Under the European Market Infrastructure Regulation (“EMIR”), counterparties established in the EU must report details of any derivative contract they have concluded, modified or terminated, to registered trade repositories (“TRs”) supervised by the European Securities and Markets Authority (“ESMA”). The reporting obligation applies to all counterparties, including non-financial counterparties, and to all derivative transactions (OTC and exchange-traded, cleared and non-cleared) of all asset classes. One of the objectives of EMIR is to reduce and identify systemic and counterparty risk and help prevent future financial system collapse by providing regulators with high quality data.
On 17 October 2019 ESMA published a report (the “Report”) on the results of a peer review (the “Review”) it conducted into the supervisory actions of six national competent authorities (“NCAs”) regarding their approaches to enhancing the quality of data reported under EMIR. The Review complements ESMA’s Data Quality Action Plan - a voluntary self-assessment exercise undertaken by NCAs and ESMA - in order to further improve the quality and usability of derivatives data. The review period ran from 1 January 2017 to 31 December 2018.
The Review examined six NCAs who supervise important derivative markets in the European Union (“EU”), namely: i) the Central Bank of Ireland (the “CBI”); ii) the Authority for the Financial Markets (AFM) in the Netherlands; iii) the Authority of the Financial Market (AMF) in France; iv) the Federal Financial Supervisory Authority (BaFin) in Germany; v) the Cypriot Securities and Exchange Commission (CySEC); and vi) the Financial Conduct Authority (FCA) in the UK.
The Review assessed how the six NCAs supervised data quality under EMIR in the following areas: a) NCAs’ supervisory approach to EMIR data quality; b) integration of EMIR data within the NCA’s overall supervisory approach; and c) NCAs’ access, assessment and analysis of EMIR data quality.
Overall, the CBI was considered to be one of the strongest performers amongst the NCAs examined. In all areas, the CBI broadly or fully met, or exceeded, the expectations set by the Review.
The publication by the CBI of the February 2019 industry letter on trade reporting, which we wrote about at the time, is commended as a “good practice” in the Report. The Report also notes that the CBI uses EMIR data as part of its approach to regulating other activities (for example, when undertaking thematic reviews of regulated investment funds). This approach was one of the recommendations made to other NCAs in the Report. The Report also notes that senior management within the CBI is routinely informed of developments relating to EMIR, including data quality issues. The level of senior management’s involvement sets the CBI apart from the other NCAs examined as part of the Review.
On the other hand, the Report also notes that improvements could be made by the CBI in the monitoring of the consistency and timeliness of reporting and the detection of duplicated reporting. In addition, the Report notes that the CBI’s data monitoring currently focuses primarily on Trade State Reports, and not other types of trade report. In addition, the CBI appears to focus on a selection of key information fields in reports when monitoring data quality.
The Report sets out a number of recommendations for each NCA, including the following for the CBI:
- exhibiting a more assertive approach to taking enforcement or administrative action against counterparties who mis-report;
- expanding the monitored dataset to include at least Trade Activity Reports as well as Trade State Reports; and
- putting in place procedures to monitor a broader selection of information fields on an on-going basis.
More broadly, the Report places an emphasis on the importance of ongoing and pro-active monitoring of data quality by NCAs, and on further integrating the collection and use of EMIR data with NCAs’ general supervisory approach to regulated entities.
It is clear that EMIR trade reporting continues to pose a challenge for market participants throughout the EU. The Report provides an interesting cross-jurisdictional analysis of the approaches and experiences of numerous key NCAs.
In general, the Report could be considered an endorsement of the CBI’s approach to monitoring compliance with the reporting obligation, including by pro-actively communicating its expectations to the industry. However, the recommendation that the CBI exhibit a more assertive approach to taking enforcement and administrative action in cases of non-compliance demonstrate that it is more important than ever for all counterparties to ensure that they have robust procedures in place to report their trades in an accurate and timely manner.