The Central Bank of Ireland (“Central Bank”) has announced its intended approach to supervising non-financial counterparties (“NFCs”) under EMIR. Significantly, this approach differs in a number of respects from that outlined in its consultation paper on the supervision of NFCs under EMIR (“CP90”). In particular, the EMIR Regulatory Return (“ERR”) outlined in CP90 (“Original ERR”) will now only be used on an exceptional basis, primarily in cases of non- compliance. A NFC-1 with a significant derivative position will instead be required to submit a shorter, more focussed ERR (“Annual ERR”). In addition, it will no longer be required to have that return assessed by a third party.

CP90

As Ireland’s national competent authority for EMIR purposes, the Central Bank is responsible for supervising compliance with EMIR in Ireland. On 4 December 2014 the Central Bank published CP90, in which it detailed its proposed approach to supervising NFCs under EMIR. That approach distinguished between three types of NFCs: small, medium-sized and large. CP90 focused in particular on “medium- sized NFCs”, identified by the Central Bank as a category of NFCs with significant positions in derivatives but which:

  • are not large enough individually to be of systemic concern or complex enough to require bespoke supervisory frameworks;
  • do not meet the conditions set out in the European Union (European Markets Infrastructure) Regulations 20142 for exemption from any Central Bank requirement to submit an EMIR regulatory return; and 
  • are beneath the EMIR clearing thresholds (ie NFC-s).

The Central Bank indicated that it proposed to use a new supervisory tool, the ERR, to supervise medium-sized NFCs, which would be required to submit an Original ERR annually, signed by the directors/partners of the reporting NFC. The reporting NFC would also be required to appoint an independent third party assessor approved by the Central Bank, to assess certain aspects of the Original ERR for accuracy and to report on this assessment to the Central Bank. The Central Bank proposed excluding certain medium- sized NFCs from this latter requirement.

In CP90, the Central Bank also discussed the question of levies and sought feedback on how it would charge costs to NFCs if the ERR model was not adopted. According to the Central Bank, it anticipated that certain NFCs that it expected would be subject to a direct engagement supervisory model would contribute to the Central Bank’s costs of supervising that NFC.

For further information see our briefing on CP90 here.

The Central Bank’s Updated Approach

In response to the feedback received on CP90, the Central Bank has modified its original proposals in a number of respects.

While NFC-s with significant positions in derivatives will still be required to submit an ERR, that ERR - the Annual ERR referred to above - is shorter and more focussed than the Original ERR and will not require independent third party assessment. The Central Bank will notify each NFC- that it requires to submit an Annual ERR in respect of a calendar year, by end-September of that calendar year.

The Annual ERR in respect of that calendar year will then be due for submission by the following end-January (the Central Bank will advise the reporting NFC- of the precise date) and on an annual basis thereafter. The Central Bank has also indicated that it intends to undertake a series of bilateral meetings with a sub-set of significant users of derivatives within the State.

As mentioned, the independently assessed Original ERR will now only be used on an exceptional basis, primarily in cases of non- compliance, in which case the required form of ERR and assessor report may be tailored for the particular reporting NFC- and the relevant circumstances.

With regard to levies, the Central Bank has confirmed that although there is no mechanism in place for covering the supervisory cost of unregulated NFCs, it is not currently proposing to impose a levy on those NFCs and that any proposal to do so would be the subject of separate industry consultation.3 It has not, however, given any indication of the potential impact of the EMIR supervisory regime on the levies currently charged to regulated NFCs.

Comment and Next Steps

The Central Bank’s new approach to the supervision of NFC-s that have significant derivative positions is to be welcomed. As compared with the approach outlined in CP90, this new approach should significantly reduce compliance costs.

The Central Bank will notify in writing entities that it requires to submit the Annual ERR for the calendar year 2015 by end- September 2015. Such entities will be required to complete and submit an Annual ERR in relation to the period 1 January 2015 to 31 December 2015 on a date prior to end-January 2016 and on an annual basis thereafter.

The Central Bank has also indicated that  it wishes to achieve improved data quality from both financial counterparties and NFCs, focussing first on larger users of “more complex” derivative products; it has identified Interest Rate Swaps and Credit Derivatives in this regard. It plans to undertake a campaign of data validation in the near future, in order to check data from such counterparties and will post further details in this regard on its website in due course. It has also indicated that it plans to follow-up with counterparties where trade repositories have identified a high level of reports that have failed to pass their validation checks on submission.

The Central Bank’s Feedback Statement to CP90 may be accessed here.