives (ETDs)
Both financial and non-financial parties that enter into a derivatives contract are subject to the reporting obligation. Both parties to a derivatives contract must report separately to their chosen TR, stating the details of every derivative contract that they enter into and every change or termination. Following the entry into force of EMIR REFIT, from 18 June 2020, a financial counterparty will be solely responsible and legally liable for reporting on behalf of both counterparties, the details of OTC derivative contracts concluded with a non-financial counterparty not subject to the clearing obligation. For more detail, please see our Reporting obligation page. The details must be reported no later than the business day following the transaction, the clearing or the change to the contract. You can report to a TR yourself, or outsource reporting to a third party.
Following the entry into force of EMIR REFIT on 17 June 2019, firms entering into an intragroup transaction where one counterparty is a non-financial counterparty (or would be qualified as a non-financial counterparty if established in the EU) may benefit from an exemption from the reporting obligation following the submission of a notification to the FCA which can be done via the FCA’s Connect page.
To benefit from this exemption, non-financial counterparties and financial counterparties must meet specific conditions. These conditions are referred to in Article 9(1) of EMIR and referred to in a notification to the FCA as their competent authority. For further information on this notification process please see our EMIR notifications and exemptions page.
For further information on trade reporting, timetables and the details that have to be reported, please see:
- reporting to trade repositories
- the technical standards on reporting to trade repositories in our EMIR library
Risk mitigation for uncleared trades
Where OTC derivative contracts have not been cleared through a central counterparty, there are certain risk management requirements that apply to all non-financial counterparties in relation to:
- timely confirmation of trades
- portfolio reconciliation
- dispute resolution procedures
- portfolio compression
Non-financial counterparties below the clearing threshold
Non-financial counterparties that remain below the clearing threshold must ensure timely confirmation of their derivatives contracts. The confirmation deadline for all these derivative types is T+2.
- Articles (13), (14) and (15) of the OTC derivative technical standards in our EMIR legislative library
Non-financial counterparties above the clearing thresholds
Following the entry into force of EMIR REFIT on 17 June 2019, non-financial counterparties must notify the FCA and ESMA when they exceed or cease to exceed the clearing thresholds that correspond to individual derivative asset classes. Non-financial counterparties that do not perform the calculation to determine if they are above or below the clearing thresholds will automatically become subject to the clearing obligation and are also required to submit a notification to the FCA and ESMA. Non-financial counterparties are only required to clear their OTC derivatives in the asset class(es) exceeding the relevant clearing threshold(s).
Non-financial counterparties above the clearing threshold must also ensure stricter timely confirmation of their derivatives contracts. The confirmation deadline for all these derivative types is T+1.
Non-financial counterparties above the threshold must have processes in place to meet requirements on portfolio reconciliation, portfolio compression and dispute resolution, although the requirements they need to meet are generally stricter. For more information see:
- Articles (13), (14) and (15) of the OTC derivative technical standards in our EMIR library
The hedging definition and the clearing threshold
Non-financial counterparties need to assess whether any OTC derivative activity is above the clearing thresholds specific to the asset classes of derivatives contracts. This activity is measured on a group-wide basis that is not objectively measurable as reducing risks directly related to the commercial activity or treasury financing activity of the non-financial counterparty.
Non-financial counterparties above the clearing threshold (NFC+) then become subject to the same requirements as financial counterparties, including:
- additional reporting requirements
- the clearing obligation
- stricter risk management procedures
- valuation and bilateral margin requirements
The clearing threshold calculation is a 2-step test.
Step 1: The ‘hedging’ definition
Derivatives that are designed to reduce risks directly related to the commercial activity or treasury financing activity of the non-financial counterparty do not count towards the clearing threshold.
The criteria for establishing which OTC derivative contracts are objectively measurable as reducing risks directly related to the commercial activity or treasury financing activity of the non-financial counterparty are set out in the OTC derivative technical standards in our EMIR legislative library.
There are 3 categories of contracts that qualify as hedges:
- Contract hedging risks directly associated with the normal course of business (includes proxy hedging and stock options arising from employee benefits).
- Contract hedging risks indirectly associated with the normal course of business.
- Where a contract qualifies as a hedging contract in accordance to International Financial Reporting Standards (IFRS).
If an OTC derivative contract qualifies as a hedge it is not counted in the calculation of whether the clearing thresholds have been exceeded. Non-financial counterparties must be able to demonstrate how their contracts are within the criteria.
Step 2: Clearing thresholds
The gross notional value of any OTC contracts that do not fall within the criteria under step 1 must be compared to the following clearing thresholds:
- credit derivatives: €1 billion gross notional value
- equity derivatives: €1 billion gross notional value
- interest-rate derivatives: €3 billion gross notional value
- currency derivatives: €3 billion gross notional value
- commodity derivatives: €3 billion gross notional value
Following the entry into force of EMIR REFIT on 17 June 2019, if a non-financial counterparty exceeds one of the clearing thresholds for a particular asset class, they need to clear all future (whether hedging or non-hedging) OTC derivative contracts in the relevant asset class(es) for as long as they are over the clearing threshold. Non-financial counterparties are not required to clear the OTC derivative contracts in the asset class(es) where they do not exceed the clearing threshold.
Notifications for non-financials exceeding the clearing threshold
For more information on notifications for non-financials exceeding the clearing thresholds, please refer to our Notifications and Exemptions page.