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21 August 2018 Supervision Supervision label Supervision Q&A

How can institutions that are subject to the European Market Infrastructure Regulation (EMIR) apply for exemption from the obligation to exchange collateral (initial and variation margins in accordance with Article 11 of Regulation (EU) 648/2012) or call upon the transitional provisions in accordance with Articles 36 and 37 of Commission Delegated Regulation (EU) 2016/2251 [1], with respect to intra-group OTC derivatives transactions in which one of the intra-group counterparties is established outside the Netherlands? And which information has to be given than?

Question 1

How can institutions that are subject to the European Market Infrastructure Regulation (EMIR) apply for exemption from the obligation to exchange collateral (initial and variation margins in accordance with Article 11 of Regulation (EU) 648/2012) or call upon the transitional provisions in accordance with Articles 36 and 37 of Commission Delegated Regulation (EU) 2016/2251 [1], with respect to intra-group OTC derivatives transactions in which one of the intra-group counterparties is established outside the Netherlands? And which information has to be given than?

Intra-group transactions in which one of the intra-group counterparties is established outside the Netherlands are permitted in three situations:

  1. Intra-group transactions in which one of the counterparties is established in the Netherlands and the other is established in another EEA country.

  2. Intra-group transactions in which one of the counterparties is established in the Netherlands and the other is established in a non-EEA country that the European Securities and Markets Authority (ESMA) has declared equivalent under EMIR (in accordance with Article 13(2) of EMIR).

  3. Intra-group transactions in which one of the counterparties is established in the Netherlands and the other is established in a non-EEA country that is not yet declared equivalent under EMIR.

Under Article 11 of EMIR, institutions may apply for exemption with DNB for situations 1) and 2). Under Articles 36 and 37 of Commission Delegated Regulation (EU) 2016/2251, institutions may call upon the transitional provisions for situation 3). DNB will then assess against Articles 26 and 36 of the Delegated Regulations whether the transitional provisions can be applied, using the same criteria that also apply to applications for exemption. In all three situations, therefore, institutions are asked to use the exemption application form and indicate whether they meet the criteria for exemption, including those ensuing from the provisions of Articles 33 and 34 of Delegated Regulation (EU)2016/2251.

In addition to the exemption application form, institutions must also submit specific supplementary details in order to assess whether the criteria for exemption are met.

  1. For intra-group transactions in which one of the counterparties is established in the Netherlands and the other is established in another EEA country: a.an analysis, to the satisfaction of DNB, of the impact of the other country's insolvency regulations on the possibility to meet the payment obligations ensuing from the relevant derivatives contract at any (later) moment in time. The institution may also use any analysis already performed in the context of the ILAAP for this purpose.

  2. Intra-group transactions in which one of the counterparties is established in the Netherlands and the other is established in a non-EEA country that ESMA has declared equivalent:

    1. an analysis, to the satisfaction of DNB, of the impact of the other country's insolvency regulations on the possibility to meet the payment obligations ensuing from the relevant derivatives contract at any (later) moment in time. The institution may also use any analysis already performed in the context of the ILAAP for this purpose.

    2. an analysis, to the satisfaction of DNB, of the impact of the other country's resolution regime on the possibility of the party established in that country to transfer funds to the counterparty/to meet the payment obligations ensuing from the relevant derivatives contract.

  3. Intra-group transactions in which one of the counterparties is established in the Netherlands and the other is established in a non-EEA country that is not yet declared equivalent:

    1. an analysis, to the satisfaction of DNB, of the impact of the other country's insolvency regulations on the possibility to meet the payment obligations ensuing from the relevant derivatives contract at any (later) moment in time. The institution may also use any analysis already performed in the context of the ILAAP for this purpose. Since this situation involves a non-EEA country, DNB may require the institution to also submit a legal opinion.

    2. an analysis, to the satisfaction of DNB, of the impact of the other country's resolution regime on the possibility of the party established in that country to transfer funds to the counterparty to meet the payment obligations ensuing from the relevant derivatives contract.

    3. information, to the satisfaction of DNB, demonstrating that the volume of intra-group transactions involving third-country counterparties stays within prudent limits with respect to the institution's Additional Tier 1 (AT1) capital, with the limit being permanently monitored and any overruns being promptly notified to DNB and adjusted.

    4. If a guarantee is available from the parent company to the subsidiary (in accordance with Section 2:403 of the Dutch Civil Code or comparable to a guarantee as referred to in Section 2:403(1), under f, of the Dutch Civil Code), the limit referred to in part 3c does not apply, and the institution will be eligble for exemption provided it also meets the other requirements.

Question 2

Can exemptions for intra-group contracts in which one of the counterparties is established in the Netherlands and the other is established in a non-EEA country be subject to restrictions, and could a restriction also consist of a time limit?

Answer

Yes, exemptions may be subject to restrictions, and a restriction can also consist of a time limit. Article 11(8) of EMIR and Article 32(4) of the Delegated Regulation also allow partial exemptions. This means DNB can also grant temporary exemptions.

Explanatory notes to questions 1 and 2

Since 2012, the European Market Infrastructure Regulation (EU)648/2012 (EMIR) applies to financial institutions using derivatives. EMIR is based on central clearing of OTC derivatives contracts (Article 4(1)). In specific cases, Article 4(2) exempts OTC derivatives that can be classified as intra-group transactions from this central clearing obligation. These cases involve non-centrally cleared OTC derivatives contracts that are subject to the risk-mitigation techniques described in Article 11 of EMIR, including the exchange of initial and variation margins and risk mitigation. For derivative transactions that qualify as intra-group transactions (as defined in Article 3 of EMIR), there are four possible exceptions to the obligation to exchange collateral:

  1. Intra-group transactions in the same EEA country, i.e. the Netherlands.

  2. Intra-group transactions in which one of the counterparties is established in the Netherlands and the other is established in another EEA country.

  3. Intra-group transactions in which one of the counterparties is established in the Netherlands and the other is established in a non-EEA country that is declared equivalent under EMIR.

  4. Intra-group transactions in which one of the counterparties is established in the Netherlands and the other is established in a non-EEA country that is not yet declared equivalent under Article 13 of EMIR.

Re a)
In the case of intra-group transactions in which both counterparties are established in the Netherlands, the exception applies directly and there is no need to apply for exemption with DNB. A notification to DNB will suffice. It should be noted, however, that a number of specific provisions apply to the exception (see Article 11 of EMIR). For example, there must not be practical or legal impediments to the prompt transfer of own funds, or repayment of liabilities. In addition, sound and centralised risk management procedures must be in place in accordance with Article 11(3) of EMIR. It is the institution's responsibility to ensure this, and DNB may assess it in the course of regular supervision.

Re b)
In the case of intra-group transactions in which one of the counterparties is established in the Netherlands and the other is established in another EEA country, the institution must first apply for an exemption to the obligation to exchange collateral with DNB (see Article 11(6-10) of EMIR). A form has been made available on our Open Book on Supervision pages for this purpose.

In Part F1 of this form, the institution must describe that there are no legal impediments to the exchange of margins. The institution must also submit a description of the other country's insolvency regulations, demonstrating that there are no legal impediments to the exchange of margins, now or at any moment in the future, as insolvency regulations may vary from one EEA country to another. The institution may also use any analysis already performed in the context of the ILAAP for this purpose.

Once the institution has demonstrated to the satisfaction of DNB that there are no impediments, DNB will grant an exemption. If the institution no longer meets the conditions for exemption as referred to in Article 11(6-10) of EMIR and elaborated in Articles 33 and 34 of Commision Delegated Regulation (EU)2016/2251, it must notify DNB of this without delay. If the institution no longer meets the conditions, DNB may withdraw the exemption.

Re c)
If a non-EEA country has been declared equivalent, the rules for EEA countries will apply. Since the EEA countries' resolution regulations may vary, the institution is only asked to submit a supplementary analysis of the impact of the EEA country's resolution regime on the possibility of the party established in that EEA country to transfer funds to the counterparty/to meet the payment obligations ensuing from the relevant derivatives contract.

Re d)
If the counterparty is established in a non-EEA country which has not yet been declared equivalent, some conditions apply in addition to those described under b) and c) above.

Firstly, to obtain assurance about the absence of legal impediments, DNB reserves the right, in addition to the information the institution already submitted, to ask for a legal opinion.

Secondly, application of the transitional provisions is only allowed if the volume of intra-group transactions involving third-country counterparties stays within prudent limits with respect to the institution's core equity Tier 1 (CET1) capital. It is primarily the institution's responsibility to demonstrate to the satisfaction of DNB that this is the case. The limits must fit the institution's risk profile and risk appetite. In demonstrating that the volume of intra-group transactions stays within prudent limits, the institution should address elements such as credit risk, liquidity risk, the maturity and complexity of the derivatives, operational risk (timely settlement with respect to possible time differences), its rating and the development of its own funds. The institution must permanently monitor the limits, promptly notify any overruns to DNB and immediately remedy them.

[1] As amended in Commission Delegated Regulation (EU)2017/323 (Article 37(3-4))