Research European Commodity Market Regulations - Part 1 | Page 13

European Energy Market Regulations V3.1

Hedges – Hedged trades do not contribute to the threshold. Hedges under EMIR are defined
as a trade being one of the following:
a) The trade is already defined as a hedge under hedge accounting rules (e.g. IAS 39)
b) It is designed to objectively “reduce risk” of assets, services, inputs, products,
commodities or liabilities that the NFC owns
c) It is designed to reduce the risk of a hedge instrument as defined above
It is important to record the hedge status of each trade to determine if it is a hedge or not.
NCAs are already auditing NFCs that are not over the threshold and so it is important to
record the hedge reason.
What is a derivative? – When calculating the threshold it is important to consider which
trades are considered “derivatives” under EMIR. This definition is not simple but is generally
defined as a trade that is settled for cash, but also as a trade that is transacted via a
multilateral trading facility (MTF), which is particularly important for physical forwards which
could otherwise not be considered thus. This was confirmed by the FCA on 12th September
2013.
Different execution venues, platforms and brokers may or may not be MTFs, and there is a
current trend for certain platforms to delist themselves from the MTF list. Since the list will
be dynamic, any solution to calculate threshold values will need to be able to cope with such
changes. The FCA have announced their intention to say which platforms are to be
considered MTFs on 16th December 2013. The rules will only apply to trades executed after
that date.
If an intra-group trade is not a hedge (although it often will be), then both sides of the trade
count towards the threshold i.e. double the notional.

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v3.1

November 13th, 2013

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