Derivatives and Financial Markets Horizon

This alert gives an overview of impending regulatory developments in the near to medium term which will be of interest to alternative investment managers engaged in the derivatives and wholesale markets.  Some of these changes will be affected by a Hard Brexit where EU laws will cease to apply and UK replicas of such laws will apply instead.

EMIR Refit

The EMIR regime will be modified in a number of respects. The final text of the amending regulation (known as “EMIR Refit“) is expected in the near future with the amendments to enter into force following the conclusion of the EU’s ordinary legislative procedure, expected to be in Q2 2019. Of particular interest to the buy-side is as follows:

Counterparty classification and new clearing obligation exemption:

Any AIF established in the EU, regardless of the location of its manager, will now be classified as a Financial Counterparty (“FC“). EU funds that are currently completely out of scope for EMIR (because their investment manager is outside of the EU) will have to consider what aspects of EMIR will apply to them. Post-Brexit, EU AIFs with a UK manager will remain subject to EMIR.

A new category of small FC (“SFC“) will be introduced, which will be exempt from the clearing obligation, provided they do not exceed the clearing thresholds. The thresholds will be the same as those currently used to distinguish between an NFC+ and an NFC-.. This is welcome news for some buy-side participants who would otherwise be subject to mandatory clearing from June 2019 as “Category 3 Counterparties”. Note that as it is still unclear when precisely EMIR Refit will come into force, it is possible that the new SFC exemption will apply after the June 2019 deadline for Category 3 compliance, resulting in the clearing obligation applying for a number of months before the exemption kicks in. ESMA has publicly stated that regulators ought to grant forbearance to entities affected by this timing issue.

Reporting obligation will apply to the AIFM

The AIFM of an AIF (as opposed to the AIF itself) will be responsible and liable for reporting transactions on behalf of the AIF. Currently, the reporting responsibility rests with the AIF. Delegation of the reporting function will still be permitted, but it will need to be clear that the AIFM is the delegating party and the party liable for ensuring accurate reporting. Additionally, the requirement for entities to report historic transactions by February 2019 (known as “backloading”) will be disapplied.

In planning for these changes, investment managers should consider:

  • Whether any of the EU funds they manage will be re-classified as FCs
  • Whether any funds they manage will be re-classified as SFCs
  • Whether delegated reporting agreements will need to repapered to reflect the AIFM (rather than the AIF) as the responsible and delegating party
  • Whether amendments are needed to fund documentation and/or representations given in trading documentation.

Initial Margin

The fourth and fifth phases  of the EMIR initial margin rules may see over a thousand new entities coming into scope either on 1st September 2019 on or more likely on  1st September 2020. Most of these entities will be on the buy-side. Entities who are caught by these rules must exchange initial margin on all uncleared OTC derivatives traded with other in-scope entities. Initial margin must be segregated from the counterparty’s assets and held with a third party custodian. The current English law version of ISDA’s CSA where collateral is transferred to the counterparty by title transfer will need to be amended. Repapering of existing arrangements will be required.

To be in scope for Phase 5, the fund’s trading must have an aggregate average notional amount (“AANA“) of uncleared OTC derivatives of more than EUR 8 billion. . Under EMIR, the AANA is the average of the total gross notional amount recorded across the group on the last business day of March, April and May of the relevant year. Ring-fenced funds are treated as separate entities and are not considered to be part of the same “group” as other funds.

In planning for the initial margin rules, affected investment managers should:

  • Ascertain the scope of uncleared OTC derivatives in their portfolio and monitor the applicable AANA;
  • Ascertain the documentation which will require repapering and resource the negotiations;
  • Plan who will be used as custodian to hold the initial margin;
  • Decide whether to use ISDA’s Standard Initial Margin Model (SIMM) or agree a different methodology with the fund’s counterparty;

The industry has been lobbying extensively for relief to be offered to large influx of entities that will be caught in 2020, whether by way of increasing the AANA threshold (thereby reducing the number of entries falling within scope) or eliminating the need to have new custodian arrangements where no initial margin is transferred – only margin amounts above €50M are required to be posted. No decision at EU level has been made yet to address these points although the Basel Committee and IOSCO have confirmed that no documentation or custodial changes are mandated under the international margin standards where the IM amounts are below EUR 50m. .


LIBOR and other interbank offered rates (IBORs) will be replaced in the coming years by alternative risk-free rates (“RFRs“). RFRs will be based on actual transactions data and are seen as more reliable.  However, RFRs may not be forward looking or yield rates for a range of tenors making them economically different from IBORs. Various solutions are still being considered by a number of working groups comprising of industry and regulators to develop a reliable economic adjustment to a transaction upon migration to the RFR.

Given the extensive use of IBORS as reference rates in the derivatives, bonds and loan markets, reform of IBORs will be far-reaching. The Sterling Overnight Index Average (SONIA) has been recommended by the Bank of England as an alternative to sterling LIBOR as the primary interest rate benchmark in the sterling loan, bond and derivatives market by the end of 2021.  The ECB Working Group on euro risk-free rates has recommended that market participants transition to the euro short-term rate (ESTER) as a backstop RFR in the euro-area. RFRs have also been identified in the United States, Switzerland, Australia, Brazil, Canada and Hong Kong.

The following measures should be taken by investment managers in planning for the IBOR replacement:

  • Identify transactions within their portfolio including loans, bonds and derivatives referencing LIBOR and other IBORs
  • Amend transaction documentation where such transaction extends beyond the end of 2021 (the earliest date LIBOR and other IBORs may be discontinued)
  • Track industry initiatives from organisations such as ISDA and LMA and consider the appropriateness of adopting applicable industry protocols or product definitions
  • Consider the economic effect of moving from IBOR to RFR rates on applicable transactions.

Click here for Fieldfisher’s IBORS micro-site which sets out links to various materials on IBOR reform.


The Securities Financing Transactions Regulation (“SFTR“) has been in force since January 2016.  It includes transparency, disclosure and reporting obligations on managers of funds.  For example, AIFMs must disclose in the annual report, the use they make of securities financing transactions (“SFTs“) and total return swaps (“TRS“).  Similarly, pre-contractual documentation must specify the proposed use of SFTs and TRS, including the type of transactions and instruments.

The obligation to report SFTs to a trade repository is being phased-in in stages depending on the nature of the party.  The phase-in begins from the publication of detailed regulatory technical standards (“RTS“). These will be finalised once ESMA and the European Commission have agreed them which is imminent.

Once the RTS have been adopted, AIFMs of AIFs (and third country equivalents) will have to comply with reporting obligation 18 months from the date at which at the RTS come into force. This will therefore be no earlier than 2020.

Note on a Hard Brexit, the RTS will not form part of English law and entities subject to English law in this regard will be subject to the reporting obligation as implemented in the UK.  Assuming the UK seeks to mimic EU laws, which would enable the UK to be deemed “equivalent” to the EU and allow for substituted compliance, the UK can be expected to replicate the RTS. Under the draft Financial Services (Implementation of Legislation) Bill (the “Implementation Bill“) HMT is empowered to transpose the reporting framework under SFTR into UK law (with such modifications as it deems appropriate). However, it has not yet done so as the Implementation Bill has not yet been approved by Parliament.  The SFTR itself, including the requirement to maintain records of securities financing transactions under Article 4(4) SFTR, will be transposed directly into UK law on a Hard Brexit. Article 4(4) SFTR requires counterparties to keep records of any securities financing transaction that they have concluded, modified or terminated for at least 5 years following the date of termination of such transaction. This provision is likely to require counterparties to build and maintain systems to collect this information and store it in the prescribed manner. Under the draft SI transposing the SFTR into UK law, the recordkeeping requirement would apply from the date of Brexit, currently schedule for 29 March 2019.


The Central Securities Depositories Regulation (“CSDR“) is the regulation governing central securities depositaries and settlement requirements. It effects a change to the buy-in compensation provisions which will only be one way only from the defaulting party. Although already in force, key provisions relating to the prevention of settlement fails will apply from 13 September 2020 and will necessitate amendments to repo and stock-lending documentation; and similarly in respect of the commodities markets. The buy-in mechanisms will be of particular interest to the buy-side, involving possible penalties, cash compensation obligations and forced buy-in on settlement fails.

Click on the link here for a recent Fieldfisher alert on the CSDR and settlement fails.


For some time the UK government has been preparing the legislative framework for financial services should the UK leave the European Union without a deal on exit day (scheduled at 23:01 GMT, 29th March 2019).  This is because, in broad terms, in a no-deal scenario all EU laws would cease to have effect in the UK.  This is particularly problematic for financial services as large swathes of the applicable obligations are found in EU law and a no-deal Brexit could this result in significant market disruption and uncertainty. To address this, a process of “on-shoring” of EU regulations is taking place.  The on-shoring process is designed so as to “freeze” EU law as at exit day and convert that “frozen” EU law into domestic UK law.  Thus, for example, in the case of obligations applicable in respect of derivative transactions, EMIR would be frozen to create a UK version of (or “on-shored”) EMIR, often referred to as “UK EMIR”.  This will be the case for all central pieces of EU legislation that are directly applicable in the UK with only changes being made to address any “deficiencies”.

Notwithstanding the intent of the “onshoring” process, there are inevitably questions of duplication where both UK and EU laws could both apply. For instance, on derivatives reporting ESMA recently issued a public statement on how derivatives data reported under EMIR should be handled in the event of a Hard Brexit, clarifying the different reporting scenarios applying where both counterparties are from the EU27, where both are from the UK and where one is from the EU27 and one is from the UK. However, it does not address UK EMIR will also include a reporting obligation on affected UK entities which could lead to reporting of a trade under both the UK and EU EMIR regimes. The FCA issued its own statement, reminding UK reporting counterparties of their obligations under UK EMIR, urging them to continue their contingency planning for a Hard Brexit and  to “watch this space” for additional FCA clarification.


Ron Feldman


Ron is a partner at Cummings Fisher and heads the derivatives and documentation practice. Drawing on his work in private practice with buy-side clients and in house at investment banks, he has broad experience in providing legal advice in relation to derivatives and structured finance transactions, prime brokerage and asset custody arrangements.

If you would like to discuss any of the points we raise, please contact me or one of our other lawyers.

Phone: +44 (0)207 861 4170

Simon Lafferty

Simon is a financial regulatory lawyer who advises a broad range of clients including investment funds, investment firms and asset managers and other financial institutions such as banks and broker-dealers.

If you would like to discuss any of the points we raise, please contact me or one of our other lawyers.

Phone: +44 (0)20 7861 4932