UK EMIR for non-financial counterparties

Read more about non-financial counterparties under UK EMIR, including reporting to trade repositories and risk mitigation for uncleared trades.

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, all 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 UK EMIR requirements apply to these non-financial counterparties in the same way as they apply to financial counterparties under UK EMIR.

Reporting to trade repositories

Under UK EMIR, the details of all derivative contracts must be reported to an FCA registered, or recognised, 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 FCA registered, or recognised, TR, stating the details of every derivative contract that they enter into and every change or termination. 

UK EMIR REFIT – updated reporting requirements

Since 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 details, please see our reporting obligation page. 

You must report the details 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.

In addition, if you enter 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 UK), you may benefit from an exemption from the reporting obligation following the submission of a notification to us. This can be done via our 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 UK EMIR and referred to in a notification to us. 

For more information on this notification process, please see our UK EMIR notifications and exemptions page.

For more information on trade reporting, timetables and the details that have to be reported, please see: 

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

If you are a non-financial counterparty below the clearing threshold, you must ensure timely confirmation of your derivatives contracts. The confirmation deadline for all these derivative types is T+2.

Non-financial counterparties above the clearing thresholds

Under UK EMIR REFIT, if you’re a non-financial counterparty, you must notify us when you exceed or cease to exceed the clearing thresholds that correspond to individual derivative asset classes. 

If you don’t perform the calculation to determine if you are above or below the clearing thresholds, you will automatically become subject to the clearing obligation, and will also need to submit a notification to us. You are only required to clear your OTC derivatives in the asset class(es) exceeding the relevant clearing threshold(s).

If you’re above the clearing threshold, you must also ensure stricter timely confirmation of your derivatives contracts. The confirmation deadline for all these derivative types is T+1. 

If you are an NFC above the clearing threshold you must have processes in place to meet requirements on portfolio reconciliation, portfolio compression and dispute resolution, although the requirements you need to meet are generally stricter. 

The hedging definition and the clearing threshold

If you’re a non-financial counterparty, you 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.

If you’re a non-financial counterparty above the clearing threshold (NFC+), then you 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 relevant technical standards in our UK 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’s not counted in the calculation of whether the clearing thresholds have been exceeded. If you’re a non-financial counterparty, you must be able to demonstrate how your contracts are within the criteria.

Step 2: Clearing thresholds

The gross notional value of any OTC contracts that don’t 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

Under UK EMIR REFIT, if you’re a non-financial counterparty and you exceed one of the clearing thresholds for a particular asset class, you 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. You don’t have to clear the OTC derivative contracts in the asset class(es) where they don’t 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 UK EMIR notifications and exemptions page.