Reed Smith Client Alerts

The proposed amendments to the EU OTC derivatives regulation, commonly known as EMIR, have been politically agreed upon (the EMIR Refit). The final text is expected to be published in the Official Journal of the European Union (Official Journal) by the summer, with most of the changes being directly applicable in all EU member states 20 days later

This alert summarises the key changes that will be relevant to alternative investment funds (AIFs).

Definition of financial counterparty

Broadly, AIFs currently only fall into the definition of a financial counterparty (FC) if they are managed by an authorised or registered alternative investment fund manager (AIFM). Under the EMIR Refit, all EU AIFs (regardless of their manager’s regulatory status) will be treated as FCs unless they are securitisation special purpose entities or established solely for employee share purchase plans.

Categorisation as an FC or as a third-country equivalent is important since it will determine which counterparty obligations apply, and it may mean that (a) the EMIR mandatory clearing or margin rules will apply; and (b) the timeframe for trade confirmations and the frequency of portfolio reconciliation requirements will change. Furthermore, AIFs categorised as FCs will need to update their non-financial counterparty (NFC) representation documentation accordingly.

Non-EU AIFs which are not managed by an authorised or registered AIFM will remain third-country entities, but when entering into OTC derivatives with EU counterparties, they will be treated as equivalent to FCs rather than NFC-s or NFC+s (i.e. NFCs whose OTC derivatives positions exceed certain thresholds). This could have an impact on the nature of the obligations that will apply to OTC transactions entered into between EU counterparties and non-EU AIFs.