Last week, the European Commission published proposals to amend the European Market Infrastructure Regulation (EMIR), which is the main piece of EU legislation governing derivatives markets. Among the amendments proposed is a new definition of the term “financial counterparty.” This is recast to include some previously overlooked or new categories. However, it also makes changes to the way in which alternative investment funds (AIFs) fall into the scope of EU derivatives rules. If the Commission's proposals become law, all AIFs — including all third-country funds — will be considered financial counterparties, regardless of the regulatory regime applicable at fund or manager level.

The Current Position under EMIR

The existing definition of “financial counterparty” (FC) in EMIR^[1] refers to an “alternative investment fund managed by AIFMs authorised or registered in accordance with Directive 2011/61/EU” (i.e. the Alternative Investment Fund Managers Directive). In the new proposed amendments to EMIR, this is planned to be changed so as to read, simply: “an AIF as defined in Article 4(1)(a) of directive 2011/61/EU.”^[2] There would be no mention of the requirement for a regulated manager, nor any need for the manager to be authorized or registered under AIFMD in order for a fund to be an FC.

The European Securities and Markets Authority (ESMA) has previously stated that EU or non-EU AIFs managed by non-EU managers without any authorization or registration within the EU should not be considered FCs, even if such funds are permitted to be marketed in the EU.^[3] It follows from the existing text of EMIR that unregulated fund structures are also out-of-scope of the FC definition. 

Effects of the Proposal

If the proposal proceeds unchanged, it would be a considerable deviation from current ESMA Q&A and market association guidance and would bring many more entities within scope of EU derivatives regulation. The categorisation of a fund as an FC or non-financial counterparty (NFC) is important since it determines whether certain key legal requirements in EMIR apply — such as mandatory clearing and collateral rules. It is also important for persons that are dealing with funds to know the classification of their counterparties, since this determines the timeframe for confirmations, the frequency of portfolio reconciliation and compression and whether clearing and collateral obligations will apply. 

Given that the proposed change was not announced in the documents preceding or published with the EMIR Review,^[4] it cannot be excluded that this change results from an oversight or error. However, unless this text is changed during the legislative process, any regulated or unregulated alternative investment fund anywhere in the world would become an FC. The consultation period for feedback closes on 29 June 2017.^[5]