EMIR: EU extra-territorial rules on “direct, substantial and foreseeable effect” to apply from October 2014
02 April 2014
The EU rules on the extra-territorial application of EMIR have come one step closer to becoming effective following the publication in the Official Journal of the EU (the OJ) of the European Commission Delegated Regulation on derivatives contracts that are considered to have a “direct, substantial and foreseeable effect” within the EU or which are entered into to evade the provisions of EMIR. Together with the (yet-to-be-finalised) EU rules on third country “equivalence”, these rules will comprise the EMIR extra-territoriality regime.
Where are we now?
On 21 March 2014, the European Commission Delegated Regulation (Commission Delegated Regulation (EU) No 285/2014) specifying the contracts that are considered to have a “direct, substantial and foreseeable effect” within the EU and which are considered to be entered into to evade the provisions of EMIR was published in the OJ. This follows the European Commission adoption of the related RTS (which were published by ESMA in a Final Report dated 15 November 2013), without amendment, on 13 February 2014. Please refer to our bulletin EMIR: Final Draft RTS on “direct, substantial and foreseeable effect” for further detail.
The rules relate to certain OTC derivatives contracts entered into between two third country entities (TCEs) where neither entity is established in a jurisdiction which is deemed to have “equivalent” rules to EMIR. The exact application of the RTS to entities established in a third country which the European Commission has declared “equivalent” for the purposes of EMIR is uncertain, in part because the EMIR “equivalence” rules are not yet finalised.
The Delegated Regulation will enter into force 20 days after the date of its publication in the OJ (ie 10 April 2014). However, Article 2 (relating to contracts with a “direct, substantial and foreseeable effect” within the EU) will apply from 10 October 2014 to allow TCEs additional time to prepare for compliance.
What practical steps should market participants be taking now?
As we discussed in our previous bulletin – EMIR: Final Draft RTS on “direct, substantial and foreseeable effect”, the RTS raise a number of points of uncertainty for market participants. As no changes have been made to the text of the RTS, these uncertainties remain in the final Delegated Regulation. Market participants affected by the RTS should continue to consider how they propose to address potential issues with a view to compliance within the relevant timeframe.
Additionally, as discussed above, the RTS do not cover transactions between two TCEs where either side has a home state recognised as “equivalent” under EMIR. The practical scope of the rules, therefore, remains unclear due to their application relying, in part, upon “equivalence” assessments yet to be made in respect of third country regimes. To the extent the relevant “equivalence” rules are not finalised by 10 October 2014, third country market participants will be required to ensure that any relevant contracts comply with the relevant risk mitigation and clearing obligations in EMIR, as applicable.
Allen & Overy has extensive experience in advising on EMIR-related matters, including extra-territorial aspects, and would be pleased to discuss these issues with market participants further upon request.