EMIR 3 Industry Response by the Joint Energy Associations Group

We summarise JEAG’s observations themes on the current EMIR proposals and their proposed recommendations below.

Observations

[1] Reject fundamental changes to EMIR clearing threshold (EMIR CT) for non-financial counterparties and instead update EMIR CT methodology and hedging exemption.

RECOMMEND:

1. Support centralized risk management enabling efficient hedging by NFCs: AM 298 and aspects of MEP Hübner draft report (AM 56);

• Assess OTC derivatives as cleared or not (vs. current approach of assessing whether a derivative is OTC or not). Support the EC proposal to change the methodology for the calculation of the EMIR CT which addresses the credit risks associated with OTC derivative contracts as it moves away from the current approach to considering whether a derivative is cleared or not.
• Count only OTC derivative transactions entered into by EU established counterparties against the clearing threshold. This will aid the competitiveness of EU energy markets and participants and help the energy transition.
• Permit European NFCs to continue to centrally hedge risks relating to commercial and treasury financing activities on behalf of their entire group. Proposal to reinstate centralised risk management by NFCs. This would be achieved by supporting AM 56 of the Hüebner report (click here) and the intent of AM 298.

Proposed new wording (red italic) to the wording of amendment 56 of MEP Hübner’s Report in relation to Article 10(3) EMIR:

“3. In calculating the positions referred to in paragraph 1, the non-financial counterparty shall include all the OTC derivative contracts that are not cleared in a CCP authorised under Article 14 or recognised under Article 25 entered into by the non-financial counterparty or by other non-financial entities within the group to which the non-financial counterparty belongswhich are not objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of the non-financial counterparty or of that the group to which the non-financial counterparty belongs.”

REJECT:

1. Deletion of the hedging exemption and the inclusion of all OTC derivatives in the clearing threshold calculation: AM 305, 306, 307 and 308;
2.  Worldwide threshold calculation by NFCs which has adverse impacts on EU firms’ competitiveness: AM 305, 306 and aspects of MEP Hübner’s draft report (AM 55 and 56);

• Mandatory clearing and collateralisation obligations. This will force NFCs with larger derivative exposures to meet mandatory clearing and collateralisation obligations leading to increased costs and creating strong disincentives to hedge and trade. NFCs mainly use OTC derivatives to mitigate risks arising from fluctuations in commodity prices, currencies and interest rates which are clearly not the activities these obligations were designed to target.
• Remove hedging exemption and include all OTC derivatives (cleared and uncleared in EMIR CT (Amendments AM 305, 306, 307 and 308). An energy system with less or no hedging would clearly be riskier for all parties involved e.g. energy firms would not be able to supply their power to consumers at a fixed price but only at a variable spot price. It is counter-intuitive to suggest that risk-mitigating derivatives contribute to additional risks in the financial system.
• World-wide EMIR CT calculation (Amendments AM 55 and parts of 56 in MEP Hübner’s draft report and AM 305 and 306). NFCs would have to include in the clearing threshold calculations of OTC derivatives transactions that are entered into by non-EU entities of the NFC group, even if there is no EU product, EU venue or EU entity involved. The effect is to reduce the competitiveness of EU companies in the global marketplace and create incentives to reduce the volume of trade in the EU.

[2] Reject unfavourable changes to calculation of clearing thresholds for Non-Financial Counterparties and (small) Financial Counterparties.

REJECT:

1. Unfavourable change of threshold calculation methodology: AM 248, 299, 300 and 301.
2. New aggregated activity clearing threshold that includes both cleared and uncleared OTC derivatives: AM 26 and 57. 

• EMIR CT threshold based on three highest months vs. current 12-month end calculation (Amendments AM 248, 299, 300 and 301). This could force companies to breach the threshold and incur the additional costs despite having exceeded it for a short time period.
• Inclusion of all OTC derivatives, cleared and uncleared, including hedging transactions e.g. “aggregate activity threshold” (AM 26 and AM 57 of MEP Hübner’s Draft Report). The EC proposal proposes that only derivatives which are not centrally cleared should be counted towards the clearing threshold. Including all OTC derivatives (all cleared and uncleared OTC derivatives, including hedging transactions) would cause NFC’s – with their larger derivative exposures for the purpose of hedging – to breach any future EMIR CT and consequently negate the hedging exemption for NFCs.

[3] Margin transparency and predictability.

SUPPORT:

1. MEP Hübner’s draft report (AM 22, 165 and 166) and AM 469, 470 and 471 as they improve the transparency and predictability of margin requirements for NFCs;

• Support amendments ensuring that CCPs provide clearing members with the information they need to provide transparency to clients. This ensures that energy market participants, who are at the end of the information chain, are put in a better position to predict and prepare themselves for collateral requests.
• Clearing members (clearing banks) shall inform their clients (including energy market participants) in a clear and transparent manner of the way the margin models of the CCP work, including in stress situations, and provide them with a simulation of the margin requirements they may be subject to under different (stress) scenarios.

[4] Uncollateralised commercial bank guarantees as eligible collateral.

SUPPORT:  

1. MEP Hübner`s draft report (AM 22, 165 and 166) and AM 469, 470 and 471 as they recognise the use of uncollateralised commercial bank guarantees;

• Support the EC proposal that public bank guarantees, commercial bank guarantees or public guarantees are considered eligible as highly liquid collateral under certain conditions. The recognition of uncollateralised commercial bank guarantees will facilitate and encourage central clearing of derivatives by energy market participants.

REJECT:

1. Prohibition of uncollateralised commercial bank guarantees in AM 478, 479 and 480;

• We consider that all energy market participants, i.e., NFCs and financial counterparties, shall be able to post uncollateralised commercial bank guarantees as they have the same need to access eligible collateral. Furthermore, they access CCPs either directly as clearing members or through a general clearing member. To avoid an unjustified differentiation between these two models, the acceptance by CCPs of public guarantees, public bank guarantees, and uncollateralised commercial bank guarantees shall be permitted for both clearing models (direct and indirect clearing).

[5] Reporting and exemption from reporting of intragroup transactions.

SUPPORT:

1. MEP Hübner`s draft report (AM 50 and 51) and AM 221, 222, 293, 294 and 295 as they reintroduce the intra-group transaction (IGT) reporting exemption;

• Support amendments which maintain the exemption from the reporting obligations of intragroup transactions (IGTs). In practice, energy market participants make wide use of the possibilities available in EMIR to simplify their derivatives reporting obligations.

REJECT:

1. AM 223 as it extends the removal of IGT exemption to existing transactions;

• Reintroducing IGT reporting would result in a need for market participants, which are NFCs, to reinvest in costly reporting infrastructure, which is becoming even more complex with the introduction of the changes to the reporting rules as of 29th April 2024 (CDR (EU) 2022/1855).
• In addition, the deletion of the IGT reporting exemption contradicts the purpose of the previous reform of EMIR (Refit) which introduced this reporting exemption to lower operational efforts.

2. AM 49 in MEP Hübner’s draft report as it brings all subsidiaries of EU firms across the world in-scope for EU transaction reporting;

• Where an EU firm is the ultimate parent company, all subsidiaries of the EU firm across the world would be brought in-scope for EU reporting, even if there is no EU product, EU venue or EU entity involved.
• This would represent a significant volume of additional reportable activity, with no clear nexus to the EU, and would create significant additional costs without obvious benefit.
• It could also result in duplicative but also non-consistent reporting requirements under two (or more) different regimes.
• In many cases, the non-EU entities will already be reporting trades to trade repositories in other jurisdictions, such as in the UK, US, Canada, Japan, Singapore, Australia and Hong Kong. Consequently, this acts against global initiatives to standardise reporting, which are being implemented in the EU as the EMIR Reporting Refit.
• Such initiative will put European non-financial groups at a competitive disadvantage as they will face double reporting obligations and associated costs which might only be increased by non- EU regulators taking a similar stance.

[6] NFCs as direct clearing members.

SUPPORT:

1. Participation of NFCs as direct clearing members: MEP Hübner’s draft report (AM 163 and 164) and AM 465 and 468;

• We welcome the EC proposal that NFCs can continue to act as direct clearing members. The robustness and resilience of the central clearing structure are guaranteed where they meet the required participation criteria as proposed, in particular if they are able to fulfil the margin requirements and default fund contributions, and only keep accounts at the CCP for assets and positions held for their own account.
• NFCs financially capable of becoming clearing members must not be disadvantaged by disproportionate requirements, in excess of those imposed on financial counterparties.

REJECT:

1. Additional participation requirements for NFCs: AM 467;

• Participation requirements should be the same for financial counterparties and NFCs.

[7] Definition of intragroup transactions for the purpose of exemptions from clearing and margining.

SUPPORT:

1.  Amend definition of intragroup transactions through a new Article 3 EMIR

• This substantially facilitates the legitimate exemption for financial counterparties and NFCs above the EMIR clearing threshold from the clearing (Article 4 (2) EMIR) and margining obligation (Article 11(5) EMIR) where one counterparty is in a third country.
• For this purpose, it replaces the need for an equivalence decision by a blacklist of jurisdictions for which an exemption cannot be granted.
• This amendment will provide certainty to the market, reduce market fragmentation and have a positive impact on how the EU is perceived in terms of market openness and attractiveness.
  

REJECT:

1. Reintroduction of Article 13 EMIR equivalence decision as pre-condition to the availability of the exemptions: AM 199, 200 and 246;
2. Measure to reduce scope of the exempted intragroup transactions: AM 201 and 247 [extends list of non-cooperative tax jurisdictions to those on the grey list];

[8] Risk mitigation techniques for uncleared trades.

REJECT:

1. Measures to impose mandatory margining (collateralisation) on all NFCs: AM 310f;

• Introduces risk mitigation techniques for NFCs “equivalent to those of a CCP” which would include mandatory margining (collateralisation) to mitigate credit risks.
• This is not possible and not proportionate for NFCs as it would introduce a mandatory margin/collateralisation requirement for all NFCs even if those NFCs would stay below the EMIT CT.
• Furthermore, this will have a detrimental impact on the energy transition as energy firms can make fewer investments into renewables as the mandatory margining and collateralisation requirements bind financial resources elsewhere.

[9] NFC+ implementation period and ring-fencing of bilateral collateralisation requirement.

SUPPORT:

1. Extension of the NFCs bilateral margin implementation period to 6 months: AM 313;

• Support the EC proposal to grant to NFCs which exceed for the first time a clearing threshold (so-called “NFC+”) a 6 months phase-in of their mark-to-market and bilateral margining obligations (from current 4 months). This helps NFC+ with the orderly implementation of the complex NFC+ status after they exceeded the clearing threshold(s).

2. Ring-fencing of bilateral collateralisation requirement: MEP Hübner’s draft report (AM 58 and 59);

• Bilateral collateralisation requirements for NFCs+ shall apply only with respect to OTC derivative contracts in the asset class or asset classes for which the clearing threshold has been exceeded.
• This is aligned with the same “asset class approach” taken with regards to the clearing obligation.

REJECT:

1. Deletion of NFCs bilateral margin implementation period: AM 311, 312, 316 and 317;

[10] Transitional provisions for NFCs+.

REJECT:

1. Transitional provision forcing firms to maintain NFC+ status: MEP Hübner’s draft report (AM 194);

• Existing Article 10 (2) provides that NFCs exceeding a clearing threshold (so-called NFC+) “shall remain subject to that obligation and shall continue clearing until that non-financial counterparty demonstrates to the relevant competent authority that its aggregate month-end average position for the previous 12 months does not exceed the clearing threshold.”
• The repetition of this measure in the transitional provision of Art. Article 89 (10) does not provide any benefit. On the contrary, we believe that it would not be appropriate to force firms to maintain an NFC+ status where they can demonstrate that they will stay below the clearing threshold for the next months because of the change of the threshold calculation method to “cleared vs. non-cleared”.

[11] Information sharing between ACER and ESMA.

REJECT:

1. Duplicative information sharing obligation: AM 528;

• The EC has tabled appropriate proposals to amend the Regulation on Wholesale Energy Market Integrity and Transparency – REMIT.
• Therefore, it is not necessary to repeat this in EMIR and the AM 528 is consequently duplicative, i.e., that ACER shall transmit information to ESMA.

[12] ESMA Report on NFCs activity.

REJECT:

1. Duplicative ESMA reporting obligation: AM 528;

• EC proposal provides in the new Article 10 (5) EMIR that the competent NCAs shall report to ESMA at least once a year on the activity in OTC derivatives of the non-financial counterparties, as well as that of the group they belong to.
• It further stipulates that at least every 2 years, ESMA shall present a report to the European Parliament, the Council and the Commission on the activities of EU non-financial counterparties in OTC derivatives, identifying areas where there is a lack of convergence and coherence in the application of this Regulation as well as potential risks to the financial stability of the Union.
• To support this, the EC has proposed a new Article 10 (2a) EMIR that NCAs shall establish cooperation procedures to ensure the effective calculation of the positions of NFCs and to evaluate and assess the level of exposure in OTC derivative contracts of NFCs at the group level.
• AM 533 introduces a repetitive obligation into Article 85 EMIR with regard to NFCs for ESMA to issue an annual report on the overall activity in derivative transactions of EU NFCs.