Dodd-Frank’s end user vs. EMIR’s NFC-: interchangeable terms?

05 January 2015

Regardless of the nationality or domicile of their clients, European banks must still comply with European regulation. Such banks are finding it difficult for some of their US clients to agree to make certain representations under EMIR.

If those banks also happen to be registered as swap dealers in the US, it can be particularly confusing for some US clients to understand why, if they have already made an array of reps under Dodd-Frank’s Title VII (usually under the ISDA DF Protocols), they must now make some more reps, now under EMIR, about mostly the same matters.

Even if they do understand that this apparent duplication is due to the fact that the bank they are facing is European, and as such subject to European regulation, a US client might still, understandably, refuse to go to the trouble and expense of becoming familiar with the reps requested from them and their implications, which normally means hiring European counsel and trying to factor in additional expense and a new, foreign legal framework with which they might well not be comfortable.

This situation is quite common particularly in respect of the FC/NFC+/NFC- EMIR reps requested by European banks.

End user. Under Dodd-Frank, swaps subject to mandatory trading and mandatory clearing must be cleared and traded on a swap execution facility (“SEF”) or designated contract market (“DCM”) and cleared on a Derivatives Clearing Organization (“DCO”), unless one of the parties is an end user (i.e., an entity that enters into the swap to hedge commercial risk).

When an entity is acting as an end user, the swap it is entering into must always be a hedging swap. If the same entity enters into a swap normally subject to clearing and does not do so for hedging purposes, then the transaction must be cleared.

NFC-. Under EMIR, there are three types of counterparty (other than exempted counterparties): Financial Counterparty (“FC”), Non-Financial Counterparty + (“NFC+”) and Non-Financial Counterparty – (“NFC-”). If a derivative transaction is subject to mandatory clearing under EMIR, only those transactions entered into with entities classed as NFC- will be free from the obligation to clear.

An NFC- is en entity whose non-hedging swaps on a rolling average position over 30 working days has remained below all clearing thresholds.

The clearing threshold is EUR1bn for OTC credit or equity derivatives; or EUR3bn for OTC interest rate, FX or commodity derivatives.

Unlike end users under Dodd-Frank, an NFC- may enter into non-hedging transactions on a bilateral basis.

EMIR requires that each counterparty self-classifies as either FC, NFC+ or NFC-. An NFC- may become an NFC+ if it exceeds the clearing threshold for any asset class in any 30 business day period. Such event would trigger a number of obligations, such as clearing of future trades, as well as of past ones (which must then be novated to a clearing house). Because of that, it is very important for the counterparty of an NFC- entity to receive a warranty from the NFC- entity that it will promptly advise its counterparty in the event it becomes an NFC+.

As a material difference with EMIR, there is no provision in Dodd-Frank whereby backloading of previous transactions is required if an entity ceases to be an end user.

Substituted compliance/equivalence.

Given that the metrics governing end users differ from those applicable to NFC- entities, there is no exact correlation between both concepts, although they are comparable in terms of end result (i.e, exemption from clearing).

Of course, both concepts may be deemed to be equivalent, provided that:


  • for an entity subject to US regulation to rely on such equivalence, the Commodity Futures Trading Commission (“CFTC”) must have so declared it; and
  • for an entity subject to EU regulation to rely on such equivalence, such must have been determined by the European Commission.


Neither Dodd-Frank nor EMIR allow the parties to freely agree on substituted compliance.

Therefore, and inconvenient though it may be, European banks must continue insisting that their US counterparties self-classify under EMIR, as must do US banks dealing with European counterparties, until such time as the European Commission determines that an end user is equivalent to an NFC-.

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