Clearing thresholds

So in this new world where derivatives are finally seen as the weapons of mass destruction that Warren Buffett always said they were, the regulators have announced that, over certain thresholds, parties trading over-the-counter derivatives must clear them through a central clearing counterparty, and rhgw [[mark-to-market exposure arising from those types of derivative which cannot be (or are not) centrally cleared must be fully collateralised.

Thus the grand excitement, culminating in the first quarter of 2017, of variation margin regulation (call it WGMR, SIMM, UMR - whatever the hell you like).

Non-financial counterparties

EMIR identifies two sub-categories of Non-Financial Counterparties (“NFC”).

Depending on the volume of derivatives a counterparty enters into, ESMA (European Securities and Markets Authority) has defined a set of clearing thresholds for each class of derivative and NFCs are classified relative to these thresholds.The calculation is based on gross notional values of positions (excluding cash products and spot FX that are ‘objectively measurable as reducing risks directly related to its commercial activity or treasury financing activity or that of its group (‘hedging derivatives’).

Clearing thresholds by class

• Credit: EUR1billion
• Equity: EUR1 billion
• Interest Rates: EUR3 billion
• Foreign Exchange: EUR3 billion
• Commodities and others: EUR3 billion

NFC Sub-categorisation

The regulatory obligations imposed on NFCs depend upon their NFC sub-categorisation.

• NFC+: A “non-financial counterparty above the threshold” or NFC+, is one whose rolling average position over 30 working days (excluding hedging derivatives) exceeds the thresholds.
• NFC-: A non-financial counterparty below the threshold or NFC-, is one whose rolling average position over 30 working days doesn’t exceed the thresholds in any derivative classes.