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 derivatives 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 derivatives.
In cases where derivatives are not objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity the non-financial counterparty and a certain clearing threshold is exceeded, the EMIR requirements will 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 derivatives transactions will have to be reported to a trade repository (TR), which will centrally store reports of derivatives transactions.
TRs will mean that authorities, including national competent authorities and central banks, have a better picture of the derivatives market. The TRs will 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
- those traded on exchange, and
- both financial and non-financial parties that enter into a derivatives contract
Both parties to a derivatives contract will report separately to the TR stating the details of every derivative contract that they enter into and every change or termination. The details will 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.
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 and portfolio compression.
Non-financial counterparties below the clearing threshold
Since 15 March 2013, 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.
- EMIR presentation for non-financial counterparties
- Articles (13), (14) and (15) of the OTC derivative technical standards in our EMIR legislative library
Non-financial counterparties above the clearing thresholds
Since 15 March 2013, non-financial counterparties above the clearing threshold must ensure stricter timely confirmation of their derivatives contracts. The confirmation deadline for all these derivative types is T+1. This table shows the timings they need to meet.
|Derivative type||Phasing||Final confirmation deadline|
|Credit and interest rate||T+2 until Feb 2014||T+1|
T+3 until Aug 2013
T+2 until Aug 2014
Non-financial counterparties above the threshold must also 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:
- EMIR presentation for non-financial counterparties
- 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 will need to assess whether any OTC derivative activity is above the clearing threshold. 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+) will 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 Article (10) of 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
If a non-financial counterparty exceeds one of the clearing thresholds for a particular asset class, they will need to clear all future hedging or speculating OTC derivative contracts in all of the above asset classes for as long as they are over the clearing threshold.
When assessing its positions, a non-financial counterparty must:
- include all contracts entered into by all non-financial entities within the consolidated group, including the entities outside the EU that would qualify as a non-financial counterparty under EMIR if they were located within the EU
- monitor the threshold against the consolidated group’s rolling 30-day average of gross notional by class
Regarding the calculation of the clearing threshold see OTC Question 3 in the ESMA EMIR Q&As.
Notifications for non-financials exceeding the clearing threshold
If a non-financial counterparty exceeds the clearing threshold, it must notify the FCA and ESMA on the first day that it exceeds any of the clearing thresholds. In accordance with EMIR Article 10(1)(b), it will become a NFC+ if the rolling average position over 30 working days exceeds the threshold. This notification form and further information can be found at EMIR notifications and exemptions.
The non-financial counterparty should re-notify the FCA and ESMA as soon as possible if its average position over 30 working days does not exceed the clearing threshold any longer. The form for this can also be found at EMIR notifications and exemptions.
For further information on the notification process for non-financials exceeding the clearing threshold, and subsequently falling below it, see:
- EMIR Article (10) which can be found in our EMIR legislative library
- OTC Question 2 in the ESMA EMIR Q&As
Overview of requirements for non-financial counterparties
|Non-financial counterparty above the clearing threshold||Non-financial counterparty below the clearing threshold|
|Reporting to TRs||Y (trade information and daily valuations)||Y (trade information only)|
|Clearing through CCPs||Y||N|
|Risk management procedures||Y (stricter requirements)||Y|
|Bilateral margin requirements||Y||N|