On 6 August, ESMA updated its Q&A guidance on the implementation of EMIR (read here). Firms should pay particular attention to these Q&As as they have been known to overturn some common assumptions in the past, and this edition is no exception. In particular, the new answers spell bad news for the future cost of intragroup transactions whilst providing cold comfort on the counterparty classification and portfolio reconciliation side.
Perhaps most importantly, ESMA has clarified that firms cannot benefit from the intragroup exemption to the clearing rules unless both counterparties are either based in the EU or in a 3rd country that has been declared equivalent by the Commission under Article 13(2) of EMIR. Firms with operations in Japan and the US can breathe a sigh of relief here as the Commission has ordered ESMA to provide clarity on these jurisdictions by 1 September. But this was delayed in June (read here), pushing back declarations of equivalence with Hong Kong, Australia, Canada and Switzerland to October. However, since many other countries have not yet finalised their rules, there is no word as of yet as to which countries will be next in line, leaving firms with operations in 3rd countries facing the very real risk of having to clear intragroup transactions.
As for external transactions, firms are already struggling with counterparty classification ahead of the 15 September deadline, by which dates firms must have portfolio reconciliation agreements in place with their non-financial counterparties (NFCs). In the most recent Q&A, ESMA were asked how firms were expected to classify 3rd country counterparties NFC/NFC+. In response to this, ESMA repeated its previous guidance which told firms that they could rely on counterparties to self-certify their status, except where they have reason to doubt that classification. In other words, firms cannot rely on self-certification at all, and must design their classification processes (whatever form they take) to be able to deal with both EU and non-EU firms.
Finally, ESMA gave clarity on some forward dates. Firms are already aware that they must have portfolio reconciliation agreements in place by 15 September. Portfolio reconciliations must then be made each year. However, ESMA has clarified that in this first instance this means one year from EMIR’s entry into force (i.e. before 15 March 2014).
In short, the implementation problem is only getting harder, and with clear deadlines becoming fixed, firms can no longer afford to wait for solutions.