- Updated FAQ
In August 2014 the Central Bank of Ireland (the “CBI”) updated its “Frequently Asked Questions”(1) on the application of the reporting obligation under EMIR to state that, as a temporary measure:
- all FX transactions with settlement before or on the relevant spot date (generally T+2) are not required to be reported;
- all FX transactions with settlement beyond seven days are required to be reported;
- all FX transactions between an Irish counterparty and a non-Irish counterparty with settlement between the spot date and seven days (inclusive) are only required to be reported by the Irish counterparty if local laws, rules or guidance in the jurisdiction of the non-Irish counterparty require the non-Irish counterparty to report. The Irish counterparty should rely on documentation from the non-Irish counterparty as to whether it is required to report; and
- all FX transactions between two Irish counterparties with settlement between the spot date and seven days (inclusive) are not required to be reported.
In respect of (d) above, the CBI recommends that counterparties that have the capacity to report such trades do report them (notwithstanding that there is no obligation to report), and it further recommends that counterparties build a capacity to report such trades in the future.
While this updated guidance is to be welcomed, it does raise a number of fresh questions. Set against a background of divergent regulatory approaches throughout Europe, and the European Commission and the European Securities and Markets Authority (“ESMA”) being unable to provide any further guidance, it appears that the precise limits of the application of EMIR to FX trades are still yet to be settled.
- Regulatory developments so far
The CBI’s previous guidance, issued in February 2014, had stated that generally any FX trade settling greater than T+2 was to be considered an FX forward. The previous version of the FAQ stated that all FX forwards were to be considered within the scope of EMIR regardless of:
- their actual settlement date; and
- whether they are concluded for “commercial” (as opposed to speculative or investment) purposes.
The previous guidance was inconsistent with guidance issued by a number of other European regulators such as the UK’s Financial Services Authority and Luxembourg’s Commission de Surveillance du Secteur Financier.
In light of the conflicting national guidance ESMA wrote to the European Commission on 14 February 2014 (2) seeking clarification on what constituted a “derivative” within the scope of EMIR. ESMA stated that, in the absence of clarification from the European Commission, it understood that national competent authorities would not apply EMIR to “FX forwards with a settlement date up to 7 days, FX forwards concluded for commercial purposes, and physically settled commodity forwards...” Notwithstanding ESMA’s letter, the CBI did not alter its guidance.
Following ESMA’s letter, the European Commission issued a consultation document on FX financial instruments(3) in April 2014. The consultation document was intended to assist the European Commission in developing a legislative proposal to define the scope of EMIR. However, on 23 July 2014 the European Commission wrote to ESMA(4) noting that its legal power to adopt implementing legislation that could clarify the definition of FX financial instruments lapsed on 1 December 2012. Presumably such lack of authority had previously been overlooked when the European Commission commenced its consultation.
In its 23 July 2014 letter, the European Commission noted that the definition of financial instrument is due to be revised by the implementation of MIFID 2 in 2017, and that ESMA should carefully consider “whether the current approach by Member States achieves a sufficiently harmonised application of the EMIR reporting obligation in the period before the application of MIFID 2 or whether further measures by ESMA, eg guidelines, are necessary”, bearing in mind that any guidelines adopted now “may need to be changed again in 2017 if these measures are not fully aligned with the future MIFID 2 implementing measures”. This appears to indicate that the European Commission feels that no further guidelines should be issued before the implementation of MIFID 2.
Following the European Commission’s decision not to clarify the definition of what constitutes a “derivative”, the CBI issued its latest guidance. However, the CBI has indicated that this guidance is a “temporary measure”. The CBI has advised that it may revise its guidance again in the future, or its guidance may be superseded by developments at EU level.
- Continued uncertainty
The CBI’s updated guidance does not make any reference to the “commercial purpose” exemption (or indeed the treatment of physically settled commodity forwards). The “commercial purpose” exemption was expressly recognised in the guidance of the FSA and the CSSF, and was mentioned in ESMA’s letter of 14 February 2014. In the absence of any additional guidance from the CBI or ESMA, it appears that the CBI does not view FX forwards concluded for “commercial purposes” as being exempt from EMIR.
It is noteworthy that the CBI’s updated guidance distinguishes between otherwise identical contracts on the basis of where the counterparty is located. It states that if a contract is considered to be within the scope of the EMIR reporting obligation according to the “local laws, rules or guidance” of the counterparty’s jurisdiction, then it should be reported by the Irish counterparty. As the EMIR reporting obligation only applies to “derivatives” within the scope of EMIR, this suggests that the Irish interpretation of what constitutes a “derivative” will vary depending on the “local laws, rules or guidance” of the counterparty’s jurisdiction. This could result in an Irish counterparty having to treat two otherwise identical trades as subject to different regulatory regimes, by reference to guidance issued by a counterparty’s regulator.