1. FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCES Commodities concerns: EMIR thresholds, notifications and reporting MIG Seminar Financial Services Team Norton Rose LLP April 2013

2. FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCES Overview of breakout session  Scope and coverage of EMIR – commodities angle  Primary focus on non-financial counterparties (NFCs)  Impact of EMIR on NFCs  Thresholds and calculations  Hedging exemption  Group activities  “Compromise” – potential delay in implementation of clearing obligation for NFCs  Legal documentation – new reps and warranties  Notifications and reporting requirements  Linkages with REMIT  Latest developments on benchmarks – UK and EU level

3. FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCES Scope of coverage of EMIR  Meaning of “derivatives” – what is within scope of EMIR?  Key question for commodities firms – what do we trade?  Importance of MiFID II proposals – type of instruments classed as derivatives may change in the future  For example, see the latest MiFID II position on C(6) carve out for OTF contracts not entered into for speculative purposes  Note that the scope of instruments subject to mandatory clearing for FC and NFC+ is a separate issue which will be decided in due course by ESMA Meaning of “derivatives” – what instruments are within scope? “derivative” or “derivative contract” means a financial instrument as set out in points (4) to (10) of Section C of Annex 1 to MiFID  Excludes physical spot and FX spot transactions  Excludes certain physically delivered forward commodity contracts  Includes FX derivatives – grey area “OTC derivative” or “OTC derivative contract” means a derivative contract not executed on a regulated market within the meaning of MiFID or an equivalent third country market under MiFID.  Therefore, derivative contracts traded on MTFs are OTC derivatives in the context of EMIR

4. FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCES Clearing thresholds - latest  Thresholds are particularly sensitive for commodities firms  ECON Committee proposal rejected by European Parliament  “Compromise” proposal adopted in its place  Final RTS thresholds unchanged and published in Official Journal  Agreement to “phase in” clearing for NFC+ firms through ESMA powers to control application of clearing obligation  Proposal for additional published guidance in Q&A form for NFCs  Requirement to calculate clearing thresholds commenced on 15 March  NFC must report to ESMA / FCA if it is above the threshold  For groups, the group must report in each MS in which the group has legal entities that trade OTC derivatives. In addition, an overall group report must be submitted to ESMA

5. FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCES Thresholds - calculation  Clearing thresholds for each asset class – EUR 1 billion* Credit derivative contracts – EUR 1 billion* Equity derivative contracts – EUR 3 billion* Interest rate derivative contracts – EUR 3 billion* Foreign exchange derivative contracts – EUR 3 billion* Commodity derivative contracts and others * all figures represent gross notional values  Calculation is based on all NFCs in the group  Important exclusion for hedging transactions of a NFC or wider group  Breach of one class = clearing obligation will apply to all classes  Intra-group transactions DO count, although exempt from clearing obligation Hedging transactions are those transactions objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of a company. An OTC derivative is a hedging transaction if: (a)It covers the risks arising from the potential change in the value of assets, services, inputs, products, commodities or liabilities that the company does or anticipates it will own, produce, manufacture, process, provide etc in the normal course of business; (b)It covers the risks arising from the potential indirect impact on the value of assets, services or inputs referred to in (a), resulting from the fluctuation of interest rates, inflation rates, FX rates or credit risk; or (c)It qualifies as a hedging contract pursuant to IFRS.

6. FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCES Thresholds – notifications  Notification to the FCA required on first day threshold exceeded  NFC will become NFC+ if rolling average exceeds for 30 working days  NFC+ can re-notify as soon as rolling average drops below  Notification in each MS where group has a legal entity AND ESMA  FCA is the UK regulator – forms accessible through FCA website

7. FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCES Legal docs, reporting issues and other obligations  Categorisation as NFC or NFC+ is very important for trading counterparties of commodities firms  Counterparties should / likely to ask for legal representations  New ISDA protocol deals with this - put in place for 15 March  EMIR NFC Representation Protocol  Timely Confirmation Amendment Agreement  Reporting is required for all derivative contracts caught by EMIR (this includes cleared, non-cleared and exchange traded contracts)  EMIR TRs currently in process of making applications to ESMA  Firms should look into forms of access to TRs – through links with CCPs / execution venues / aggregators or directly Timeline for commodities firms: Reporting requirements likely to commence from Sept 2013 for IRS and CDS and from 1 Jan 2014 for commodities contracts Timely confirmation rules apply from 15 March 2013 Portfolio reconciliation rules apply from 15 September 2013 Portfolio compression rules apply from 15 September 2013 Mark to market for NFC+ starts 15 March 2013 Dispute resolution rules apply from 15 September 2013

8. FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCES Reporting – REMIT angle  REMIT reporting deadline likely to be in force after the EMIR reporting obligation commences for commodity derivatives  REMIT expected 2014/2015  EMIR expected 1 January 2014 for relevant energy contracts  ACER has published draft technical standards for trade reporting  Separate ACER guidelines for applying for registration as a Registered Reporting Mechanism under REMIT and also for the registration of Regulated Information Services under REMIT  RRM registered to trade report to ACER on behalf of market participants  RIS is registered to report “regulated information” to ACER on behalf of market participants- e.g. inside information that must be publicly disclosed under REMIT  EMIR reports will satisfy REMIT reporting obligations but not disclosure obligations  Likely that EMIR TRs will also offer REMIT reporting services  Ofgem consulting on UK reporting and registration  REMIT enforcement and penalty measures expected to be consulted on shortly

9. FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCES Benchmarks  Recent FSA Policy Statement PS13/6 – new rules in force 1 April 2013  Deals with the regulation and supervision of benchmarks  Driven by the LIBOR scandal and the Wheatley Review  Also potentially influenced by 2012 gas market manipulation allegations  Two new distinct regulated activities in the UK of:  administering a specified benchmark  providing information to a specified benchmark  New controlled function for firms contributing to benchmarks  Currently, LIBOR remains the only specified benchmark under the HM Treasury order  However, in the future, specified benchmarks could include energy, oil, etc.  In parallel, the European Commission is continuing its review of the integrity of benchmarks, which includes commodity indices  Commission expected to report in 2013 on the consultation so further developments are expected

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