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OTC Derivative Contract Contracts that are considered to have a Direct, Substantial and Foreseeable effect within the EU

The RTS clarify that an OTC derivative contract shall be considered as having a direct, substantial and foreseeable effect within the Union when “at least one third country counterparty benefits from a guarantee(i) provided by a financial counterparty(ii)  established in the Union which covers all or part of its liability resulting from that OTC derivative contract” to the extent that both of the following conditions are met by the guarantee:

(a)    It covers the entire liability of a third country counterparty resulting from one or more OTC derivative contracts for an aggregated notional amount of at least EUR 8 billion(iii), or it covers only a part of the liability of a third country counterparty resulting from one or more OTC derivative contracts for an aggregated notional amount of at least EUR 8 billion(iv), divided by the percentage of the liability covered;  and

(b)    It is at least equal to 5 per cent of current exposures in OTC derivative contracts of the financial counterparty established in the EU issuing the guarantee.
The RTS also clarify that OTC derivative contracts for an aggregate notional amount of at least EUR 8 billion or the equivalent amount in the relevant foreign currency concluded before a guarantee is issued or increased, and subsequently covered by a guarantee that meets the conditions set out in (a) and (b) above, shall be considered as having a direct, substantial and foreseeable effect within the Union.

IN THIS CONTEXT:

ESMA Publishes Final Draft Technical Standards on the Cross Border Application of EMIR

As mentioned in the October bulletin, EMIR provides that the clearing obligation and the obligations relating to the risk mitigation techniques for non-centrally cleared OTC derivatives may apply to OTC derivative contracts entered into between non-EU counterparties.  Where third country entities (“TCE’s”), including Cayman Funds, that would be subject to EMIR if they were established in the EU, enter into OTC derivative contracts, the EMIR clearing obligation and the EMIR obligations relating to the risk mitigation will apply both:

(a)    where the contract has a direct, substantial and foreseeable effect within the EU; and

(b)    where such an obligation is necessary or appropriate to prevent the evasion of any provisions of EMIR.

In light of this requirement, the European Securities and Markets Authority (“ESMA”) has now published its final draft Regulatory Technical Standards (“RTS”)  specifying both the contracts that are considered to have a direct, substantial and foreseeable effect within the EU and the cases where it is necessary or appropriate to prevent the evasion of any provision of EMIR.

The RTS will be of particular importance to Cayman Funds as they provide more detail on the application of EMIR to transactions between non-EU counterparties with a direct, substantial and foreseeable effect with in the Union and in relation to non-evasion.

The RTS can be found here:
http://www.esma.europa.eu/content/Draft-technical-standards-under-EMIR-contracts-direct-substantial-and-foreseeable-effect-wit


Compliments of EACCNY Member Dillon Eustace.

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(i) A guarantee is defined in the RTS as "an explicitly documented legal obligation by a guarantor to cover payments of the
amounts due or that may become due pursuant to the OTC derivative contracts covered by that guarantee and entered into 
by the guaranteed entity to the beneficiary where there is a default as defined in the guarantee or where no payment has 
been effected by the guaranteed entity".
(ii) The term financial counterparty is broadly defined in EMIR as a person authorised under one of the EU’s financial 
services directives, thereby excluding Cayman Funds.
(iii) Or currency equivalent.
(iv) Or currency equivalent.
(v) Further publications on EMIR can be found at:
http://www.dilloneustace.ie/download/1/EMIR%20-%20Key%20Points%20and%20Dates..pdf
http://www.dilloneustace.ie/download/1/EMIR%20-%20Update%20and%20Next%20Steps.pdf .