Swaps end-users that trade with counterparties that are established in the European Union (EU) (or that have affiliates established in the EU) and that trade derivatives should be aware that they may be subject to the European Market Infrastructure Regulation (EMIR). Similar to Dodd-Frank (DF) in the U.S., EMIR imposes reporting, clearing and risk mitigation obligations on end-users of derivatives; however, an end-user’s EMIR obligations may be different from and potentially more burdensome than its DF obligations. McGuireWoods LLP is providing a series of updates for swaps end-users regarding their potential obligations under EMIR. This update describes an end-user’s reporting obligations under EMIR and how EMIR’s reporting obligations are different than under DF.
On July 4, 2012, the European Parliament and Council adopted EMIR to provide a framework for addressing the risks related to certain derivative contracts. EMIR requires, among other things, that:
- All derivative contracts be reported to a trade repository (TR).
- OTC derivative contracts be cleared through a central clearing counterparty (CCP), unless an exception or exemption applies.
- Parties to derivative contracts employ certain risk mitigation techniques for uncleared OTC derivative contracts.
EMIR applies to a broad range of financial instruments and may impose obligations on end-users of those financial instruments that are not required by the DF swaps regime in the U.S. An end-user is typically classified as a nonfinancial counterparty (NFC) under EMIR. An end-user’s obligations under EMIR will depend on whether the end-user is classified as an NFC+ or an NFC-, which depends on the gross notional amount and purpose of an NFC’s derivative contracts. Click here for our Swaps End-User Update regarding counterparty classifications under EMIR.
Who Is Obligated to Report Under EMIR?
Unlike under DF, under EMIR both parties to a derivatives contract must report that transaction. However, by prior arrangement, one party can report on behalf of both counterparties. As a result, end users should consider whether to report directly to a TR or delegate reporting to a counterparty or a third party. If an end-user will do its own reporting, the end-user must identify which TRs will accept reports for the types of derivatives the end-user trades.
When Do End-User Reporting Obligations Begin Under EMIR?
The reporting start date is Feb. 12, 2014. Beginning on that date, all derivative contracts entered into on or after that date must be reported to a TR. The reporting obligations include exchange-traded and OTC derivative contracts. In addition:
- Derivative contracts that were outstanding on Aug. 16, 2012, and are still outstanding on the reporting start date must be reported to a TR within 90 days after the reporting start date.
- Derivative contracts that were outstanding on Aug. 16, 2012, but are not still outstanding on the reporting start date must be reported to a TR within three years after the reporting start date.
What Are End-Users Required To Report Under EMIR?
The EMIR technical standards set out the information that must be reported by each of the counterparties to a derivatives contract. Required data includes information regarding each counterparty (26 data fields) and the details of the derivatives contract, including, among other things, the type of contract, maturity, notional value, price and settlement date (59 data fields in all, but many fields apply only to specific transaction types). An NFC- need not report exposure information (collateral values and mark to market or mark to model valuation data fields). Reports are required for the execution of any new contract and any modification or termination of an existing contract. Counterparties must report the execution, modification or termination of a derivatives contract no later than the next working day. Counterparties must keep records of all derivative contracts, including any modification or termination, for at least five years following the termination of the derivative contract.
How Can End-Users Comply With Reporting Obligations Under EMIR?
An end-user can agree with its counterparty to delegate its reporting obligation to that counterparty (typically a dealer or CCP). However, counterparties that delegate their reporting obligations remain responsible for the accuracy of reporting details and should ensure that the relevant data is reported correctly and without duplication. To facilitate reporting by end-users, ISDA and the Futures and Options Association (FOA) published the ISDA/FOA EMIR Reporting Delegation Agreement (the “EMIR Delegation Agreement”). The EMIR Delegation Agreement is a bilateral standard form of reporting delegation agreement intended to enable end-users and other counterparties to comply with their EMIR reporting obligations. Under the EMIR Delegation Agreement, a counterparty (the Client) and another counterparty (the Reporting Delegate) agree that the Reporting Delegate will report relevant data for specified derivative transactions to a TR on the Client’s behalf. A link to the EMIR Delegation Agreement is available on the ISDA Focus: EMIR web page under Frequently Used Documentation.
How Are End-Users Reporting Obligations Under EMIR Different Than Under DF?
As mentioned above, EMIR requires both counterparties, including end-users, to report all derivative contracts, including contracts traded on a regulated exchange. The DF reporting rules have a hierarchy that generally requires a swap dealer or other financial entity, rather than an end-user, to be the reporting party for a swap and provide that swaps executed on a swap execution facility (SEF) or designated contract market (DCM) be reported by the relevant SEF or DCM. The EMIR reporting obligations apply to all derivative contracts. The DF swap data reporting rules currently apply to any “swap” transaction, which is more limited in scope than the EMIR reporting obligations. Finally, DF requires the reporting party to submit more swap data than is required under EMIR’s reporting obligations.
In the next Swaps End-User Update, we will discuss an end-user’s clearing obligations under EMIR.
A link to the European Securities and Markets Authority website for EMIR, which includes a quick guide to EMIR for NFCs, is available here.