Following the European Securities and Markets Authority’s (ESMA’s) approval and registration of the first four trade repositories (TRs) in November 2013, counterparties to all types of over-the-counter (OTC) and exchange-traded derivatives contracts will be required, from 12 February 2014, to report certain details of their trades to a registered or recognised TR.
All counterparties, even those exempt from the clearing obligation, should take note that they will not be exempt from the reporting obligation. To facilitate the process, counterparties will, however, be permitted to delegate trade reporting requirements to third parties or their respective counterparties.
The reporting obligation forms part of the requirements imposed by the EU Regulation on OTC derivative transactions, central counterparties (CCPs) and TRs (Regulation 648/2012), also known as the European Market Infrastructure Regulation or EMIR. EMIR aims to establish within the European Union the G-20 leaders’ commitment to improve transparency in derivatives markets, mitigate systemic risk and prevent market abuse.
The primary obligations imposed by EMIR relate to clearing, reporting and risk mitigation of derivatives trades. Such obligations are imposed on both financial counterparties (FCs) and non-financial counterparties (NFCs), to varying degrees.
Whilst the scope of these obligations is aimed at EU entities, non-EU entities should not ignore EMIR’s territorial application, as they may still be caught by its requirements. In particular, a non-EU entity may be required to comply with obligations under EMIR where either its trading counterparty is established in the European Union, or the derivatives transaction has a direct, substantial and foreseeable effect within the European Union.
The Reporting Obligation
Despite a request from ESMA that the reporting obligation in respect of exchange traded derivatives be delayed by one year, in order to give market participants sufficient time to put in place the necessary systems and procedures, the reporting obligation will come into full effect on 12 February 2014.
Under Article 9 of EMIR, all counterparties to all derivatives contracts and CCPs are required to report particular details of any derivatives contract they have concluded, modified or terminated (including lifecycle events such as give-ups and partial terminations), to a TR. ESMA guidance suggests that, in respect of terminations, a report is only required to be made where termination takes place on a date different to that originally provided for in the relevant contract.
Whilst the clearing and risk mitigation obligations are restricted to OTC derivatives contracts, the reporting obligation applies to all derivatives contracts, irrespective of whether they are traded on-exchange or OTC. In addition, although the clearing obligation only applies to FCs and non-financial counterparties that exceed the relevant clearing threshold (NFC+s), the reporting obligation also applies to non-financial counterparties below the clearing threshold (NFC-s). The clearing threshold, as prescribed in the technical standards to EMIR, differs depending on type of derivative contract. The clearing thresholds are as follows:
- Credit derivatives: €1bn in gross notional value
- Equity derivatives: €1bn in gross notional value
- Interest-rate, currency and commodity derivatives: €3bn in gross notional value.
Intragroup derivatives trades that are exempt from the clearing or risk mitigation obligations must still be reported. The reporting obligation will not affect natural persons, nor will it affect non-EU entities that are not caught under EMIR.
Delegated Transaction Reporting Arrangements
EMIR requires both counterparties to a derivatives contract to report the necessary information to a registered or recognised TR. A counterparty is, however, permitted, by prior arrangement, to delegate its reporting obligation to its respective counterparty or to an agent or any third party capable of fulfilling the reporting function, e.g., a CCP, exchange, trading platform or service provider, to report on its behalf. It should be noted, however, that the original delegating counterparty remains liable for any deficiencies or failure by the other counterparty/agent/third-party service provider to comply with the requirements of the reporting obligation under EMIR. For this reason, the UK’s Financial Conduct Authority (FCA) has advised that delegating counterparties should carry out reasonable checks to ensure reports are submitted in compliance with EMIR.
Where a counterparty delegates its reporting obligation, the relevant report must make this clear. In addition, an agent or third-party service provider can report on behalf of both counterparties. In this instance, the relevant report must contain the same information as would have been reported, had each report been submitted separately.
From 12 February 2014, counterparties will have to submit reports to a TR no later than the working day following the conclusion, modification or termination (as above) of the relevant derivatives contract.
Counterparties to derivatives contracts that were entered into on, or after, 16 August 2012 and are still outstanding on 12 February 2014 will have until 13 May 2014 to report to TRs. Conversely, those counterparties to derivatives contracts that were entered into before 16 August 2012, and are still outstanding on 12 February 2014, will have until 11 February 2017. Counterparties to derivatives contracts that were entered into on, or after, 16 August 2012, and are no longer outstanding on 12 February 2014, will also have a reporting deadline of 11 February 2017.
Finally, the reporting of exposures information, i.e., collateral and market-to-market or market-to-model information, will undergo a transitional period until 11 August 2014, and must be reported on a daily basis thereafter.
Information to be Reported
The specific information that must be included in reports to TRs is set out in a technical standard to EMIR, and relates to specific counterparty and common information between the counterparties, covering over 80 fields of information, some of which may not be applicable to particular reports. The FCA has advised that Pre-Legal Entity Identifiers (LEIs) should be used wherever available and applicable. In the absence of an LEI, a counterparty’s Business Identifier Code should be used.
Key information in respect of counterparty information includes the identities of the counterparties, the beneficiary of the rights and obligations arising from the contract, the broker used (if any), the clearing member (in the case of cleared contracts), the counterparty’s trading capacity, information as to the nature of the trade, valuation updates and collateral information. Key information in respect of common information includes the main details of the contract, the transaction type, the notional value, maturity, price and settlement date.
Obtaining a Legal Entity Identifier
In order for counterparties entering into derivatives trades to comply with the reporting obligation under EMIR, each counterparty is required to have an LEI. There are currently 11 Local Operating Units, such as the London Stock Exchange (LSE), that are permitted to issue LEIs for the purposes of compliance with EMIR. Obtaining an LEI is a relatively inexpensive exercise. The LSE, for example, charges an initial allocation cost of £100+VAT, together with an annual maintenance of £55+VAT, per LEI.
Trade Repositories Registered With, or Recognised by, ESMA
All trade reports must be submitted to EU-TRs that have been registered with, or Non-EU-TRs that are recognised by, ESMA. There are currently five registered TRs covering all asset classes: DTCC Derivatives Repository Ltd., CME Trade Repository Ltd. and UnaVista Ltd, based in the United Kingdom; Krajowy Depozyt Papierów Wartosciowych S.A. in Poland; and Regis-TR S.A. in Luxembourg. In addition, ICE Trade Vault Europe Ltd., based in the United Kingdom, will cover commodities, credit, equities and interest rates derivatives asset classes.
Counterparties can choose whichever TR they feel best suits their needs and are permitted to report different trades to different TRs. Counterparties to a trade are under no obligation to report to the same TR. Additional TRs can be expected to be registered soon, as ESMA is currently in the process of reviewing further applications. Updated lists can be found on the ESMA website.
Intragroup Transactions Exempted From The Clearing Obligation
The FCA has encouraged all firms that are planning to take advantage of the exemption from the clearing obligation contained in Article 4(2) of EMIR (which applies to intragroup transactions), to register and submit a notification to the FCA, if they have not already done so. Applications for this exemption can be made through the FCA EMIR web portal and should receive a response within 30 days, confirming whether or not the exemption is available. Where the FCA intends to oppose an application, the FCA will provide notice in advance and give the applicant the opportunity to either withdraw the application or submit further supporting information.
The 12 February 2014 start date for trade reporting will be a landmark date for the implementation of EMIR obligations. The next big landmark is likely to be the commencement of the clearing obligation. Although no precise date has been set for this, it is likely to commence in 2014.