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Erscheinung:04.10.2015 12:00 AM, Stand:updated on 08.06.2022 | Topic OTC derivatives BaFin’s FAQs regarding EMIR

Content

Regulation (EU) No 648/2012 of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, amended by Regulation (EU) No 2019/834 (EMIR Refit)

If you have any queries on this matter, please contact BaFin by e-mail at WA14@bafin.de.

Important Information: Authoritativeness of these FAQs

The assessments set out here represent BaFin’s current views and these issues may, in particular, be subject to different interpretations by the European institutions.

Legal Basis

Are there other relevant rules in addition to EMIR?

Yes, not only does Regulation (EU) No 648/2012 apply, but there are also several other implementing provisions. A list of the relevant European provisions can be found on the website of the European Securities and Markets Authority (ESMA) here.

Further information on EMIR can also be found here on the European Commission’s website.

In addition to European provisions, compliance with national provisions is also required. Currently these include, inter alia, sections 30 to 32 of the German Securities Trading Act (WertpapierhandelsgesetzesWpHG), the German Counterparty Review and Certification Regulation (Gegenpartei-PrüfbescheinigungsverordnungGPrüfbV), the German Regulation on the Contents of Examination Reports for External Domestic Management Companies, Investment Stock Corporations, Investment Limited Partnerships and Funds (Kapitalanlage-Prüfungsberichte-VerordnungKAPrüfbV), the German Audit Report Regulation (PrüfungsberichtsverordnungPrüfbV) and the German Regulation on Auditors’ Reports (PrüfungsberichteverordnungPrüfV).

Scope of application

How are municipalities, municipal enterprises and municipal special purpose associations treated under EMIR?

The test as to whether municipalities, as well as their various activities, fall within the scope of EMIR comprises two steps:

The first step is to determine whether the municipality’s activity is covered by the exemption of Article 1(4)(a) of EMIR. The following applies:

Definition of the core area of activity – other organisational forms

Municipalities, as well as legally dependent municipal undertakings and publicly-owned companies are, in principle, covered by the exemption of Article 1(4)(a) of EMIR, since they are responsible for managing their own debt, and thereby any public debt. Therefore, they do not have to fulfil any obligations under EMIR.

The exemption of Article 1(4)(a) of EMIR does not, however, cover legally independent private law or public law entities of the municipalities, such as, for example, public bodies, special purpose associations and legal entities under private law.

For these entities it is necessary, as a second step, to determine whether they have the characteristics of a non-financial counterparty as defined in Article 2(9) of EMIR. In this case, the principle applies that the exercise of sovereignty, or of sovereign powers, falls outside the definition of economic activity within the meaning of Article 2(9) of EMIR:

Public bodies/special purpose associations

It is assumed that municipal bodies governed by public law and special purpose associations act in a sovereign manner, and that therefore they do not constitute undertakings within the meaning of EMIR. Insofar as such public law legal entities exercise both sovereign and other activities, for individual cases an assessment of their focus of activity should be undertaken.

This assessment is to be carried out on the basis on the annual financial statement of the public body. From this information, it can be deduced whether the revenues in the annual financial statement that are clearly attributable to sovereign actions exceed the revenues that are clearly attributable to economic activities. Any revenues that cannot be clearly attributed shall be disregarded.

Private law entities

Insofar as private law entities are concerned (e.g. a limited liability company), these entities generally do not carry out any sovereign activities. They fall within the scope of application of EMIR, as long as a business activity is exercised and the remaining requirements of Article 2(9) of EMIR (established in the Union, not a financial counterparty) are met. Should a private law company clearly not be active as a business, because it is, for example, solely involved in charitable or cultural activities, it shall not be treated as a company within the meaning of Article 2(9) of EMIR and is therefore also not subject to the obligations under EMIR.

Do goods supply contracts with take-or-pay clauses fall within the scope of application of EMIR?

Take-or-pay clauses are used in framework supply contracts of electricity and gas distribution companies. These contracts are concluded bilaterally, which means that no business on a regulated market or via multilateral trading facilities (MTFs) takes place. These contracts frequently provide for take-or-pay clauses. These clauses state that, should the contractually agreed quantity not be purchased a compensatory payment is due. The level of the compensatory payment is dependent on the nature of the contract; it is generally combined with a cancellation fee.

The question arises as to whether the compensatory payment, which is provided for in the take-or-pay clause, constitutes a cash settlement within the meaning of section 2 (3) no. 2 (a) of the WpHG, and whether consequently this constitutes a derivative in accordance with Article 2(5) of EMIR.

A classification in accordance with section 2 (3) no. 2 (a), first option of the WpHG can be ruled out, since these contracts require a physical performance and the contract is not solely performed by a cash settlement.

Nor can these contracts be regarded as derivative transactions in accordance with section 2 (3) no. 2 (a), second option of the WpHG. The compensatory payment that must be paid to the seller should the contractually agreed delivery quantity not be purchased does not represent a cash settlement within the meaning of the aforementioned provision. The compensatory payment can rather be seen as a form of contractual penalty for the non-purchase of the quantity of goods. In BaFin’s view, section 2 (3) no. 2 (a), second option of the WpHG requires the possibility of a cash settlement by granting a unilateral option right. The contractual requirement for a compensatory payment which comes into effect in the event of non-performance is in any case mutually agreed by the contracting parties.

Goods supply contracts with take-or-pay clauses are therefore not to be regarded as derivatives within the meaning of section 2 (3) no. 2 of the WpHG and thus do not come within the ambit of EMIR. The dividing line is, however, a misuse of legal form.

What constitutes an undertaking within the meaning of EMIR?

EMIR is an EU Regulation, thus the EU interpretation of the term “undertaking” applies.

EU Law contains no legal definition of the term undertaking. According to the jurisprudence of the Court of Justice of the European Communities (ECJ) on competition law the concept of an undertaking encompasses, regardless of the legal status of the entity and the way in which it is financed, every entity engaged in an economic activity (see for example ECJ Judgment of 23 April 1991, Case C-41/91; ECJ Judgment of 17 February 1993, Joined Cases C-159/91 and C 160/91) which is not limited just to consumers or employees; this is the so-called functional concept of undertaking.

Under the functional concept of undertaking, the main feature of economic activity is that it is understood as encompassing every form of activity which leads to goods or services being offered on a particular market. This includes any behaviour relating to the supply of or demand for goods and thus to market behaviour. A lack of intention to generate profit is not a criterion for exclusion. Furthermore, neither the length of the activity nor its organisation or financing are relevant to the definition of economic activity.

However, in the light of the aim pursued by EMIR a degree of durability as regards the definition of an undertaking is required. This means that a business activity can only be assumed when a longer-term and indefinite participation in the economy exists. EMIR’s scope of application also excludes undertakings that exclusively deal with asset management. Whether an exclusive asset management activity exists depends on the individual case.

Taking into consideration current legislation and with regard to both current European jurisprudence and to the aim pursued by EMIR, an undertaking shall mean one of the following:

  • Commercial undertakings with the legal status of a public limited company (AktiengesellschaftAG), a limited liability company (Gesellschaft mit beschränkter HaftungGmbH), a limited partnership (KommanditgesellschaftKG) or a general partnership (Offene HandelsgesellschaftOHG) as well as other legally established undertakings such as cooperatives, business associations, mutual insurance associations (Versicherungsvereine auf Gegenseitigkeit – VvaG) (Court of First Instance (CFI) Judgment of 30 March 2000, Case T-513/93 as well as the Commission Decision of 26 May 1978, OJ L 157, p. 39).
  • Agricultural undertakings
  • Members of the liberal professions, for example tax consultants, doctors, lawyers, architects in connection with the provision of services (ECJ Judgment of 19 February 2002, Case C-309/99; Judgment of 26 October 2010, Case T-23/09 and CFI Judgment of 30 March 2000, Case T-513/93).
  • Sole traders (CFI Judgment of 30 March 2000, Case T-513/93)

    No “economic activity” and therefore no undertaking shall be understood by:

  • Natural persons insofar as no economic activity takes place (ECJ Judgment of 19 January 1994, Case C-364/92).
  • Exercise of sovereign activities (ECJ Judgment of 18 March 1997, Case C 343/95).
  • The pursuit of social purposes (e.g. professional associations, ECJ Judgment of 11 July 2006, Case C-205/03 and of 05 September 2009, Case C-350/07 and statutory health insurance companies, ECJ Judgment of 16 March 2004, cases C-264/01, C-306/01, C-354/01 and C-355/01).
  • Religious communities recognised under German law (also ECJ Judgment of 18 March 1997, Case C 343/95 as well as ECJ Judgment of 11 July 2006, Case C-205/03).
  • Non-profit associations, e.g. non-profit foundations, non-profit corporations (gemeinnützige Gesellschaft mit beschränkter Haftung – gGmbH), church or cultural organisations and charitable societies (ECJ Judgment of 11 July 2013, Case C-440/11).
  • Non-trading partnerships (Gesellschaft bürgerlichen RechtsGbR), non-profit associations.
  • Investment-/stock clubs, as long as there is no obligation to apply for a licence to act as a financial services provider.

    Family Offices come within EMIR’s scope of application if they have a separate corporate identity (e.g. KG, GmbH) and/or are subject to the authorisation requirement pursuant to section 32 (1) of the German Banking Act (KreditwesengesetzKWG).

Are the provisions of Article 4(2)(a) of EMIR also applicable to purely domestic situations?

Yes. Article (4)(2)(a) of EMIR is also applicable if both counterparties have their registered office in the same Member State.

Which supervisory authority is responsible as regards EU or non-EU branches for the notification pursuant to Article 4(2) and Article 11 of EMIR?

Insofar as financial or non-financial counterparties established in the EU enter into OTC derivative transactions in other EU or non-EU countries via their dependent branches, these transactions are to be attributed to the undertakings operating said branches, irrespective of whether the undertaking concerned is a financial or non-financial counterparty.

Applications pursuant to Article 4(2) and Article 11 of EMIR are to be submitted to the supervisory authority of the Member State in which the applicant is established.
If the applicant is established outside the EU, the notification pursuant to Article 4 and Article 11 of EMIR can only be made by the counterparty to the transaction who is established in the EU.

Questions regarding sections 30 ff. of the WpHG

Section 32 of the WpHG/notification pursuant to Article 4(2) of EMIR: When calculating the threshold under section 32 (1) no. 2, first option of the WpHG, is a prior notification to BaFin in accordance with Article 4(2) of EMIR necessary to ensure that intragroup transactions are not taken into consideration in the calculation?

No. Section 32 (1) no. 2, first option of the WpHG contains a reference to legal consequences. Therefore, in assessing whether intragroup transactions exist, the only relevant factor is whether the requirements of Article 3 of EMIR have been fulfilled. A notification in accordance with Article 4(2) of EMIR is not necessary with respect to section 32 (1) no. 2, first option of the WpHG.

Does the provision in section 32 (1) of the WpHG regarding 100 open contracts or transactions with a nominal volume >€100m refer to derivative contracts that were concluded in the previous financial year, or to the derivative portfolio as it stands on 31 December?

The wording of the provision refers to the actual conclusion or the prolongation of a contract in the previous financial year. A cut-off deadline is not provided for. In this respect it makes no difference whether a full financial year or an abridged financial year is concerned.

What are the requirements for the attestation under section 31 (3) of the WpHG?

No specific format is required for the attestation. Essentially, the contents of the attestation must confirm that the relevant clearing threshold is no longer exceeded in accordance with Article 10(2) of EMIR. Under section 31 (3) of the WpHG, the attestation must be issued by a public auditor (Wirtschaftsprüfer), a sworn auditor (vereidigter Buchprüfer) or a public auditing firm (Wirtschaftsprüfungsgesellschaft) or sworn auditing firm (Buchprüfungsgesellschaft).

In certain individual cases, a simplified attestation confirming that there are no outstanding transactions is sufficient. This is conceivable in the following situation: a single company within a group exceeds the clearing threshold, which results in other companies within the group being subject to the clearing obligation. The company that exceeded the clearing threshold leaves the group, which means that the other companies in the group are no longer subject to the clearing obligation. Provided that no derivative contracts were concluded during the period for which the clearing obligation existed and there are no outstanding transactions within the entire group, an attestation issued by one of the persons named in section 31 (3) of the WpHG declaring that there are no outstanding transactions is sufficient.

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