top of page

Philippe Foerster and Admir Fejzic (PwC) : Navigating EMIR obligations for Non-Financial Counterparties (NFCs)


The European Market Infrastructure Regulation (EMIR) was established to regulate derivative1tradesand mitigate risks. EMIR imposes stringent obligations on market participants including Non-Financial Counterparties (NFCs)2, such as corporations and non-financial sector entities, provided they engage in derivativestrades.The recent energy crisis and the latest regulatory updates which are introducing a significantredesign of the reporting obligationunder EMIR REFIT, have once again put EMIR under the spotlight of both market participants and supervisory authorities. This article delves into the obligations for NFCs and provides insights for regulatory compliance.


Understanding EMIR obligations for NFCs

EMIR recognizes that NFCs utilize derivative contracts to hedge risks related to their commercial or treasury financing activities. To reduce the administrative and regulatory burden of NFCs, the applicability of EMIR obligations is based on the NFC’s classification and volume of trading activities. NFCs can be classified as ‘NFCs above the clearing threshold3(NFC+)’ and ‘NFCs below the clearing threshold (NFC-)’. The obligations can be categorized into threemain areas:

However, further refinement is possible by identifying other categories or subcategories, including "trapped cash" or "restricted cash" (cash that is inaccessible, for various reasons, and therefore "unusable" by the treasury center). 

  1. Clearing obligation:Clearing certain standardized OTC derivatives through central counterparties is only applicable to NFC+. NFC-, while not subject to clearing obligations, need to apply the EMIR risk mitigation techniques

  2. Obligation to apply ‘Risk Mitigation Techniques’:The risk mitigation techniques include timely confirmation, portfolio reconciliation, portfolio compression, and dispute resolution processes. For NFC+, additional requirements such as dailyvaluation of outstanding contracts and bilateral collateral exchange must be met.

  3. Reporting obligation:NFC+are required to report the details of all concluded OTC and ETD derivative contracts to approved trade repositories. While anNFC+may delegate its reporting to another entity under certain conditions, it is important to note that the responsibility for data accuracy still lies with the delegating counterparty. NFC-are only responsible and legally liable to report details of OTC contracts when they are not trading those derivatives with an FCestablished in theEuropean Union(EU). When trading with an EU FC, they are only obliged to provide the correct reporting details to their counterparty. 

"Since EMIR is a constantly evolving framework, it is crucial for NFCs to be well-informed on the regulatory developments and industry best practices."

Ensuring EMIR compliance

In Luxembourg, theFinancial Sector Supervisory Commission (CSSF) is overseeing EMIR compliance and has already engaged withmultipleNFCs to ensure that they fulfil their EMIR responsibilities. It is important to highlight that the CSSF requires all NFCs that are not subject to prudential supervision, which conclude derivative trades(OTC andETD) to provide the CSSF with details of the person responsible for ensuring the on-going compliance with EMIR.While regulatory compliance may seem daunting, posing both operational and technological challenges for NFCs, it is not impossible to achieve. NFCs can take key actions to facilitate this.Firstly, NFCs need to understand and assess the applicability of EMIR obligations.

They must ascertain their classification and regularly monitor their derivative positions against clearing thresholds. Doing so would allow them to take appropriate actions in compliance with specific clearing obligations or if necessary, adjust their trading strategies to stay below the thresholds. 

The calculation of the thresholds however can be a complex taskand should not be underestimated, since the group wide trading data needs to be consolidated and calculated. If an NFC chooses not to calculate its position,it will be subject to the strictest requirements of the clearing obligation.Also, if NFCs choose not to calculate its positions against the clearing threshold or when they exceed or fall below clearing thresholds,they must notifythe CSSF and the European Securities and Markets Authority (ESMA)to aid in the authorities’ regulatory oversight.The authorities insist on a strict application of EMIR through dedicated processes and controls.These processes and their outcomes(e.g. clearing threshold calculation) have to be properly documented in order to be able to prove to the authorities that all the requirements are fulfilled.In general, a process that is not documented in detail is considered non-existent.

A similar diligence should also be demonstrated when applying for an intra-group exemption. While it is in principle possible to obtain certain exemptions for intra-group trades(e.g. reporting or collateralization), entities applying for these exemptions usually have to provide proof to the authorities that the risks related to the derivate trades are understood and correctly managed.

The latest updates to the EMIR reporting have come into forcein October 2022, requiring all entities in scope to reportin a newformat from the 29thof April 2024 on.These updates introduce a significant increase of reporting fields (from 129 to 203fields), a completely new data format (ISO 20022 –XML), as well as other obligationsfor the reporting counterparties (e.g. pairing and matching of reports). Consequently,the controls, processes, ICT framework and organization around the reporting mustbe adapted to achieve compliance. As a reminder, in case an NFC-trades derivativeswith an FC established in a third country, the NFC-is responsible for reporting the trade under EMIR4

Constantly evolving framework


Since EMIR is a constantly evolving framework, it is crucial for NFCs to be well-informed on the regulatory developments and industry best practices.Theprocesses and the controls framework must be regularly updated since the authorities are insisting on a strict application of the regulation.Also, NFCs shouldbe aware that an update to EMIR has been drafted and is currently being reviewedon EU level. While these texts still haven’t been validated, they are foreseeingimportant changes which will impact NFCs. Some of the updates which are being discussed arearemoval of the intra-group reporting exemption as well as changes to the hedging definition while calculating the clearing thresholds.


« pluses » and « minuses » of short-term investments 

It is obvious that each investment product offers "pluses" and "minuses", is stronger/weaker in one respect or another. Obviously, we would all look for the ideal, namely: maximum diversification, immediate liquidity assured, the most flexible and easy operational processing, the highest net return, the lowest counterparty risk, the lowest sensitivity to rising interest rates and the most transparent and complete reporting.  

What is the perfect strategy? 

It remains difficult to determine the best strategy, since it depends so much on the culture of the company, its appetite for risk or not, its internal policies in terms of investment and the objectives pursued. As a financial risk manager, the treasurer must find the best alchemy between the different instruments to optimize the return without compromising the preservation of the principal and the correct accounting treatment. Diversification remains one of the best ways to mitigate counterparty risk. Automation is a factor to be considered. We forget that return is essential, but the risks are also operational. A deposit made over the phone is still a somewhat old-fashioned way of working, isn't it?

The right strategy is to segment the liquidity if the C-Level agrees to do so. Often CFOs want 100% of the cash in the short term to cover the eventuality. Reporting is important to measure performance (ex-post) and to reassure management. Performance analysis must be done globally. Sometimes, a long-term pocket can allow the use of more adapted products with a longer horizon and better yield. The overall return can thus be boosted and give an outperformance compared to its benchmark (i.e., often ESTER / Over-night rate).  

Philippe Foerster.jpg

One should also never forget the accounting rules (i.e., IFRS) and the regulations such as the one under review for Money Market Funds. As we can see, managing excess cash is perhaps less stressful than managing debt. Nevertheless, it is sometimes complex and needs to be reviewed, especially after a crisis like the one we have just experienced.  

François Masquelier, CEO of Simply Treasury – Luxembourg December 2022 

Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT). 


Francois Masquelier
Résidence Soho/NY
1 rue de Chiny,
L-1811 Luxembourg

Phone: 00352 621 27 80 94

BGL : LU79 0030 7000 7964 0000

Contact us:

bottom of page