What is EMIR?

The European Market Infrastructure Regulation (EMIR) is a European Union (EU) regulation which sets out rules on OTC derivatives, central counterparties and trade repositories.

EMIR, which first came into effect in 2012, aims to reduce the risks posed to the financial system by derivatives transactions in the following three main ways:
- increasing transparency in the OTC derivatives markets by introduces reporting requirements;
- requiring parties to mitigate credit risk; and
- reducing operational risk associated with trade in derivatives such as fraud and human error.
Following the UK's withdrawal from the EU, the UK retained an onshored version of EMIR under the jurisdiction of the Financial Conduct Authority (FCA), known as UK EMIR. The obligations imposed by UK EMIR remain broadly similar to EMIR.

UK EMIR came into force on 31 December 2020 following the end of the UK's post-withdrawal transition period.

What are OTC derivatives? - An over-the-counter (OTC) derivative is a financial contract that is arranged between two counterparties but with minimal intermediation or regulation. - OTC derivatives do not have standardized terms and they are not listed on an asset exchange. - OTC products include FX forwards, FX swaps, FX options, FX structures. - OTC derivatives account for almost 95% of the derivatives market.

Who is affected?

EMIR affects market participants in the EEA (European Economic Area) along with market participants outside of the EEA trading with an EEA counterparty. UK EMIR affects market participants in the UK and market participants outside of the UK trading with a UK counterparty.
EMIR and UK EMIR (as applicable) may also have extra-territorial impact on trading between two non-EEA or non-UK counterparties where:
i. Both counterparties trade through UK branches or both counterparties trade through EU branches; or,
ii. Either counterparty has a qualifying guarantee for OTC derivatives activity from a UK or EU FC (as defined below)

EMIR and UK EMIR Reporting Requirements

All EEA counterparties must report details of any derivative contract (OTC or exchange-traded) they have concluded, or which they have modified or terminated, to an ESMA registered, or recognised, trade repository (TR) under the EMIR reporting requirements. Similarly, UK counterparties must report derivative contracts to a trade repository recognised by the FCA in line with UK EMIR reporting requirements. Under UK EMIR, Silicon Valley Bank UK Limited (SVB UK) has mandatory obligations in respect of UK clients which are classified as NFC- to report on their behalf.

Both EMIR and UK EMIR rules allow for third parties to be used to report OTC and exchange-traded derivatives on the reporting firm’s behalf.

In line with the EMIR and UK EMIR delegated reporting obligations, SVB UK's FX Terms and Conditions (https://www.svb.com/globalassets/client-service/uk/uk-branch-fx-terms-of-business-nov-2021.pdf) state that SVB UK will report in-scope transactions on behalf of all clients to the relevant TR in line with EMIR and/or UK EMIR. Clients have the ability to opt out of delegating reporting in the FX application form (or by notifying UKFXOnboarding@svb.com).

Please notify SVB UK at UKFXOnboarding@svb.com as soon as possible if there are any changes to your LEI or country of domicile to ensure that your EMIR or UK EMIR delegated reporting arrangements remain correct.

Legal Entity Identifier (LEI) An LEI is a 20-digit, alpha-numeric code that enables clear and unique identification of legal entities participating in financial transactions. LEIs are needed by firms to fulfil their reporting obligations. LEI’s can be purchased through a number of providers (including Bloomberg - https://lei.bloomberg.com/) and need to be renewed on an annual basis.

EMIR and UK EMIR Classification

Market participants subject to EMIR or UK EMIR are classified as either Financial Counterparties (FCs) or Non-Financial Counterparties (NFCs).

FCs include:

(a) banks;
(b) investment firms;
(c) direct life and non-life insurance undertakings;
(d) reinsurance undertakings;
(e) certain undertakings for Collective Investment in Transferable Securities (UCITS) and their management companies;
(f) central securities depositories;
(g) institutions for occupational retirement provision; and
(h) certain alternative investment funds (AIFs).
NFCs are all other counterparties to OTC derivatives transactions that are not FCs (other than CCPs).

An annual calculation of the aggregate month-end average position in OTC derivative transactions for the previous twelve months and clearing thresholds (described below) are then used to further bifurcate these categories:
- FCs who conduct sufficiently large volumes of OTC derivatives transactions to exceed the clearing thresholds in respect of any category of OTC derivatives transactions are FCs. All others are Small Financial Counterparties (SFCs); and
- NFCs who conduct sufficiently large volumes OTC derivatives transactions for non-hedging purposes to exceed the clearing thresholds in respect of any category of OTC derivatives transactions are NFC+s. All others are NFC-s.

Clearing Thresholds - Credit: EUR1 billion - Equity: EUR1 billion - Interest rates: EUR3 billion - Foreign exchange: EUR3 billion - Commodities and others: EUR3 billion

SVB UK’s UK EMIR Classification
SVB UK is classified as an FC under UK EMIR. SVB UK is required to report all non-spot trades to a TR under UK EMIR on behalf of itself.

SVB UK will also report all non-spot trades to a TR under UK EMIR on behalf of its clients where they are UK counterparties (unless those clients have opted out of SVB UK providing delegated reporting services). Despite the delegated reporting provided by SVB UK, UK clients remain ultimately responsible for compliance with their regulatory reporting obligations.

SVB UK’s EMIR Classification
Whilst SVB UK would be classified as an FC under EMIR, as a third country entity (TCE) it is not required to report non-spot trades on behalf of itself to a TR under EMIR.

Where SVB UK trades non-spot with EEA clients, it will report those trades on behalf of its clients to an EU TR under EMIR (unless the clients have opted out of SVB UK providing delegated reporting services). As above, EEA clients remain ultimately responsible for compliance with their regulatory reporting obligations.

What is MiFID?

MiFID is an EU directive in place since 2007, that aims to increase the transparency of the EU’s financial markets along with standardising the regulatory disclosures required for firms operating in the EU. New measures were implemented such as pre- and post-trade transparency requirements. MiFID II, in which FX and fixed income derivatives are covered, came into effect in 2018.

MiFID Classifications
One of the key aspects of MiFID is the classification of entities into specific client types. The goal of the classification is to ensure that clients have a level of protection commensurate with their sophistication as investors.
The different MiFID classifications are:

Eligible Counterparties
- An eligible counterparty is a client that is either a per se eligible counterparty or an elective eligible counterparty.
- This group has the lowest level of protection.

Per Se Eligible counterparties

Counterparties that fall under one of the below MiFID client categories:
1. An investment firm;
2. A credit institution;
3. An insurance company;
4. A collective investment scheme authorised under the UCITS directive or its management company (some may be classified as Professional clients)
5. A pension fund or its management company; (some may be classified as Professional clients)
6. Another financial institution authorised or regulated under the law of the UK;
7. A national government or its corresponding office;
8. A central bank;
9. A supranational organisation.

Elective eligible counterparties

SVB UK may treat a client as an elective eligible counterparty for certain purposes if the client:
1. is an undertaking;
2. is a per se professional client (except for a client that is only a per se professional client because it is an institutional investor); and
3. requests such categorisation and is an elective professional client;
SVB UK must also have obtained express confirmation from the prospective counterparty that it agrees to be treated as an eligible counterparty in relation to MiFID business.

Professional Clients

Professional clients are split into two categories, per se professionals and elective professional counterparties.

a) Per se professional clients include companies that meet at least two of the below criteria:
i. a total balance sheet equal or exceeding EUR 20,000,000;
ii. a total net turnover equal or exceeding EUR 40,000,000; or
iii. a total own capital equal or exceeding EUR 2,000,000.

b) Elective professional clients

a) A client can be treated as an elective professional client:
1) as long as SVB UK undertakes an adequate assessment of the expertise, experience and knowledge of the client that gives reasonable assurance, that the client is capable of making his own investment decisions and understanding the risks involved; and
2) the following procedure is followed:

(a) the client must state in writing to the firm that it wishes to be treated as a professional client either generally or in respect of a particular service or transaction or type of transaction or product;

(b) SVB UK must give the client a clear written warning of the protections and investor compensation rights the client may lose; and

(c) the client must state in writing, in a separate document from the contract, that it is aware of the consequences of losing such protections.

Retail clients

A client who is not a professional client or an eligible counterparty will be classified as a retail client.

Eligible counterparties are provided the least protection and retail clients are provided the greatest. Investors are provided with different levels of information regarding the risks associated with trading derivatives products, alongside more general explanations and details of a particular transaction.

MiFID professional clients have access to SVB UK's full product suite of financial instruments and MiFID retail clients have access to only some of those products.

Opting up

As MiFID does not intend to restrict investment services firms provide to clients, but instead seeks to ensure that clients receive appropriate protections, clients who feel they have the necessary expertise to trade more sophisticated derivative products can opt-up from their defined category (subject to meeting the requirements), providing them with less protection, however an increased product suite.

To opt-up a client must state this intention in writing.

Key Information Document

A key information Document (KID) is intended to provide retail clients with key information regarding the investment product, which will help them make informed decisions and compare different products. Retails clients domiciled in the UK or EEA , will be issued a KID prior to trading a derivatives product with SVB UK.

How do EMIR obligations differ for MiFID Investment Firms and Credit Institutions?

EMIR and UK EMIR impose requirements with regards to the posting of variation margin (VM) by parties to derivatives transactions. Different rules apply to parties if they are categorised as “investment firms” or “credit institutions” for the purposes of MiFID.

Under EMIR and UK EMIR, parties which enter into OTC derivatives transactions are required to post VM in respect of these transactions if they are both classified as FCs (including SFCs) or NFC+s.

There is an exception to this VM requirement if the parties are trading physically-settled FX forwards or swaps. However, this exception does not apply if both counterparties are classified as investment firms or credit institutions for the purposes of MiFID. Therefore, such firms looking to trade non-spot products with SVB UK will be required to enter into an ISDA Master Agreement and credit support annex (CSA) with SVB UK prior to trading in order to facilitate the exchange of VM.

What is an ISDA Master Agreement and CSA?

The ISDA Master Agreement is a document published by the International Swaps and Derivatives Association (ISDA) which is used to provide certain legal and credit protection for parties who enter into OTC derivatives transactions. The ISDA Master Agreement is an umbrella agreement which sets out the overarching terms between the parties who want to trade OTC derivatives.

A CSA is an annex to an ISDA Master Agreement which regulates the credit support arrangements for the derivative transactions governed by the ISDA Master Agreement, including the bilateral margin collateral arrangements between the parties. Within the CSA, thresholds (the total exposure both counterparties are willing to have to the other prior to exchanging VM) and minimum transfer amounts (the smallest amount sum needs to be transferred as VM) are agreed between the two parties to the CSA.

If an ISDA Master Agreement and CSA is required to trade, counterparties will be put in touch with SVB UK’s legal team to negotiate terms before entering into derivatives transactions.

The Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd Frank) is a US federal law that was enacted in 2010. The purpose of Dodd Frank is to promote the financial stability of the US by improving accountability and transparency in the financial system, to protect consumers from abusive financial services practices.

SVB Financial Group’s Dodd Frank requirements

To adhere to SVB UK's parent's Dodd Frank reporting requirements, SVB Financial Group reports all client eligible trades to a TR.

SVB UK’s Dodd Frank Requirements

SVB UK is not considered to be within the jurisdiction of the Commodity Futures Trading Commission (CFTC) and is therefore not required to submit reports for the purposes of Dodd Frank.

However, if a client of SVB UK is a US Person and an eligible contract participant (both as defined within Dodd Frank), SVB UK can trade eligible products with the client and report on their behalf.

Useful Links
• Financial Conduct Authority Website
https://www.fca.org.uk/markets/uk-emir
• International Swaps and Derivatives Association Website
https://www.isda.org/2022/05/11/video-understanding-the-isda-master-agreement/
• SVB Order Handling and Execution Policy

You are encouraged to seek legal advice on how MiFID, EMIR and Dodd-Frank Guidelines will impact your business.