OTC Question 10: Hedging definition [last update 19 November 2021]
Article 10(3) of Regulation (EU) 648/2012: Hedging definition
In order to determine whether they exceed the clearing thresholds, non-financial shall include all OTC derivative contracts "which are not objectively measurable as reducing risks directly relating to that commercial activity or treasury financing activity" of itself or of its group.
(a) Are policies adopted by non-financial counterparties or audited accounts sufficient to demonstrate compliance with the hedging definition?
(b) Should less frequent operations be captured in the scope of the definition of the "normal course of business"? Could OTC derivative contracts concluded rarely qualify for hedging?
(c) When NFCs use portfolio or macro hedging, how should they demonstrate compliance with the hedging definition?
(d) Can non-financial counterparties (NFCs) whose core activity is to buy, sell or own financial instruments, benefit from the hedging exemption when using OTC derivative contracts to hedge certain risks, for example risks arising from the potential indirect impact on the value of assets the NFC buys, sells or owns resulting from the fluctuations of interest rates, inflation rates, foreign exchange rates or credit risk?
OTC Answer 10