On 4 December 2014 the Central Bank of Ireland (the “Central Bank”) published Consultation Paper 90, a ‘Consultation on the Supervision of Non-Financial Counterparties under EMIR’ (“CP 90”) (available here).
Purpose of CP 90
As the sole national competent authority in the State for EMIR1, the Central Bank has supervisory responsibility for EMIR compliance. CP 90 addresses one aspect of that responsibility: the supervision of EMIR compliance for Non-Financial Counterparties (“NFCs”). In CP 90 the Central Bank describes:
- the challenges faced by it in discharging that new supervisory responsibility, being:
- identifying the NFCs subject to EMIR (other than those that exceed the clearing threshold which are, therefore, required to notify their status as such to the Central Bank and ESMA) and understanding the business undertaken by them;
- creating a supervisory framework that is fit for purpose, cost effective and thorough without being excessively intrusive; and
- the proposed supervisory framework which it has developed to meet those challenges,
and seeks stakeholder feedback on that proposed framework, generally, and on certain specific questions posed in CP90.
Overview of the Proposed Supervisory Framework
Categorisation of NFCs
The categorisation which the Central Bank proposes to underpin the supervisory framework is as follows:
- “Small NFCs”: non-complex NFCs, trading derivatives primarily to hedge foreign exchange risk, in low volumes and in a relatively risk-averse way. This category includes, but is not limited to, NFCs that meet the conditions set out in the Regulations2 for exemption from any Central Bank requirement to submit an EMIR regulatory return (the “ERR Exemption”). See further below regarding such returns;
- “Medium Sized NFCs”: NFCs with significant positions in derivatives, but which:
- are not large enough individually to be of systemic concern or complex enough to require bespoke supervisory frameworks;
- do not meet the conditions for the ERR Exemption; and
- are beneath the EMIR clearing threshold 3; and
- “Large NFCs”: NFCs which:
- have derivative positions that exceed the EMIR clearing threshold; or
- have derivative positions that would exceed the EMIR clearing threshold but for the fact that certain positions are excluded from the relevant calculations on the basis that they hedge commercial or treasury financing activities.
The Central Bank has requested feedback on whether this is the optimal categorisation to underpin its supervisory framework.
EMIR Regulatory Return
The Regulations entitle the Central Bank to require entities subject to EMIR to submit an EMIR compliance self-assessment - an EMIR Regulatory Return (“ERR”) - and to require that any such ERR be independently assessed, at the cost of the entity submitting it, prior to submission. An ERR may not be required more than once in a 12 month period. The Regulations exempt NFCs meeting certain conditions from any such requirement ERR (the ERR Exemption referred to above). The proposed form of ERR, and draft independent assessor’s report of factual findings, are set out as Annex One to CP90. The Central Bank has sought feedback on the form and content of the ERR, related professional disclosures and the role of the independent assessor.
Proposed Supervisory Approach
The Central Bank proposes that:
- Small NFCs would be subject to both targeted and random thematic inspections on a sample basis which may, in the case of Small NFCs that do not meet the conditions for the ERR Exemption, involve the submission of a tailored ERR which would not be subject to independent assessment;
- Medium-Sized NFCs would be required to submit an annual ERR. The Central Bank is considering excluding certain Medium-Sized NFCs from the obligation to have its ERR independently assessed and has sought feedback on the appropriateness of that proposal and, if it is considered appropriate, the threshold at which the requirement for independent assessment should be set. The Central Bank also envisages that certain Medium-Sized NFCs may, subject to Central Bank consent, choose to opt-in to the supervisory regime proposed for Large NFCs, involving direct engagement with the Central Bank; and
- Large NFCs would be subject to the supervisory approach adopted by the Central Bank in respect of Financial Counterparties, involving direct engagement with the Central Bank on an on-going basis.
It is envisaged that, where a NFC is required to submit an ERR, it must be submitted annually but that the NFC will have flexibility regarding the timing of submission so that its preparation could, if appropriate, be aligned with the NFC’s preparation of its annual financial statements.
The Central Bank has sought feedback on this proposed supervisory approach, including the timing issue referred to above.
Anticipating NFC focus on the likely cost implications of the new supervisory regime, the Central Bank notes that the ERR supervisory model, involving direct engagement between a NFC subject to that model and the independent assessor (if independent assessment is required), will enable such NFCs to exercise control over applicable costs. The Central Bank has sought feedback on how it would charge costs to NFCs if the ERR model was not adopted. CP90 confirms that a NFC that is subject to a direct engagement supervisory model (a Large NFC, or a Medium-Sized NFC that opts-in to that model with Central Bank consent) will contribute to the Central Bank’s costs of supervising that NFC. CP90 does not provide any information on how those costs might be calculated. Nor does CP90 definitively confirm that a NFC subject to the ERR supervisory model would not be required to make any contribution to the Central Bank’s supervisory costs in connection with that NFC.