EMIR REFIT and New Ordinance on Replication of Master Agreements

France Introduces New Replication Mechanism for Master Agreements Ahead of Brexit

On Feb. 6, the French government put forth a statutory instrument (l'ordonnance n° 2019-75 du 6 février 2019, hereinafter  the l’ordonnance) containing changes to French law, including the French monetary and insurance codes, that take into account the United Kingdom's imminent departure from the European Union. One such change would allow for existing master agreements to be deemed to be replicated, subject to certain conditions.

In order to facilitate the repapering of financial contracts in anticipation of Brexit, Article 3 of the ordinance includes a mechanism for “automatic replication” of master agreements governing transactions relating to financial instruments ("instrument financier," which is broadly defined to include securities and derivatives). Pursuant to the proposed mechanism, a European counterparty having an existing master agreement with a counterparty located in the United Kingdom shall be deemed to have accepted an offer to enter into a new master agreement of identical terms with a member of the UK entity’s consolidated group (such member being located in Europe and of equal creditworthiness), provided the parties have entered into a contract (“conclu un contrat”) in connection with the new master agreement within five days of receiving the offer. Article 3 stipulates that this mechanism shall be available for a period of one year following the ordinance's effective date (to be the date the United Kingdom leaves the European Union without a final withdrawal agreement).

While it is clear the intention was to simplify the replication process, the ordinance imposes two conditions that are likely to render it underutilized: the newly offered master agreement must be subject to French law, and it must provide for exclusive French jurisdiction. It is difficult to see a counterparty not located in France availing itself of the mechanism proposed by Article 3, and these restrictions limit its utility beyond uniquely French counterparties.

ESMA Publishes Guidance for Small Financial Counterparties in Anticipation of EMIR Refit

In connection with the European Commission’s proposed amendments to the European Market Infrastructure Regulation¹ (herein referred to as “EMIR Refit”), ESMA has put forth a statement concerning the upcoming clearing obligations for small financial counterparties, as well as EMIR’s "backloading" requirement.

Normally the clearing obligation for Category 3² counterparties would begin on June 21, 2019. However, the commission’s proposed amendments would create a new small financial counterparties category for which the clearing obligation would be delayed. Although it is possible that EMIR Refit will be approved in time for June 21, there will likely be a period during which these small financial counterparties will be required to clear before being granted a delay pursuant to the new regulation. Given this risk, ESMA has stated that it expects competent authorities to focus their supervisory powers on those financial counterparties that are unlikely to qualify for the newly created category of small financial counterparty, rather than those counterparties for whom the clearing obligation will be delayed under EMIR Refit.

EMIR Refit also proposes eliminating what is commonly referred to as backloading, a requirement under EMIR pursuant to which counterparties would have been required to report derivatives that were outstanding on or after Aug. 16, 2012, and terminated before Feb. 12, 2014, the EMIR reporting start date. Following a delay by the commission, the deadline for the completion of backloading is now Feb. 12, 2019.  However, given that EMIR Refit’s implementation date is uncertain, ESMA has recommended that competent authorities not prioritize their enforcement of counterparties’ reporting of backloaded transactions.

¹ https://ec.europa.eu/info/law/better-regulation/initiatives/com-2017-208_en

² Counterparties meeting certain criteria that are below €8 billion in aggregated month-end average of outstanding gross notional amount of non-cleared derivatives at group level