ESMA_QA_2050
Status: ✅ Answer Published
Regulatory Context
Level 1 Regulation: European Market Infrastructure Regulation (EMIR) Regulation (EU) No 648/2012- PTR- Derivatives Level 2 Regulation Regulation 149/2013 on indirect clearing arrangements, the clearing obligation, the public register, access to a TV, non-financial ctps, and risk mitigation for OTC derivatives not CCP cleared
Topic: OTC Derivatives questions - Other
Subject Matter: Hedging definition and virtual power purchase agreements
Question
Submission Date: 19-12-2023
Can virtual power purchase agreements be considered as “risk reducing transactions” under EMIR?
ESMA Answer
Answer Date: 19-12-2023
Answer provided by the European Commission in accordance with Article 16b(5) of the ESMA Regulation
In general, a transaction through which a counterparty A takes on market risk to allow counterparty B to hedge risk related to counterparty’s B commercial activity cannot be considered as “risk reducing” under EMIR for counterparty A. Assuming counterparty A (‘the buyer’) buys the environmental attributes and benefits associated with the renewable energy generated by counterparty B (‘the seller’) through a virtual power purchase agreement (PPA), counterparty B may claim that the virtual PPA is objectively measurable as reducing risks directly relating to its commercial activity, assuming its main commercial activity is to produce renewable energy and the virtual PPA provides a stable long-term financial income to compensate from the variable output of renewable energy production. With regard to counterparty A, and subject to compliance with other legislative texts such as in particular with the ancillary activity exemption therein, the provision of a hedge through a virtual PPA may be considered as directly related to the commercial activity of counterparty A. In accordance with Article 10 of Commission Delegated Regulation (EU) No 149/2013, a derivatives contract concluded by counterparty A to offset risks resulting from the virtual PPA concluded with counterparty B could be considered as “risk reducing” under EMIR and therefore the resulting position in those derivatives does not have to be included in the calculation of counterparty A’s position towards the clearing thresholds. Hedging strategies have to be well documented and need to be supplemented by evidence of the actual risk directly related to the commercial or treasury financing activity that the contract is covering.
The answers clarify provisions already contained in the applicable legislation. They do not extend in any way the rights and obligations deriving from such legislation nor do they introduce any additional requirements for the concerned operators and competent authorities. The answers are merely intended to assist natural or legal persons, including competent authorities and Union institutions and bodies in clarifying the application or implementation of the relevant legal provisions. Only the Court of Justice of the European Union is competent to authoritatively interpret Union law. The views expressed in the internal Commission Decision cannot prejudge the position that the European Commission might take before the Union and national courts.
This document was automatically extracted from the ESMA EMIR Q&A database.