Each of the following shall be deemed to be Financial Counterparties for the purposes of EMIR: a credit institution, an investment firm, a UCITS, and where relevant, its management company, an AIF managed by AIFM, an insurance, assurance, reinsurance undertaking, or an institution for occupational retirement provision.

Non-financial counterparties ("NFCs") are all those counterparties to a derivative contract other than Financial Counterparties, Trade Repositories and Central Counterparties.

Until a fund shall remain regulated under the Malta PIF regime, it shall be classified as an NFC (and hence Parts A, B and C below shall apply), however, it is important to note that once a fund is classified as an AIF as a result of its manager becoming AIFMD compliant, the AIF would then be treated as a Financial Counterparty ("FC") for all intents and purposes under EMIR (and hence Parts A, D and E below shall apply).


All counterparties and Central Counter Parties ("CCPs") must ensure that details of any derivative contract (i.e. both Exchange Traded Derivatives ("ETDs") and Over The Counter ("OTC") Derivatives, and whether cleared or not, including intra-group transactions) are reported to a registered Trade Repository ("TR") within one working day of their conclusion, modification or termination.


Trades outstanding on 16 August 2012 and still outstanding on the reporting start date have to be reported within 90 days of the reporting start date. Trades outstanding on the 16 August 2012 or entered into thereafter but not outstanding on the reporting start date have to be reported within 3 years of the reporting start date.

Reporting details - set in the Commission Delegated Regulation (EU) No 148/2013, that is, all details set out in Table 1 of the Annex which contains information relating to the counterparties to a contract and all information set outin Table 2 of the Annex which contains details pertaining to the derivative contract between the two counterparties.

Format and frequency of reports - set in the Commission implementing Regulation (EU) No 1247/2012, that is, as follows:

Where provided for in Article 11(2) of Regulation (EU) No 648/2012, mark to market or mark to model valuations of contracts reported to a trade repository shall be done on a daily basis. Any other reporting elements as provided for in the Annex to this Regulation and the Annex to the delegated act with regard to regulatory technical standards specifying the minimum details of the data to be reported to trade repositories pursuant to Article 9(5) of Regulation (EU) No 648/2012 shall be reported as they occur and taking into account the time limit foreseen under Article 9 of Regulation (EU) No 648/2012, notably as regards the conclusion, modification or termination of a contract.



As from the 16 August 2012 NFCs are required to keep a record of any derivative contract they have concluded and subsequent modifications, for at least 5 years following termination of the contract (art 9(2) EMIR).


EMIR treats NFCs differently depending on whether their positions in OTC derivative contracts exceed certain "Clearing Thresholds" outlined hereunder. NFCs with OTC derivative contract activity above the "Clearing Threshold" are subject to the same requirements as a Financial Counterparty ('FC') under EMIR. The "Clearing Threshold" is a predefined amount dependent on the class of the OTC derivative contract as set out below.

Clearing Thresholds

 €1 billion* - Credit Derivative Contracts

 €1 billion* - Equity Derivative Contracts

 €3 billion* - Interest Rate Derivative Contracts

 €3 billion* - Foreign Exchange Derivative Contracts

 €3 billion* - Commodity Derivative Contracts and Others

*in Gross Notional Value

It is important to note that while the clearing threshold is dependent on the position held in relation to one asset class (e.g. for credit derivatives), if the threshold is exceeded, NFCs will be required to clear OTC derivative contracts through a CCP for all asset classes (e.g. for interest rate and foreign exchange derivatives).

Examples in practice:

 Firm A

- €750m Equity Derivative Contracts

- €2.95b Interest Rate Derivative Contracts

- €2.70b Foreign Exchange Derivative Contracts

* Clearing Threshold Not Exceeded so no clearing is required

 Firm B

- €1.5b Equity Derivative Contracts

- €100m Interest Rate Derivative Contracts

- €270m Foreign Exchange Derivative Contracts

* Clearing Threshold Exceeded, therefore the NFC must clear ALL contracts

Hedging Exception

When calculating thresholds, an NFC may ignore OTC derivative contracts used for hedging purposes. The Commission Delegated Regulation [(EU) No 149/2013] sets out a precise definition. This definition includes activities which:

o Cover risks incurred in the normal course of business

o Cover risks arising from fluctuations in interest rates, inflation rates, foreign exchange rates, credit risk, etc…

o Qualify as a 'hedging contract' pursuant to the IFRSs

(i.e. those derivative contracts which are objectively measurable as reducing risks directly related to its commercial or treasury financing activity).

NFCs exceeding this threshold:

1. Must immediately notify ESMA and the MFSA;

2. Will become subject to the clearing obligation for future contracts if the rolling average position over 30 working days exceeds the threshold; and

3. Centrally clear all relevant future contracts, through a Central Counterparty ('CCP'), within four months of becoming subject to the clearing obligation.

The clearing obligation will only apply to those classes of OTC derivative contracts that a CCP has been authorised or recognised to clear. ESMA shall determine those OTC derivative contracts to be cleared in a public register available on its website. The clearing of contracts through CCPs will not come into effect before 15th March 2014 – depending on the publication date of the relevant Regulatory Technical Standard.

The clearing obligations under EMIR are summarised in the table below:

 Counterparty    FC       NFC +         NFC -        (TABLE)

 FC                         Y           Y                 x     

NFC +                    Y           Y                x 

NFC -                     x               x              x


FC Financial Counterparty

NFC + Non-Financial Counterparty Exceeding the Clearing Threshold

NFC - Non-Financial Counterparty Below the Clearing Threshold


All NFCs (irrelevant of the clearing threshold) must have appropriate procedures in place to ensure that they are able to confirm the details of their non-cleared OTC derivative contracts with counterparties. The requirement to have in place procedures and arrangements to measure, monitor and mitigate risks associated with OTC derivative contracts which are not centrally cleared.

Risk Mitigation Techniques should include, at least:

 The timely confirmation of the terms of the relevant OTC derivative contract, where possible by electronic means (e.g. confirmation platforms)

 Formalised processes to reconcile portfolios, manage associated risks, identify disputes between parties, and monitor the value of outstanding contracts

Risk Mitigation requirements:

1. Timely Confirmations (15th March 2013)

2. Dispute Resolutions (15th September 2013)

3. Portfolio Reconciliation (15th September 2013)

4. Portfolio Compression (15th September 2013)

1. Timely Confirmations:

 Confirmation – the documentation of the agreement of the counterparties to all the terms of an OTC Derivative Contract

 e.g. Master Agreements, Master Confirmation Agreements, or other Standard terms

 Timely Confirmations? As soon as possible, but not later than the times indicated in the tables below:



2. Dispute Resolution:

All NFCs must have agreed procedures and processes to:

a) Identify, record and monitor disputes relating to the recognition or valuation of the OTC Derivative Contract, and to the exchange of collateral between counterparties

b) b)Resolve disputes in a timely manner, with a specific process for those disputes that are not resolved within 5 business days

3. Portfolio Reconciliation:


4. Portfolio Compression:

 Portfolio compression involves parties netting trades to maintain the same risk profile but reducing the number of contracts and therefore the gross notional value

 NFCs with 500 (or more) OTC Derivative Contracts outstanding with another counterparty

 Required to have in place procedures to regularly analyse the possibility of portfolio compression to reduce counterparty risk at least twice a year

 NFCs must be able to explain if they have concluded this is not appropriate.


FCs are required to clear all OTC Derivatives that will be included in the European Commission RTS (the Register)(Art 6 of EMIR). Therefore after [i] CCPs have been authorised, and [ii] the derivative contracts to be cleared defined in an RTS.

Intragroup Exemption (Art 4(2) EMIR)

Intragroup transactions may qualify (subject to MFSA approval) for exemptions from:

 the clearing obligation; and

 exchange of collateral element of the risk mitigation obligations

when certain conditions are met. The notification shall be made at least 30 days before using exemption.

Criteria for Intragroup Exemption

 The risk management procedures of the counterparties are adequately sound, robust, and consistent with the level of complexity of the transactions; and

 There is no current or foreseeable practical or legal impediment to the prompt transfer of own funds and or repayment of liabilities between counterparties.



Requirement to have in place procedures and arrangements to measure, monitor and mitigate risks associated with OTC derivative contracts which are not centrally cleared.

Risk mitigation techniques

1. Timely confirmation (from the 15th March 2013)

 confirm trades (agreement of the counterparties to all terms of the OTC derivative contract) by the set deadlines (stipulated in the Regulatory Technical Standards ("RTS"))

 FC to have procedures in place for unconfirmed OTC DT outstanding for more than five business days. (Art 12(4) RTS 149/2013)

2. Portfolio reconciliation (from the 15th September 2013) – FC are required to:

 agree in writing or electronic means with each of its counterparties to the arrangements under which portfolios are to be reconciled (before entering into OTC Derivatives); and

 perform reconciliation on the key trade terms that identify each particular OTC derivative including mark-to-market model valuation (frequency of reconciliation also defined in RTS)

3. Dispute resolution (from the 15th September 2013)

FC to maintain detailed procedures and processes with respect to:

 the identification, recording and monitoring of disputes relating to the recognition or valuation of the contract and to the exchange of collateral between counterparties (e.g. duration of dispute and amount involved);

 resolution of disputes in a timely manner with a specific process for those disputes that are not resolved within five business days; and

 FC to report to the MFSA disputes between counterparties relating to an OTC derivative contract, its valuation or the exchange of collateral for an amount or a value higher than EUR15m and outstanding for at least 15 business days.

4. Portfolio compression (from the 15th September 2013)

 If >500 OTC derivative contracts outstanding with one counterparty – FC must have procedures in place to analyse the possibility of conducting a portfolio compression exercise (at least twice a year) in order to reduce its counterparty credit risk and engage in such portfolio compression exercise if needed.

 FCs must provide reasonable explanations to the MFSA for concluding that a portfolio compression exercise is not appropriate.

5. Segregated Exchange of Collateral (from the 15th September 2013)

 FCs to implement and maintain procedure for the timely, accurate and appropriate segregated exchange of collateral, other than in respect of certain intragroup transactions.

 FCs are required to hold an appropriate and proportionate amount of capital to manage the risk not covered by appropriate exchange of collateral.

Risk mitigation techniques - valuation

 Mark-to-Market (or-Model).

 FCs are required to mark-to-market the value of outstanding contracts on a daily basis, or in case marking-to-market is not possible (due to certain market conditions), a reliable and prudent marking–to-model shall be used.


This document does not purport to give legal, financial or tax advice. Should you require further information or legal assistance, please do not hesitate to contact Dr. Katya Tua or Dr. Nicholas Micallef.