When does EMIR apply to commodity and other non-financial derivatives? August 2013
When does EMIR apply to commodity and other non-financial derivatives? Contract of relevant type (note 1)? Relates to eligible underlying (note 2)? Cash settled (note 3)? Out of scope Traded on a regulated market or MTF? In scope Spot contract (note 4)? For commercial purposes (note 5)? Has characteristics of other derivative financial instruments (note 6)? When does EMIR apply to commodity and other non-financial derivatives? 2
tes This flowchart is intended to assist in analysing whether contracts relating to commodities or other non-financial underlyings fall within the scope of Section C(5), (6), (7) and (10) Annex I MiFID and thus are derivatives within the scope of EMIR. However, it does not analyse whether contracts are covered by Section C(4), (8) or (9) of Annex I MiFID and thus are otherwise within the scope of EMIR. 1 Relevant contract types Options, futures, swaps and any other derivative contract relating to commodities (Section C(7) also specifically includes forwards relating to commodities) and options, futures, swaps, forward rate agreements and any other derivative contract relating to the other underlyings listed in te 2. 2 Eligible underlyings Commodities Climatic variables Freight rates Emission allowances Inflation rates or other official economic statistics Telecommunications bandwidth Commodity storage capacity Transmission or transportation capacity relating to commodities, whether cable, pipeline or other means An allowance, credit, permit, right or similar asset which is directly linked to the supply, distribution or consumption of energy derived from renewable resources A geological, environmental or other physical variable Any other asset or right of a fungible nature, other than a right to receive a service, that is capable of being transferred An index or measure related to the price or value of, or volume of transactions in any asset, right, service or obligation. 'Commodity' is defined as any goods of a fungible nature that are capable of being delivered, including metals and their ores and alloys, agricultural products and energy such as electricity. The MiFID implementing regulation does not fully articulate the application of the criteria to physically settled contracts on emissions allowances. 3 Cash settled A contract is cash settled if it must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event). When does EMIR apply to commodity and other non-financial derivatives? 3
tes (continued) 4 Spot contracts A contract for the sale of a commodity, asset or right is a spot contract if under its terms delivery is scheduled to be made within the longer of the following periods: (a) two trading days; (b) the period generally accepted in the market for that commodity, asset or right as the standard delivery period. However, a contract is not a spot contract if, irrespective of its explicit terms, there is an understanding between the parties to the contract that delivery of the underlying is to be postponed and not to be performed within the period specified above. 5 Commercial purposes A contract is considered to be for commercial purposes if it is entered into with or by an operator or administrator of an energy transmission grid, energy balancing mechanism or pipeline network, and it is necessary to keep in balance the supplies and uses of energy at a given time. For the purposes of Section C(10) Annex I the same test is applied for determining whether a contract has the characteristics of other derivative financial instruments. 6 Characteristics of other derivative financial instruments A transaction is considered to have the characteristics of other derivative financial instruments if it satisfies the following conditions: (a) it meets one of the following sets of criteria: (i) it is traded on a third country trading facility that performs a similar function to a regulated market or an MTF; (ii) it is expressly stated to be traded on, or is subject to the rules of, a regulated market, an MTF or such a third country trading facility; (iii) it is expressly stated to be equivalent to a contract traded on regulated market, MTF or such a third country trading facility; (b) it is cleared by a clearing house or other entity carrying out the same functions as a central counterparty, or there are arrangements for the payment or provision of margin in relation to the contract; and (c) it is standardised so that, in particular, the price, the lot, the delivery date or other terms are determined principally by reference to regularly published prices, standard lots or standard delivery dates. MiFID2/MiFIR will amend the definition of derivative financial instruments in MiFID. In particular, this is likely to affect the scope of the definition as it relates to commodity and other non-financial derivatives. When does EMIR apply to commodity and other non-financial derivatives? 4
Glossary Derivative: as defined in EMIR, i.e. a financial instrument as set out in points (4) to (10) Section C, Annex 1, MiFID, as implemented by the MiFID implementing regulation EMIR: the EU regulation on OTC derivatives, central counterparties and trade repositories EU: European Union Member State: member state of the EU MiFID: the Markets in Financial Instruments Directive MiFID implementing regulation: the regulation implementing MiFID MiFID2/MiFIR: the proposed EU directive and regulation that will replace MiFID MTF: a multilateral trading facility under MiFID Regulated market: a regulated market as defined in MiFID Third country: a country outside the EU Sources: Article 2(5) EMIR Sections C(5), (6), (7) and (10) Annex I MiFID Recital 21 and Articles 38 and 39 MiFID implementing regulation This document is not intended to be comprehensive or to provide legal advice. For more information, speak to one of the contacts listed below or your usual contact. When does EMIR apply to commodity and other non-financial derivatives? 5
Contacts Chris Bates Caroline Dawson Senior Associate Simon Gleeson Caroline Meinertz Senior Associate T: +44 20 7006 1041 M: +44 7785 700236 E: chris.bates@ T: +44 20 7006 4355 M: +44 7949 443527 E: caroline.dawson@ T: +44 20 7006 4979 M: +44 7977 423944 E: simon.gleeson@ T: +44 20 7006 4253 M: +44 7717 693723 E: caroline.meinertz@ Habib Motani T: +44 20 7006 1718 M: +44 7785 700107 E: habib.motani@ Nick O Neill T: +1 212878 3119 M: +44 7798 503501 E: nick.o neill@ Monica Sah T: +44 20 7006 1103 M: +44 7747 627820 E: Monica.sah@ Jeremy Walter T: +44 20 7006 8892 M: +44 7717 693702 E: jeremy.walter@ When does EMIR apply to commodity and other non-financial derivatives? 6
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