Entities within scope
Under Article 9 of EMIR, the reporting obligation applies to entities established in the EU who enter into, modify or terminate certain derivatives transactions.
Note that under Article 1(4) of EMIR, the members of the European System of Central Banks and other Member States' bodies performing similar functions and other EU public bodies charged with or intervening in the management of the public debt and the Bank for International Settlements are exempt from EMIR and would not be subject to the reporting obligation.
Note also that whilst third country entities are not subject to the reporting obligation in EMIR, they will nevertheless need to furnish any EU counterparty with which they transact appropriate details in order to allow that EU counterparty to discharge its reporting obligations. Therefore, although there is no legal obligation to report, third country entities will need to cooperate with its EU counterparties.
Under Article 26(1) of MIFIR, the reporting obligation applies to investment firms authorised under MIFID II18 from 3 January 2018.
Note however pursuant to Article 26(7) of MIFIR, the reports are required to be made to the competent authority either by the investment firm itself, an approved reporting mechanism ("ARM") acting on its behalf (to whom the relevant investment firm has delegated the obligation) or by the trading venue through whose system the transaction was completed.
Under Article 26(5) of MIFIR, an operator of a trading venue is required to report details of transactions in financial instruments traded on its platform which are executed through its systems by a firm which is not subject to MIFIR.
Under Article 26(7) of MIFIR, where an investment firm reports details of those transactions through an ARM which is acting on its behalf or a trading venue, the investment firm is not responsible for failures in the completeness, accuracy or timely submission of the reports which are attributable to the ARM or trading venue but rather the ARM or trading venue is responsible for those failures.
There is an exemption from the reporting obligation under Article 3(2) of RTS 2219, pursuant to which an investment firm is not deemed to have executed a transaction where it has transmitted an order in accordance with Article 4 of RTS 22.
Instruments within scope
The reporting obligation applies in respect of all derivative contracts (i.e. OTC and exchange-traded). The report must be made to a registered trade repository within the EU or a recognised third-country trade repository. A trade repository is defined in EMIR as an entity that centrally collects and maintains records of derivative contracts.
Article 26(2) of MIFIR states that the reporting obligation applies to:
(a) financial instruments which are admitted to trading or traded on a trading venue or for which a request for admission to trading has been made;
(b) financial instruments where the underlying is a financial instrument traded on a trading venue; and
(c) financial instruments where the underlying is an index or a basket composed of financial instruments traded on a trading venue.
The obligation shall apply to transactions in financial instruments referred to in points (a) to (c) irrespective of whether or not such transactions are carried out on the trading venue.
Definition of "financial instrument": "Financial instruments" is defined as follows in MIFID II:
(1) Transferable securities;
(2) Money-market instruments;
(3) Units in collective investment undertakings;
(4) Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, emission allowances or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash;
(5) Options, futures, swaps, forwards and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event;
(6) Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market, a MTF, or an OTF, except for wholesale energy products traded on an OTF that must be physically settled;
(7) Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in point 6 of this definition and not being for commercial purposes, which have the characteristics of other derivative financial instruments;
(8) Derivative instruments for the transfer of credit risk;
(9) Financial contracts for differences;
(10) Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event, as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this definition, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market, organised trading facility ("OTF"), or a multilateral trading facility ("MTF");
(11) Emission allowances consisting of any units recognised for compliance with the requirements of Directive 2003/87/EC (Emissions Trading Scheme).
Definition of "trading venue": Trading venue is defined in MIFID II as a regulated market, an MTF or an OTF.
Transactions to be reported
From 12 February 2014, counterparties were required to report details of any derivative contract (i.e. OTC and exchange traded) they have concluded, or which they have modified or terminated, to a registered or recognised trade repository. Contracts entered into on or after 12 August 2012 but which were not outstanding on or after 12 February 2014 should have been reported to a trade repository by 12 February 2017.
Transactions to be reported (Article 2 RTS 22)
(1) An acquisition or disposal of a financial instrument.
(2) An "acquisition" is defined to include the following:
(a) a purchase of a financial instrument;
(b) entering into a derivative contract;
(c) an increase in the notional amount of a derivative contract.
(3) A "disposal" is defined to include the following:
(a) sale of a financial instrument;
(b) closing out of a derivative contract;
(c) a decrease in the notional amount of a derivative contract.
(4) Note that a transaction also includes a simultaneous acquisition and disposal of a financial instrument where there is no change in the ownership of that financial instrument but post-trade publication is required under Articles 6, 10, 20 or 21 of MIFIR.
Exempted transactions (Article 2(5) RTS 22)
The following transactions are exempt from the reporting obligation:
(a) securities financing transactions (other than securities financing transactions to which a member of the European System of Central Banks is a counterparty);
(b) a contract arising exclusively for clearing or settlement purposes;
(c) a settlement of mutual obligations between parties where the net obligation is carried forward;
(d) an acquisition or disposal that is solely a result of custodial activity;
(e) a post-trade assignment or novation of a derivative contract where one of the parties to the derivative contract is replaced by a third party;
(f) a portfolio compression;
(g) the creation or redemption of units of a collective investment undertaking by the administrator of the collective investment undertaking;
(h) the exercise of a right embedded in a financial instrument, or the conversion of a convertible bond and the resultant transaction in the underlying financial instrument;
(i) the creation, expiration or redemption of a financial instrument as a result of pre-determined contractual terms, or as a result of mandatory events which are beyond the control of the investor where no investment decision by the investor takes place at the point in time of the creation, expiration or redemption of the financial instrument (other than initial public offerings or secondary public offerings or placings, or debt issuance);
(j) a decrease or increase in the notional amount of a derivative contract as a result of pre-determined contractual terms or mandatory events where no investment decision by the investor takes place at the point in time of the change in the notional amount;
(k) a change in the composition of an index or a basket that occurs after the execution of a transaction;
(l) an acquisition under a dividend re-investment plan;
(m) an acquisition or disposal under an employee share incentive plan, or arising from the administration of an unclaimed asset trust, or of residual fractional share entitlements following corporate events or as part of shareholder reduction programmes where all the following criteria are met:
(i) the dates of acquisition or disposal are pre- determined and published in advance;
(ii) the investment decision concerning the acquisition or disposal that is taken by the investor amounts to a choice by the investor to enter into the transaction with no ability to unilaterally vary the terms of the transaction;
(iii) there is a delay of at least ten business days between the investment decision and the moment of execution;
(iv) the value of the transaction is capped at the equivalent of EUR 1 000 for a one-off transaction for the particular investor in the particular instrument or, where the arrangement results in transactions, the cumulative value of the transaction shall be capped at the equivalent of EUR 500 for the particular investor in the particular instrument per calendar month;
(n) an exchange and tender offer on a bond or other form of securitised debt where the terms and conditions of the offer are pre-determined and published in advance and the investment decision amounts to a choice by the investor to enter into the transaction with no ability to unilaterally vary its terms;
(o) an acquisition or disposal that is solely a result of a transfer of collateral.
Timing for delivery of transaction reports
Under Article 9(1) of EMIR, the details of the trade must be reported no later than the working day after the conclusion, modification or termination of the contract (i.e. on a T+1 basis).
Under Article 26(1) of MIFIR, investment firms which execute transactions in financial instruments must report complete and accurate details of such transactions to the competent authority as quickly as possible, and no later than the close of the following working day (i.e. on a T+1 basis).
Content of reports
The format of reports is set out in RTS and ITS relating to EMIR20.
Table 2 (Details to be reported in transaction reports) of RTS 22 sets out the required format for reports. Note in particular that:
(A) For transactions not carried out on a trading venue, the reports shall include a designation identifying the types of transactions in accordance with the measures to be adopted pursuant to Article 20(3)(a) and Article 21(5)(a)21.
(B) For commodity derivatives, the reports shall indicate whether the transaction reduces risk in an objectively measurable way in accordance with Article 57 of MIFID II.
(C) Article 8 (Identification of person or computer algorithm responsible for the investment decision) of MIFIR requires that where a person or computer algorithm within an investment firm makes the investment decision to acquire or dispose of a specific financial instrument, that person or computer algorithm shall be identified. The investment firm shall only identify such a person or computer algorithm where that investment decision is made either on behalf of the investment firm itself, or on behalf of a client in accordance with a discretionary mandate given to it by the client.
(D) Article 9 (Identification of person or computer algorithm responsible for execution of a transaction) of MIFIR requires that where a person or computer algorithm within the investment firm which executes a transaction determines which trading venue, systematic internaliser or organised trading platform located outside the EU to access, which firms to transmit orders to or any conditions related to the execution of an order, that person or computer algorithm is to be identified.
Where to report to
Under Article 9(1), counterparties in the EU and central counterparties ("CCPs") shall ensure that the details of any derivative contract they have concluded and of any modification or termination of the contract are reported to a trade repository registered in accordance with Article 5522 or recognised in accordance with Article 77 of EMIR.
Under Article 26(1) of MIFIR, investment firms should report transactions to the relevant competent authority.
Note, however, in the case that an investment firm executes transactions wholly or partly through its branch, Article 12(1) of RTS 22 requires it to report such transactions to the competent authority of its home Member State unless otherwise agreed by the competent authorities of the home and host Member States.
Note also that in the case of a transaction executed by branch of a third country firm, Article 12(5) of RTS 22 requires such firm shall submit the transaction report to the competent authority which authorised the branch.
The EMIR Review
On 4 May 2017, the European Commission published various proposals to amend EMIR, (the "EMIR Review")23 which, if implemented, would bring reporting obligation under EMIR closer to that under MIFIR. In particular, the EMIR Review reduces the burden of compliance by allowing legal liability to transfer to any entity to which responsibility for the reporting obligation has been delegated in a similar way to MIFIR:
- in respect of exchange-traded derivatives contracts, it is proposed that the CCP should have legal liability, for reporting on behalf of both counterparties (similar to MIFIR reporting via an ARM under Article 26(7) of MIFIR, as discussed above);
- in respect of a transaction between an financial counterparty and a non-financial counterparty below the clearing threshold, the FC would have legal liability for reporting on behalf of both counterparties to the transaction (similar to Article 26(1) of MIFIR which places the reporting obligation only investment firms authorised under MIFID II );
- the manager of a UCITS that is a counterparty to an OTC derivative contract would have legal liability for reporting on behalf of that UCITS; and
- an alternative investment fund manager would have legal liability for reporting on behalf of an alternative investment fund (AIF) that is a counterparty to an OTC derivative contract.
Note additionally that it is proposed that the requirement to backload historic transactions that were not outstanding on the starting date of the reporting obligation on 12 February 2014 should be deleted and that intragroup transactions where one where one of the counterparties is a non-financial counterparty should be exempted from the reporting obligation.