12 July 2013

EMIR Implementation Update

More time to report for regulated and unregulated firms but big challenges still lie ahead

The European Market Infrastructure Regulation ("EMIR") reporting requirements are more complex and extensive than those contemplated in the Dodd-Frank Wall Street Reform Act and the current European transaction reporting framework. As the deadline for reporting fast approaches there are still a number of significant challenges that need to be addressed to enable counterparties to report in an EMIR compliant manner. It is to be hoped that the next round of European Securities and Markets Authority ("ESMA") FAQs, which are expected to be published in September 2013, will assist counterparties and other firms in this endeavour.

EMIR requires certain financial counterparties, including banks, insurers, investment firms as well as certain non-financial counterparties , including energy and real estate firms (please see our previous Alert on the definition of counterparties) to report details of new, modified or terminated MiFID derivatives contracts to a registered trade repository. Counterparties may also be required to comply with certain risk mitigation requirements (e.g. timely confirmations, daily mark to market, portfolio compression and reconciliation and dispute resolution), collateralise and in certain circumstances clear their OTC derivative contracts through central counterparties ("CCPs").

The reports to trade repositories should include trade and counterparty data. Mark to market valuations of contracts and collateral values, type and basis (e.g. whether on a portfolio margining or transaction level margining basis) should also be reported.

Unlike Dodd-Frank, the reporting obligation under EMIR applies to both counterparties to a trade (known as the 'dual reporting requirement') and will capture OTC derivative trades as well as exchange traded derivative trades (such as futures). The reports must be submitted no later than the next business day. Whilst reporting can be delegated to the other counterparty to the trade, or a CCP or a third party, the legal obligation to report accurate information remains with the counterparties.

A phased approach to implementing the EMIR reporting requirement per asset class was proposed. However, a recent update published on ESMA's website indicates that reporting of all five derivative asset classes (i.e. interest rate, credit, foreign exchange, commodity and others) will not be required before 1 January 2014 (assuming that trade repositories have been registered with ESMA by 24 September 2013). This latest 'announcement' will come as a relief to many market participants, who were faced with the prospect of having to report details of MiFID interest rate derivatives and credit derivatives from 23 September 2013 onwards (including some existing trades). However, this 'additional time' should be put to good use by counterparties to finalise and implement their EMIR implementation plans.

EMIR implementation plans for counterparties may cover the following:

  • Reviewing existing portfolios to identify which products are likely to fall within scope and ensuring systems changes are made to capture all reportable information
  • Deciding whether to self-report or delegate reporting to another party
  • Establishing connectivity with one or more registered trade repositories or ensuring that the other counterparty or the third party delegate is willing and able to report on your behalf (including in relation to group trades)
  • Discussing with trade repositories how the legal identifier and product identifier issue is going to be addressed. Legal entity identifier codes are required in order to properly identify each counterparty to a reportable derivative trade and the unique product identifier codes are required in order to identify the derivative products that are being executed. Various global initiatives are underway in order to generate such codes
  • Establishing processes that provide them (including firms who plan to offer delegated reporting services) with access to all relevant information for each trade. EMIR requires counterparties to report 'common data' (i.e. certain trade details) and 'counterparty data' (i.e. specific data relating to each counterparty – e.g. whether the counterparty has exceeded the clearing threshold or whether the trade is entered into by the counterparty for commercial or treasury financing purposes only) at the same time. However, unlike common data, counterparty data will not always be readily available to the other counterparty or the delegate at the time the trade is executed, so counterparties and delegates will have to have a process in place to address this issue in advance of the reporting start date
  • Putting arrangements in place to: (a) agree on and in some cases generate common unique trade identifier codes, and then (b) ensure both counterparties or their respective delegates report trades using those codes. EMIR requires both counterparties to a reportable trade to use a common unique trade identifier code when reporting trades to a trade repository. This is designed to make it easier for trade repositories and regulators to identify and match the trade to which the reports relate. However, such codes are not readily available or easily generated for all asset classes (e.g. some FX markets lack a central infrastructure hub to issue common trade identifiers to both counterparties). Counterparties will therefore have to have an arrangement in place to address this issue
  • Making all necessary changes to existing IT systems, monitoring and documentation arrangements

As we know from the operation of the current European transaction reporting regime, mistakes have been made and some firms have received significant fines for non-compliance or for incorrectly interpreting the requirements. It is expected that regulators will be equally aggressive in enforcing the EMIR reporting requirements as they have been in enforcing the transaction reporting requirements.

The Financial Conduct Authority appears to be of the view that the EMIR timetable is tough but achievable. Indeed, the FCA has already contacted certain non-financial counterparties who have failed to notify it that their OTC derivative trades have exceeded the relevant EMIR clearing threshold (as is required under EMIR).

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