Insights

On the 13th of February 2014, the Commission adopted the regulatory technical standards (“RTS”) on the direct, substantial and foreseeable effect of contracts within the EU and on the prevention of the evasion of rules and obligations in connection with the European Markets Infrastructure Regulation (“EMIR”). The RTS, which were prepared by the European Securities and Markets Authority, were endorsed by the Commission after having going through two public consultations, and following consultation with the Post-Trading Consultative Working Group and the Securities and Markets Stakeholder Group.

The RTS apply to contracts where both counterparties are established in a non-EU country, which does not have legislation which is equivalent to EMIR. This arises in two instances. Firstly this arises where OTC derivative contracts are concluded by entities established in third countries and the derivative is covered by a guarantee provided by an entity established in the EU. The rationale is that such an arrangement would create a financial risk for a guarantor established in the EU. In order for the guarantee to be considered substantial, the effect of the guarantee should reach or exceed a significant monetary value and it should be significant considering the overall activity on OTC Derivatives of the EU guarantor.

The second instance arises where financial counterparties established in third countries can enter into OTC derivatives through their branches which are located in the EU. An OTC derivative contract shall be considered as having a direct, substantial and foreseeable effect within the EU where the two entities established in a non-EU country enter into an OTC derivative through their branches in the EU, and the EU entities would qualify as financial counterparties if they were established in the EU.

EMIR also provides for an anti-avoidance test which would render EMIR applicable to global forms of arrangements involving OTC derivatives which are structured in such a way as “to prevent the evasion of any of the provisions of EMIR”. An OTC derivative shall be deemed to have been designed to circumvent the provisions of EMIR if the way in which it has been concluded is considered to have, as its primary purpose, the avoidance of the provisions of EMIR. This arises where the primary purpose of an arrangement (or series of arrangements) related to OTC derivatives is to defeat the object, spirit and purpose of EMIR, and includes the situation where this is part of an artificial arrangement. An arrangement that intrinsically lacks business rationale, commercial substance or relevant economic justification and consists of any contract is considered to be an ‘artificial arrangement’.