European investment managers of non-UCITs funds will have to be authorised as an alternative investment fund manager (known as an “AIFM” under AIFMD) under the Alternative Investment Fund Managers Directive (“AIFMD”) from 22 July 2014. From the date of an EEA investment manager’s authorisation as an AIFM (the “Authorisation Date”) any of its funds (known as Alternative Investment Funds, or “AIFs”, under AIFMD) that are counterparties to derivative contracts will also come within the scope of Europe’s regulatory reform of its derivative markets, known as the European Market Infrastructure Regulation (“EMIR”). Under EMIR, an off-shore AIF with an AIFMD-authorised AIFM will be defined as a “Financial Counterparty” and consequently subject to the fullest possible scope of the regulation. Specifically, a Financial Counterparty is expected to ensure details of its derivative contracts are reported to a central trade repository, all derivatives in-scope for clearing are cleared with a clearing house and, in respect of those contracts that are not centrally cleared, that it complies with the EMIR risk mitigation requirements.

Consequently, AIFMs should start preparations to ensure that their offshore AIFs comply with EMIR with effect from 22 July (or earlier if authorised as an AIFM prior to 22 July). The obligations under EMIR apply to the AIF rather than the AIFM, but practically speaking the AIFM will have to ensure that the AIF complies with those obligations.

A non-EEA AIFM that wishes to market an AIF in Europe through private placement is currently not required to be authorised as an AIFM, but only to register with the relevant national regulator. This registration will not bring the AIF within the scope of EMIR.

How are “Derivatives” defined in EMIR?

EMIR provides that a ‘derivative’ or ‘derivative contract’ means a financial instrument in points (4) to (10) of Section C of Annex I to Directive 2004/39/EC (MiFID) – being: 

(4) Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash;

(5) Options, futures, swaps, forward rate agreements 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 (otherwise than by reason of a 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 and/or an MTF;

(7) Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in C.6 and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognised clearing houses or are subject to regular margin calls;

(8) Derivative instruments for the transfer of credit risk;

(9) Financial contracts for differences; and

(10) Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates, emission allowances 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 (otherwise than by reason of a 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 Section, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognised clearing houses or are subject to regular margin calls.

The definition includes all types of derivatives, other than some physically settled commodity transactions. It does not include “spot” foreign exchange (FX) transactions.

There has been some confusion as to the difference between FX “forwards” (which are “in scope” for the definition above) and “spot” transactions (which are “out of scope”). The FCA in the UK considers FX transactions with a settlement period up to seven days, or those entered into for commercial purposes, to be “spot” transactions. Other Member States take the narrower view that FX transactions would need to be reported if the settlement period was more than two days. As a consequence, ESMA has asked the European Commission as a matter of urgency to clarify the definition of a derivative to ensure the uniform application of EMIR across all Member States. The European Commission released a consultation document on this issue on 10 April 2014 asking interested stakeholders to contribute. We await final confirmation on this position from the Commission.

Reporting the details of derivative contracts

The EMIR reporting obligation began across Europe on 12 February 2014. AIFs with Europe-based investment managers who were not yet authorised as AIFMs were not “in-scope” for reporting at that time. However, once such an AIF has a manager which is authorised under AIFMD, it must comply with the reporting requirement.

What needs to be reported?

An AIF which is counterparty to exchange-traded and over-the-counter (“OTC”) derivative transactions will have to report certain specified information to a trade repository no later than the working day following the creation of the contract. In certain circumstances the reporting obligation will also apply to the modification or termination of the contract.

“Modification” – This is generally taken to mean the modification of terms that were originally reported upon entry into the contract. If an existing uncleared contract is subsequently cleared by a central counterparty (a “CCP”), this should be reported as a modification of the existing contract.

“Termination” – ESMA says that when a contract is terminated on its original terms (i.e. terminated on the maturity date envisaged under the relevant contract) and the date has already been reported to the trade repository no further reporting is required on the termination date. Where the contract is terminated otherwise than on those original terms, counterparties must report this separately.

The reporting of certain additional information related to collateral exposure will commence in August 2014. Until then, the relevant collateral fields in the report to the trade repository should be left blank.

Timeframes for reporting

It is currently understood that the FCA will implement the reporting rules for offshore AIFs from the Authorisation Date on the following basis:

  • Trades entered into from the Authorisation Date must be reported on a T+1 basis (i.e. within one day of entering the trade) from the date the fund enters into the trade.
  • Existing trades that remain open on the Authorisation Date must be reported on a T+1 basis from the Authorisation Date.
  • There is no requirement to report trades that were entered into before the Authorisation Date but which were closed prior to the Authorisation Date. This effectively operates an exemption for offshore AIFs from certain aspects of the EMIR obligation to report “historic contracts”. However, we are yet to see an official statement to this effect.   

Reporting Data Requirements

Counterparties are to report by reference to 64 separate data fields. These cover both the transaction (common data), and the counterparties (counterparty data).

ESMA acknowledges that “although all fields are mandatory, not all will be filled by counterparties in all cases, as they may not apply for certain reasons”. This would be the case where the AIF is facing a counterparty who is not subject to EMIR and the AIF is therefore submitting “one-sided” reports (i.e. reports that include the AIF’s counterparty data, as well as the common data of the trade but not data in respect of its counterparty), the AIF would leave blank data field 7 in ‘Table 1- Counterparty Data’ (Financial or Non Financial nature of counterparty) and instead fill in data field 14 (Trade with Non-EEA counterparty).

Delegated or Direct Reporting

There are three possible approaches to fulfilling the reporting obligation:

  1. the AIF and the dealer each directly report to their preferred trade repository. If the AIF reports to a different trade repository from the dealer, the reported transactions will be reconciled via a Unique Trade ID (for more on UTIs, see below). If the AIF elects to report directly, it must select a trade repository, enter into any necessary contracts and agree pricing;
  2. the AIF delegates the reporting to the dealer. The dealer then reports the counterparty data of each party and the common data; or
  3. the AIF delegates responsibility to a third party, such as its administrator.  

Dealers and administrators have taken differing approaches to offering such services, and in some cases may expect to be paid a fee for providing the service.

An AIFM should assess whether it is operationally able to meet the tight timeframe for reporting derivative transactions on behalf of its AIF. As an alternative, the AIFM may prefer to delegate the reporting obligation as outlined above. In order to do so, the AIF would normally need to agree a form of an EMIR reporting delegation agreement with its delegate.

Generally speaking, larger asset management institutions may see advantages in reporting directly to their preferred trade repository, whilst smaller AIFMs may find it easier to delegate reporting responsibilities to their dealers.

An additional obligation to report valuation and collateral data begins in August 2014. AIFMs will need to establish how they will meet this requirement – there are indications that at least some dealers may not be prepared to carry out this reporting function on a delegated basis.

Access to a Trade Repository

Irrespective of any delegation arrangements, the obligation to report remains with the counterparties to the trade. Consequently, the AIF will still need to be able to access the trade repositories chosen by the dealers in order to review the information being submitted on its behalf, and to modify this where there are inaccuracies.

Legal Entity Identifiers (LEIs)

To meet its repository obligations the fund vehicle will need to obtain a legal entity identifier (LEI), which is a required field in the reporting form. LEIs are issued by Local Operating Units (LOU), such as the London Stock Exchange and CFTC. The global LEI issuance system remains under review and the LOUs are currently known as pre-LOUs, issuing pre-LEIs. It is understood that such pre-LEIs will automatically convert to LEIs once the full system is in force.

Unique Trade Identifiers

A Unique Trade Identifier (UTI) is also required to meet the reporting obligation. A UTI is an identifier of a given trade and remains the same throughout the life cycle of a trade. Dealers will typically take on responsibility for generating UTIs and providing them to their counterparties on a trade-by-trade basis.

Recordkeeping Requirements

The AIFM will have to keep (on behalf of the AIF) a record of any derivative contract that they have concluded, and any modification to such a contract, for at least five years after the contract has been terminated.

Risk Mitigation

The provisions of EMIR relating to risk mitigation began coming into effect in March 2013 (with the introduction of timely confirmation and the requirement for daily marking-to-market or marking-to-model). The rules now also cover portfolio reconciliation, portfolio compression and dispute resolution. In due course risk mitigation rules will also be introduced on exchange of collateral. AIFMs will have to ensure that they have documentation and operational capacity to ensure that their AIF complies with the rules when it enters into derivative contracts. Once clearing comes into force (see below), the AIFM will only have to ensure compliance with the risk mitigation rules for those types of derivatives that are out-of-scope for clearing.

The risk mitigation requirements will apply to financial counterparties in the following manner:

Portfolio Compression

Portfolio compression requires counterparties with 500 or more OTC contracts to have in place procedures to conduct a portfolio compression exercise regularly (at least twice a year), to enable them to terminate equal and offsetting trades with the same counterparty.

Dispute Resolution

Dispute resolution requires counterparties to have agreed detailed procedures and processes for the identification, recording and monitoring of disputes relating to the valuation of the contract and the exchange of collateral, and to implement agreed processes for resolving those disputes.

Timely Confirmation

An OTC contract must be confirmed (where available by electronic means) between the parties as soon as possible. The Regulations specify the number of business days following the date of execution of the derivative contract by when confirmation must be given.

Portfolio Reconciliation

Portfolio reconciliation requires counterparties to agree in writing a process for reconciling portfolios. The reconciliation must cover “key trade terms” and the trade valuation, and a process should be in place prior to entering into the trade. The frequency of the reconciliation depends on the number of derivative contracts outstanding between the two counterparties.

Portfolio reconciliation is to be performed by an AIFM periodically as follows:

  • each business day when the counterparties have 500 or more OTC derivative contracts outstanding with each other;
  • once per week when the counterparties have between 51 and 499 OTC derivative contracts outstanding with each other at any time during the week; and
  • once per quarter when the counterparties have 50 or less OTC derivative contracts outstanding with each other at any time during the quarter.

Daily Mark-to-Market

Daily Valuation requires an AIF which enters into uncleared OTC derivative contracts to mark-to-market on a daily basis the value of its outstanding derivative contracts. In circumstances where mark-to-market is not appropriate, a mark-to-model valuation is possible.

Exchange of Collateral

The draft regulatory technical standards (“RTS”) have yet to be approved and are currently in consultation. The requirement for “timely, accurate and appropriately segregated exchange of collateral” for non-centrally cleared OTC derivative contracts will apply to AIFs as financial counterparties.

Adhering to the EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol

Adherence to the ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol (the “Protocol”) assists counterparties in creating a framework to comply with certain aspects of the risk mitigation obligations. An AIFM that does not want to adhere to the Protocol may instead be able to enter into bilateral agreements with its dealers that incorporate the Protocol’s terms by reference.

Under the Protocol, counterparties must elect to be either a “Portfolio Data Sending Entity” (a “sending party”) or “Portfolio Data Receiving Entity” (a “receiving party”) for the purposes of portfolio reconciliation. Most on the buy-side have elected to be a receiving party. A receiving party receives data from the dealer (a sending party), which it must confirm or dispute within five business days. If the receiving party fails to do so within the time period, it will be deemed to have accepted the portfolio data. Consequently, there is a benefit, where there is the operational capacity to do so, in being a sending party as no such negative affirmation process applies in this case. Where both parties are sending parties, they exchange data and then reconcile any discrepancies, but no deemed acceptance will apply.

Financial Counterparties are expected to comply with the risk mitigation rules irrespective of where their counterparty is located. For certain of the risk mitigation requirements, compliance requires both parties to exchange data. Consequently, non-E.U. counterparties are being asked to comply with certain aspects of the EMIR rules even though they are not themselves directly subject to such rules.

It is important to note that the Protocol applies only to ISDA agreements entered into prior to the date that the AIF and its counterparty both adhered to the Protocol. For any future ISDAs, even if both parties have already adhered, they will need to include language in the ISDA schedule establishing that: (i) the parties have each adhered to the Protocol; and (ii) the parties agree that the terms of the Protocol will apply to this ISDA agreement.

The Protocol does not cover the timely confirmation, daily valuation or exchange of collateral, and parties should review their internal processes to comply with these rules.


Once clearing is in effect, AIFs will have to clear their in-scope derivative contracts. The EMIR clearing rules are drafted in such a way that they will apply even if the AIF is contracting with an offshore entity which would itself be subject to the clearing obligation if it was established in the EEA, or where ESMA has indicated that an alternative clearing regime that would also be able to clear the contract in question is “equivalent” with EMIR (at the moment, it is unclear how this will work in practice). AIFMs may wish to discuss with their bank counterparties how this is expected to operate.

AIFs will have to become either a clearing member of the CCP or a client of a clearing member to access the CCP. Dealers typically will be clearing members, and the AIF is likely to be a client of the clearing member. ESMA will establish and maintain a public register showing the derivative types that need to be cleared.

The most recent guidance from ESMA is that the entry into force of the RTS on the clearing obligation is expected anytime between November 2014 and June 2015. There could also be a phased-in implementation of the provisions of the RTS which may extend the start date for clearing derivative contracts further.

Retrospective Clearing: Frontloading

Counterparties in scope for clearing will be required to clear certain OTC derivative contracts on a “prospective” basis from when the clearing obligation starts, and certain OTC derivative contracts on a “retrospective” basis.

Contracts to be cleared on a retrospective basis are those derivatives in respect of which: (i) the contract has not expired by the time the clearing obligation is in effect; and (ii) the contract was entered into after a CCP was authorised under EMIR to clear the relevant contract but before the date the clearing obligation comes into effect. The first CCP to be authorised was NASDAQ OMX which was authorised on 18 March 2014. To complicate matters, there exist different frontloading periods for different derivative classes. For instance, the requirement to clear debt securities retrospectively commenced on 8 April 2014 when KDPW_CCP was authorised to clear those derivative contracts (which NASDAQ OMX was not authorised to clear on 18 March 2014). The full list of authorised CCPs and the derivatives they are authorised to clear are included in the ESMA Public Register for the Clearing Obligation under EMIR.

Until the RTS come into force for clearing there is no certainty as to which derivative contracts the retrospective clearing obligation will attach to; only that certain contracts exceeding a minimum remaining maturity period will have to be cleared. The uncertainty surrounding the requirement has raised a number of concerns, including the potential impact on pricing structures (since cleared derivatives have different cost structures from those that do not), market participation, market stability and market functionality.

On 8 May 2014, ESMA sent a letter to the European Commission proposing a solution to mitigate the negative impact of the frontloading requirement. ESMA proposes to articulate the clearing obligation in such a way that frontloading may only apply to contracts between the entry into force of the RTS and the date of application of the clearing obligation (rather than from the start of CCP authorisation). This would provide legal certainty on the contracts which are subject to the clearing obligation, on the date from which the clearing obligation takes effect and on the CCPs available to clear the relevant classes of derivatives. Another solution which has been put forward by the industry is for ESMA to set the minimum maturity periods remaining on the derivative contracts to such a high threshold that no derivative contracts would be caught by the retrospective clearing requirement. It remains to be seen whether the European Commission will approve either solution.

List of Registered Trade Repositories

Last updated by ESMA: 28 November 2013

The trade repositories listed below have been registered by ESMA in accordance with Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (European Market Infrastructure Regulation).

The derivative asset classes which can be reported to each trade repository are also mentioned. The first registrations took effect on 14 November 2013, with the reporting obligation beginning on 12 February 2014, i.e. 90 working days after the official registration date.

The list is published by ESMA in accordance with Article 59(3) of EMIR and it is updated within five working days following the adoption of a registration decision.

Click here to view the table.