EMIR 3.0

Exemption from the reporting obligation for intra-group transactions

The exemption from the reporting obligation for intragroup transactions has been in force since 17 June 2019. In recent years, however, there have been repeated considerations and discussions as to whether the exemption from the reporting obligation for internal derivatives should be withdrawn. These considerations tended to be met with incomprehension among non-financial counterparties, as they would supposedly thwart the objective of EMIR 2.0 of reducing the regulatory requirements for industrial companies.

With EMIR 3.0, which has now come into force, the previous regulations have basically been retained. Accordingly, intra-group transactions continue to be exempt from the reporting obligation, provided that the requirements in Article 3 EMIR are met. At least one counterparty to the intragroup transaction and the parent company must be a non-financial counterparty. Furthermore, the counterparties must be fully consolidated in the same group and both counterparties must be subject to suitable centralised risk assessment, measurement and control procedures.

However, there have been changes with regard to intragroup transactions with counterparties domiciled in a third country. For these, no relief can be claimed with regard to the reporting obligation if the following circumstances apply:

• This is a high-risk third country within the meaning of Art. 29 EU Regulation 2024/1624, which classifies third countries whose national systems for combating money laundering and terrorist financing have significant strategic deficiencies as high-risk third countries.
• The third country is one of the non-cooperative countries and territories designated by the EU for tax purposes1.

If a company fulfils the requirements for a reporting exemption for intragroup transactions, a notification of the use of the exemption is sent to the national supervisory authority of all intragroup counterparties domiciled in the European Union. This then comes into force after a three-month objection period.

As a result of EMIR 3.0, Corporate Treasury should review reporting exemptions already obtained with regard to a change in the permitted third countries and store them in its processes for future EMIR reporting exemptions.

Management of an active account with an authorised EU CCP (central counterparty)

This amendment to EMIR 3.0 affects all financial counterparties and non-financial counterparties that are subject to a clearing obligation pursuant to Art. 7a EMIR or that exceed the clearing threshold in one of the specified categories (pursuant to Art. 7a para. 6 EMIR). These are currently interest rate derivatives denominated in euros or Polish zloty and short-term interest rate derivatives denominated in euros.

The obligation to maintain an active account with an authorised EU CCP also results in further obligations. For example, it must be an authorised EU CCP in accordance with Art. 14 EMIR that provides clearing services for the relevant derivatives. The counterparty obliged under EMIR must maintain at least one active account with a corresponding EU CCP. Furthermore, the so-called representativeness obligation also applies, i.e. at least a representative number of transactions must be cleared via this account. However, there is an exception in cases where the outstanding clearing volume (nominal) is less than EUR 6 billion for the above-mentioned interest rate derivative contracts.

If no active account with an EU CCP exists beforehand, a corresponding account must be set up. The account must be set up within 6 months of the obligation to maintain an active account arising. An affected financial or non-financial counterparty that has to set up a new active account should be guided by ESMA's consultation draft with regard to the technical details, as the technical regulatory standard has not yet been finalised. If an active account already exists, it must fulfil the requirements of Art. 7a para. 3 EMIR.

In addition, the maintenance of an active account is subject to a notification obligation. A corresponding notification must be made to BaFin and ESMA. ESMA provides a form2 for this purpose, which can be sent to BaFin and ESMA by email.3

Maintaining an active account also entails the obligation for a financial or non-financial counterparty to monitor this account on an ongoing basis. In accordance with Art. 7b para. 1 EMIR, this includes calculating the activities and risk positions of the above-mentioned categories of derivative contracts and transmitting this information to the competent national authority every six months so that it can assess compliance with the obligation. The relevant competent authorities in turn ensure that this information is forwarded to ESMA without delay.4

Although the changes to clearing introduced by EMIR 3.0 are unlikely to have any direct consequences for Corporate Treasury, the fact that clearing of certain types of derivatives by financial counterparties is now mandatory for the first time means that indirect effects such as the passing on of clearing costs for currency and interest rate hedges are not unlikely.

_______________________________________________________________________________________________

1 EU list of non-cooperative jurisdictions for tax purposes - Consilium

2 Link to the ESMA form

3 Notification by email to BaFin Artikel7aEMIR@bafin.de and ESMA AAR-notifications@esma.europa.eu

4 BaFin will provide a form for this purpose as soon as further clarification has been obtained from ESMA; in the meantime, a notification can also be sent by e-mail.

In future, a more precise definition of hedging could influence the calculation of the clearing threshold. When calculating the clearing threshold, the aggregated average month-end positions for the previous twelve months in the respective derivative classes must be used as the basis, whereby no OTC derivative contracts that objectively contribute to reducing risks (hedging) are taken into account. The calculation must be carried out at the level of the entire group of companies. However, neither the EMIR Regulation itself nor ESMA or BaFin have yet provided a more extensive definition of the term "hedging". This leads to different interpretations regarding the calculation of the clearing threshold. Although ESMA's Q&A contains a more detailed description of the term hedging, it does not provide any clear clarification on its application to the clearing threshold calculation.

Under EMIR, the term hedging is defined more broadly than under IFRS. IFRS defines hedging as the application of hedge accounting in accordance with IAS 39 / IFRS 9, which means that OTC derivative contracts that qualify as hedges under the IFRS definition also qualify as hedges for EMIR purposes. In addition, OTC derivative contracts may qualify as hedging for EMIR purposes even though they do not qualify as hedging under the IFRS definition.

Many companies therefore come to the conclusion that if derivatives are generally not concluded for speculative purposes according to the guideline, they are therefore always concluded for hedging purposes. Consequently, these transactions are treated as fully deductible in the clearing threshold calculation, even if hedge accounting is not applied. Other companies, on the other hand, only regard derivatives that qualify for hedge accounting as risk-reducing within the meaning of EMIR.

Due to this heterogeneous approach to determining the EMIR clearing threshold calculation, it is necessary to clarify which OTC derivative contracts objectively and measurably contribute to the reduction of risks.

In addition, ESMA would like to see greater granularity with regard to commodity derivatives. There are countless types of commodity derivatives, ranging from aluminium to sugar. The recitals of EMIR 3.0 (point 21 of EU Regulation 2024/2987) include the proposal to divide the clearing threshold into sectors and types, e.g. "agricultural, energy or metal commodities". However, a separation based on "environmental, social and governance criteria, environmentally sustainable investments or crypto-related characteristics" is just as conceivable. For traditional industrial companies, the first proposal mentioned would probably be the most sensible and also the most efficient to implement. ESMA can therefore be expected to make further requests for changes to these points and to the more extensive structure, and corresponding changes to EMIR are possible in the future.

Finally, it can be concluded that EMIR 3.0 will hardly bring any changes for non-financial counterparties that are not subject to a clearing obligation. With regard to the trading of intragroup derivatives, the requirements for a reporting exemption should be reviewed regularly. In particular, attention should be paid to whether the non-EU countries in which the internal counterparty is domiciled are recognised third countries or whether they are high-risk third countries or non-cooperative countries and territories designated by the EU for tax purposes.  If OTC transactions are concluded with new intragroup counterparties, the exemptions must also be applied for in good time from the respective national supervisory authorities and BaFin.

If you have any questions or need advice on the EMIR compliance system or an EMIR audit, please do not hesitate to contact us.

Source: KPMG Corporate Treasury News, Issue 151, January/February 2025

Authors:
Robert Abendroth, Partner, Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG
Katharina Baumann, Manager, Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG