On 14 June 2019, the European Securities and Markets Authority (ESMA) published a letter to the Commission, dated 7 June 2019, regarding the calculation of the month-end average positions of financial counterparties (FC) in non-financial groups under the EMIR Refit regulation, which is used to determine whether FCs are subject to the clearing obligation when they are above the clearing thresholds.
For the purpose of performing the calculation of the positions against the clearing thresholds, an FC will need to take into account all over-the-counter (OTC) contracts entered into by that FC or entered into by other entities within the group to which that FC belongs (irrespective whether those other entities are FCs or NFCs). In contrast, for the purpose of performing the calculation of the positions against the clearing thresholds, a non-financial counterparty (NFC) will only need to take into account all OTC derivative contracts entered into by that NFC or by other NFCs within the group to which that NFC belongs, which are not objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity (i.e. hedging) of the NFC or of that group.
ESMA proposes in its letter that it would make sense that if an NFC can apply the hedging exemption for its positions, then the FCs in their group could also apply the same hedging exemption when taking into account the position of the NFCs at group level. ESMA also raises concerns that requiring FCs to include all the positions of the NFCs in their group, whether concluded for hedging purposes or not, could have consequences on nonfinancial groups’ behaviour, i.e. it could act as a disincentive for NFC groups to enter into hedging transactions in order for their FC entities to remain below the clearing thresholds.
ESMA requests the Commission to clarify the correct interpretation of the applicable provision for FCs with NFCs in their group.