What is a non-financial counterparty?

A non-financial counterparty is an undertaking established in the EU other than the entities referred to below:

• any investment firm authorised in accordance with Directive 2014/65/EC;
• any credit institution authorised in accordance with Directive 2013/36/EC;
• any insurance undertaking or reinsurance undertaking authorised in accordance with Directive 2009/138/EC;
• any UCITS and, where relevant, its management company, authorised in accordance with Directive 2009/65/EC, unless that UCITS is set up exclusively for the purpose of serving one or more employee share purchase plans;
• any institution for occupational retirement provision (IORP) as defined in point (2) of Article 6 of Directive (EU) 2016/2341 of the European Parliament and of the Council;
• any alternative investment fund (AIFs), as defined in point (a) of Article 4(1) of Directive 2011/61/EU, which is either established in the Union or managed by an alternative investment fund manager (AIFM) authorised or registered in accordance with Directive 2011/61/EU, unless that AIF is set up exclusively for the purpose of serving one or more employee share purchase plans, or unless that AIF is a securitisation special purpose entity as referred to in point (g) of Article 2(3) of Directive 2011/61/EU, and, where relevant, its AIFM established in the Union.

In its FAQs about EMIR, the European Commission provides a definition regarding the application of EMIR to natural persons and municipalities under questions 14 and 15. Based on an initial assessment, municipalities and individuals who offer goods and services in the market are also subject to the obligations pursuant to Articles 4 and 11 of EMIR and to the reporting obligation pursuant to Article 9 if commercial activities are carried out.

Pursuant to Article 9 of EMIR, the conclusion of derivative contracts must be reported to a trade repository from 12 February 2014 onwards.

• Further information about the requirements for non-financial counterparties
• More information about reporting

What are OTC derivatives?

OTC derivatives are derivatives within the meaning of points (4) to (10) of Section C of Annex I to Directive 2004/39/EU (Markets in Financial Instruments Directive – MiFID), which are not executed on a regulated market within the meaning of Article 4(1)(14) of Directive 2004/39/EC or on a third-country market considered equivalent to a regulated market in accordance with Article 19(6) of Directive 2004/39/EC.

What obligations must non-financial counterparties comply with?

Reporting obligation regarding the conclusion of derivative contracts

Since 12 February 2014, it has been required that all derivative transactions be reported to a trade repository. Details on this can be found under "Reporting obligation". Please note that the requirement to report derivative transactions to trade repositories applies to all derivative transactions, irrespective of whether these are traded OTC or not.

Under certain circumstances, OTC derivative transactions must be cleared via a central counterparty (CCP).

Clearing obligation for specific OTC derivatives

The EU Commission has imposed a CCP clearing obligation for certain standardised OTC derivatives in future. ESMA lists the classes of OTC derivatives covered by this obligation in a register which is accessible on the ESMA website.

Who is subject to the clearing obligation?

The clearing obligation applies to those non-financial counterparties whose net volume of OTC derivatives in an asset class exceeds one of the thresholds set forth in Article 11 of Regulation (EU) No 149/2013. Once the threshold of an asset class has been reached, the clearing obligation applies for all further transactions in that asset class (if the clearing threshold is calculated), or for all OTC derivatives (if the clearing threshold is not calculated). In calculating the gross volume of OTC derivatives, the transactions within the entire group are aggregated. This calculation need not take into account any transactions concluded by non-financial counterparties within the same group where these transactions are objectively measurable as reducing risks directly related to the commercial activity or treasury financing activity of the non-financial counterparty or of that group. Article 10 of Regulation (EU) No 149/2013 contains more specific information in this connection.

When a group reaches the clearing threshold or falls below it, BaFin and ESMA must be notified accordingly. The relevant forms for notifying BaFin can be found under "Notifications to BaFin".

The clearing threshold calculation is carried out on the basis of the aggregate month-end average position for the non-financial counterparties within the group for the previous 12 months in the respective derivative classes in accordance with Article 10(3) of EMIR.

ESMA and BaFin are also to be notified if the non-financial counterparty or the group does not carry out a calculation under Article 10(1) of EMIR. The relevant forms can be found under "Notifications to BaFin".

If a non-financial counterparty was not subject to the clearing obligation before EMIR Refit came into force, it is required to centrally clear the relevant contracts within four months of the above notification. This means that all of the changes brought about by EMIR Refit are designed such that there is no time gap between the old and new legal situation with regard to the clearing obligation for non-financial counterparties.

Are there any exceptions?

Intra-group transactions in OTC derivatives between non-financial counterparties within the same group may be exempted from the clearing obligation where both counterparties are included in the same consolidation on a full basis, are subject to appropriate centralised risk evaluation, measurement and control procedures, and the respective other counterparty is established in the Union or, if it is established in a third country, the Commission has adopted an implementing act under Article 13(2) of EMIR in respect of that third country.

The forms to apply for these exemptions can be accessed under "Forms".

Risk-management requirements for OTC derivative contracts concluded bilaterally

Pursuant to Article 11(1) of EMIR, all non-financial and financial counterparties must confirm their OTC derivative transactions in a timely manner and establish processes to manage the risks associated with OTC derivatives. These requirements are more specifically defined in Regulation (EU) No 149/2013. The following applies from the viewpoint of non-financial counterparties:

Pursuant to Article 12 of Regulation (EU) No 149/2013, non-financial counterparties must confirm their OTC derivative transactions – where available via electronic means – at the earliest time possible. In so doing they must comply with certain deadlines, which differ depending on asset class. Shorter deadlines for confirmation of the transaction apply with respect to transactions between non-financial counterparties whose OTC derivative business exceeds one of the thresholds referred to in Article 10 of EMIR and financial counterparties.

Pursuant to Article 13 of Regulation (EU) No 149/2013, prior to concluding a transaction in OTC derivatives, financial and non-financial counterparties must enter into an agreement on the reconciliation of portfolios. How often such portfolio reconciliation is to be performed depends on the number of OTC transactions concluded with the respective counterparty. In this respect, consideration will also be given to whether the threshold referred to in Article 10(1) of EMIR has been exceeded or not.

Pursuant to Article 14 of Regulation (EU) No 149/2013, procedures must be in place to conduct a portfolio compression exercise, if appropriate, where there are more than 500 OTC derivative contracts outstanding with a counterparty. On request by BaFin, it must be explained why a portfolio compression has not been performed. Portfolio compression involves terminating offsetting OTC derivative contracts and concluding new contracts. The aim is to mitigate the operational risk by reducing the number of outstanding contracts while the market risk remains the same.

Finally, Article 15 of Regulation (EU) No 149/2013 requires that processes be in place for the identification, recording, monitoring and resolution of disputes relating to the recognition or valuation of the contract and to the exchange of collateral.

The requirements stipulated under Articles 13 to 15 of Regulation (EU) No 149/2013 must be complied with as of 15 September 2013. Contracts which have already been concluded must also comply with the obligations. Contracts are to be formulated such that they comply with the obligations. For this purpose, EMIR annexes and protocols should be used while the German Master Agreement and the ISDA Master Agreement retain their applicability.

What other provisions apply for non-financial counterparties that have exceeded the threshold referred to under Article 10(1) of EMIR?

Where the threshold referred to under Article 10(1) of EMIR has been exceeded by a non-financial counterparty, additional requirements must be met:

Article 11(2) of EMIR provides that the portfolio must be marked-to-market on a daily basis. The conditions under which marking-to-market is not possible and the criteria for using marking-to-model are defined in more detail under Articles 16 and 17 of Regulation (EU) No 149/2013.

In addition, non-financial counterparties who have exceeded the threshold under Article 10 of EMIR with regard to their OTC derivatives portfolio are – as is also the case for financial counterparties – required to provide adequate collateral for such OTC derivative contracts if this is provided for under Delegated Regulation (EU) 2016/2251.

In this case also, an exemption for intra-group transactions may apply under certain conditions.

How are these obligations monitored?

In addition to BaFin's market supervision powers, pursuant to section 32 of the WpHG there is an obligation for corporations which are neither small corporations within the meaning of section 267 (1) of the German Commercial Code (Handelsgesetzbuch – HGB) nor financial counterparties within the meaning of Article 2(8) of Regulation (EU) No 648/2012 to obtain certification of compliance with the EMIR requirements from a certified public accountant if they have an outstanding notional volume of OTC derivatives of €100 million or more (deducting intra-group transactions) or 100 outstanding OTC contracts per year. If this review reveals deficiencies, BaFin is to be informed. The specific requirements can be found in the German Counterparty Review and Certification Regulation (Gegenpartei-Prüfbescheinigungsverordnung – GPrüfbV).