The City of London Law Society (CLLS) regulatory law committee has published a memorandum on the potential legal uncertainties which may arise as to the application of the European Markets Infrastructure Regulation (EMIR) – and specifically its reporting
requirements - to ordinary corporate transactions and arrangements (e.g. between companies and their shareholders, when capital raising, with share scheme arrangements for employees).
The memorandum sets out the implications of the widely drawn definition of a derivative under the Markets in Financial Instruments Directive (MiFID) which is used in EMIR to define the application of its provisions. The memorandum sets out the view that
there should be a distinction drawn between OTC derivatives traded between corporate entities and financial counterparties for speculative and hedging purposes (in respect of which there is a discernable "market") and those private arrangements entered into
by companies with their employees and shareholders or with other non-financial companies, as part of ordinary corporate transactional business and for very different purposes.
The memorandum sets out why the CLLS considers that it was not the regulators' intention to capture such transactions and advocates extending the Financial Services Authority's approach in MiFID to adopt a "dominant characteristic" test, applying this to
corporate transactions before conducting a technical analysis of whether a component of the transactions is or is not a derivative for the purposes of MiFID and therefore reportable under EMIR.
8 examples of the application of this to the non-financial counterparty corporate sector are provided to give clear and proportionate guidance so that unnecessary and counterproductive confusion is not created and that reports provided focus on speculative
and risk management instruments which are reportable.