RegTech Intelligence 
It is common knowledge that the central clearing and risk mitigation requirements apply to any third country firm trading with an EU entity. However, it may come as a surprise that these requirements can also apply to trades purely between two third country entities where such trades have a ‘direct, substantial and foreseeable effect with the Union’. On 17 July, ESMA released technical standards on this topic. The result is more KYC requirements for third country firms who trade derivatives in and around Europe.
The consultation will determine which contracts have a ‘direct, substantial and foreseeable effect within the Union’ and, as such, are subject to the clearing and risk mitigation obligations from EMIR. These technical standards clarify ESMA’s position on extraterritoriality and will extend the scope of EMIR for the foreseeable future. However, since firms regulated under equivalent regimes will be exempt, this scope will decrease as the EU enters into bilateral agreements.
Under the draft technical standards, contracts will be subject to the clearing and risk mitigation obligations in two situations:
- Where either party is guaranteed by a European financial institution to the tune of >€8bn and >5% of the total derivative exposures of the guaranteeing entity;
- Where two non-EU entities enter into the derivatives contract through branches established in the EU.
As mentioned, this makes the perimeter of the requirements relatively clear. However, it does come with certain logistical issues: How do you know whether your counterparty is guaranteed by another entity? Fortunately for the corporate world, the obligation only affects entities guaranteed by those institutions classed as being financial counterparties (FCs) under EMIR. But will this require new KYC processes for non-EU FIs? For instance, if I’m a Chinese bank looking to trade with a bank in Tunisia, do I have to perform new due diligence to determine whether my counterparty is guaranteed by a French bank and to what extent?
The way out of all this is for individual jurisdictions to be deemed equivalent by the EU. This is already in progress with the US, with both parties allowing compliance with either EMIR or Dodd-Frank in relation to mandatory clearing, risk mitigation and other areas (press release here; JWG analysis here). But other bilateral agreements have yet to surface. Therefore, in non-US jurisdictions, firms will have to be prepared from as early as 15 September 2013 for EMIR compliance.