On April 18, 2019, the final text amending the European Market Infrastructure Regulation (EMIR) was adopted by the European Parliament. The update to EMIR is widely referred to as EMIR REFIT and will come into effect on June 17, 2019.
This article provides a broad overview of the main impacts of EMIR REFIT on fund managers and their funds, with a particular focus on U.S. fund managers.
Changes to EMIR Counterparty Categorization
Reclassification of Alternative Investment Funds
The most significant change for U.S. fund managers is the reclassification of EU-domiciled alternative investment funds (AIFs). Under the old EMIR classifications, only AIFs managed by a manager (AIFMs) authorized or registered under the Alternative Investment Fund Managers Directive (AIFMD) were classified as financial counterparties (FCs). Under EMIR REFIT, however, any AIF domiciled in the EU, whether or not its manager is an AIFM, is classified as an FC.
The expanded definition of “FC” will bring many more entities into that category, including any private fund, mutual fund or other fund that is not a UCITS. This will prevent those entities from relying on exemptions from certain EMIR requirements available to nonfinancial counterparties (NFCs), as discussed in more detail below.
Revised Clearing Thresholds
In order to alleviate some of the impact of this relatively significant recategorization, EMIR REFIT has introduced a new subcategory of financial counterparties with lower OTC derivatives trading volume, labeled FC- (or FC minus). For purposes of this new subcategory, the revised regulations replicate the clearing thresholds currently applicable to distinguish nonfinancial counterparties (as either NFC+ or NFC-). As a result, as long as the FC’s aggregate average month-end notional amount trading volume for the previous 12-month period is below EUR 1 billion (in either credit or equity derivatives) or EUR 3 billion (in any of interest rate, FX, commodity or other derivatives), then the FC will be an FC-. Those thresholds are calculated at the entity level and are subject to adjustments by the European Securities and Markets Authority (ESMA).
Where a fund is part of a group (e.g., a parent-subsidiary relationship), the calculation of clearing thresholds would take into account all covered derivatives entered into across the group. The definition of “group” under EMIR may include structures such as master and feeder funds, in which case derivatives entered into by both the feeder (such as a currency hedge) and the master will be aggregated.
Status of AIFs Going Forward
Funds of non-EU managers will fall within two separate categories depending upon whether the fund itself is domiciled in the EU.
1. EU funds with non-EU managers
2. Non-EU funds with non-EU managers
EMIR REFIT has also closed a loophole enabling non-EU AIFs previously categorized as NFC- to remain out-of-scope for the purposes of EU variation margin requirements. However, those funds escaping the EMIR margin requirements were generally in-scope for the purposes of other regimes, such as Dodd-Frank. As a result, it is not expected that this change will substantively alter the current application of variation margin across AIFs or their managers, whether domiciled inside or outside the EU.