Background to introduction of Irish EMIR Regulations
As an EU Regulation with EEA relevance, EMIR1 has direct effect in EEA Member States. However, EMIR imposes certain obligations on, and leaves certain discretions to, Member States, primarily relating to the:
- appointment and empowerment of a national competent authority to undertake certain EMIR functions; and
- establishment of a penalties regime applicable to infringements of EMIR requirements, which penalties are required to include at least administrative fines and to be “effective, proportionate and dissuasive”.
Having consulted2 earlier in 2014 on certain proposals in this regard, the Irish EMIR Regulations3, were made by the Minister for Finance of Ireland on 8 October 2014 and most4 of their provisions take effect from that date. Those Regulations:
- designate the Central Bank of Ireland (the “Central Bank”) as Ireland’s national competent authority5 for the purposes of EMIR;
- afford to the Central Bank the supervisory and investigatory powers considered by the Minister to be necessary for the exercise by the Central Bank of its functions as Ireland’s national competent authority; and
- establish Ireland’s sanctions regime for infringements of obligations imposed by EMIR and the Irish EMIR Regulations.
This briefing identifies important features of the Irish EMIR Regulations.
Appointment of the Central Bank as national competent authority
The appointment of the Central Bank as Ireland’s national competent authority for the purposes of EMIR and the Irish EMIR Regulations was non-controversial and had been publicly anticipated by the Central Bank, which had indicated on the EMIR section of its website6 that it was preparing for the role.
Powers of the Central Bank
The powers proposed to be afforded to the Central Bank have been the subject of some considerable market attention, particularly from market participants that would not otherwise be subject to Central Bank supervision. The Central Bank has been afforded all the powers necessary for the performance of its functions and duties under EMIR and the Irish EMIR Regulations including the following specific powers.
Central Bank powers - EMIR regulatory returns
With effect from 1 December 2014, the Central Bank may require a counterparty7 to:
- submit an “EMIR regulatory return” confirming whether or not, in respect of a specified period, it has complied with the Irish EMIR Regulations and any related rules or standards issued by the Central Bank; and
- appoint a “third party assessor”, which generally must be approved by the Central Bank, to:
- objectively assess whether the EMIR regulatory return has been prepared and completed in compliance with the Irish EMIR Regulations and any related Central Bank rules or standards; and
- countersign the EMIR regulatory return.
A proposed third party assessor will only be approved if, among other matters,
the Central Bank is satisfied regarding independence and absence of conflicts of interest. Although the wording of the relevant statutory provision in this regard is somewhat opaque, it appears that Central Bank approval of a third party assessor is not required where that third party assessor has been appointed
to conduct a statutory audit, or an audit that would but for the absence of a requirement for a statutory audit be a statutory audit, of the counterparty.
EMIR regulatory returns may not be required more than once in any 12 month period and the Central Bank may only require a return where it determines that it is necessary for the proper and effective supervision of the relevant counterparty, having had regard to whether any other powers available to the Central Bank under EMIR or the Irish EMIR Regulations would be more appropriate in the circumstances and the cost implications for the
counterparty of the EMIR regulatory return.
An EMIR non-financial counterparty (a “NFC”) is exempt from the requirement to submit an EMIR regulatory return where it has:
- had less than 100 outstanding over-the- counter (“OTC”) derivative contracts at any time during the relevant reporting period;
- outstanding OTC derivative contracts with a cumulative gross notional value of less than €100 million at the time the Central Bank requested the EMIR regulatory return; and
- delegated reporting of its OTC derivative contracts to a third party, or parties, during the entire of the relevant reporting period.
The Central Bank has confirmed on the EMIR
section of its website that, in the case of:
- EMIR financial counterparties (each, a “FC”) , the Central Bank’s supervision of compliance will be incorporated into its risk-based approach for supervision (PRISM); and
- Which encompasses an undertaking or person that enters into a derivative contract, within the meaning of EMIR, or is otherwise subject to EMIR.
- NFCs, the Central Bank has established a specialist EMIR unit to supervise compliance and undertake other
EMIR-related functions (eg processing applications for intragroup exemptions).
The Central Bank has also indicated that:
- NFCs will, unless exempt on the basis set out above, be required to submit a regulatory return on EMIR compliance sometime after March 2015; and
- it will follow up on any exceptions noted on a prioritised basis, with priority being given to cases of large scale non- reporting or high-value exceptions8.
Central Bank powers - issuing directions and contravention notices
The Central Bank is afforded certain powers to require the taking, or refraining from taking, by counterparties of certain actions, or to prohibit certain actions by counterparties. The powers afforded differ depending on whether:
- the counterparty is a FC or a NFC; and
- the Central Bank considers the exercise of the power necessary to ensure the stability and integrity of the financial
system in Ireland or another EEA Member State or to ensure compliance with EMIR or, where applicable, the Irish EMIR Regulations or to prevent a contravention of EMIR or the Irish EMIR Regulations.
These Central Bank powers are exercisable in respect of a FC by the issue of a “direction”, which the Central Bank may issue for any of the following purposes:
- ensuring the stability and integrity of the financial system in Ireland or another EEA Member State;
- ensuring the relevant counterparty’s compliance with EMIR; or
- preventing a contravention by any person of EMIR or the Irish EMIR Regulations.
A direction may also be issued to a FC to rectify, to the satisfaction of the Central Bank, any errors or omissions in data returns made by the FC to a trade repository and to resubmit such data to the repository without delay.
A direction may only be issued to a NFC where the Central Bank considers the exercise of the power necessary to ensure the stability and integrity of the financial system. In all other circumstances
the relevant Central Bank powers are exercisable by the issue of a “contravention notice” to the NFC, requiring the NFC
to take or refrain from taking specified actions. A different approach is taken to each of FCs and NFCs regarding one of the purposes for which direction notices and contravention orders may be issued; a contravention notice may be issued to a NFC to ensure compliance with EMIR or the Irish EMIR Regulations, whereas a direction may be issued to a FC to ensure compliance with EMIR but not the Irish EMIR Regulations.
Unlike directions, contravention notices must set out certain specified information including the reason for the Central Bank’s opinion that it is necessary to issue the contravention notice, the date by which the contravention or other matters occasioning the notice must be remedied and information regarding the NFC’s right of appeal to the High Court against the notice. Contravention notices do not, regardless of their terms, take effect until the period for appeal has expired or, if an appeal is made, until the notice is confirmed or varied on appeal, or the appeal is withdrawn.
In broad terms, the Irish EMIR Regulations provide for applications by the Central Bank to the High Court to enforce directions and seek orders for compliance with contravention notices. They also allow for persons to apply to the High Court to set aside or vary directions and appeal against contravention notices. The timeframes for such appeals/applications are short; generally they must be brought within 14 days of receipt of the direction or contravention notice. The High Court is specifically permitted:
- to make interim and interlocutory orders in relation to failures to comply with contravention notices; and
- in certain circumstances to hear proceedings relating to directions and contravention notices in private.
Central Bank powers – requiring a reviewer’s report
The Central Bank may require a FC, or a NFC that has (or, but for certain exclusions from the calculation of positions, would have) exceeded a clearing threshold (a “reviewee”) to provide to the Central Bank a report or documents on any specified matter on which the Central Bank has required, or could require, the provision of information. The provider of the report (the “reviewer”) is appointed by, and
at the cost of, the reviewee and may be nominated by the reviewee or the Central Bank but, if nominated by the reviewee, must be approved by the Central Bank. The contract of appointment of a reviewer is subject to certain statutory requirements. The requirement to provide such a report or documents may only be imposed for
the purposes of the proper and effective implementation of EMIR and the Irish EMIR Regulations and the Central Bank must first have had regard to:
- whether any other powers available to it under financial services legislation would be more appropriate in the circumstances;
- the relevant knowledge and expertise available to the reviewer; and
- the cost implications for the reviewee of providing the report, the resources available to the reviewee and the benefit to the reviewee of providing the report.
Obligations are imposed on both the reviewer and reviewee regarding the report and the Central Bank may apply for a court order to enforce related statutory, and contractual, obligations or issue a direction or contravention notice in respect thereof.
Central Bank powers – appointment of authorised officers and assessors
The Central Bank has the power to appoint authorised officers, with powers of entry, search, inspection and other related powers, to monitor compliance with EMIR or the Irish EMIR Regulations.
It also has the power, where it has reasonable grounds to suspect that a prescribed contravention is being, or has been, or committed by a person (an “assessee”), to appoint one or more assessor(s) (each of which shall, if it is not an officer, employee or official of the Central Bank, be its agent) to assess:
- whether that is the case; and
- if it is the case, the appropriate sanction(s), if any, in respect of the contravention.
The assessor must consider any written (and, if permitted by the assessor, oral) submissions that may be made by the assessee and issue an assessment. The assessor is given extensive powers to require witnesses to appear and give evidence and to produce documents and the assessor may refer questions of law to the High Court. If the assessor decides
that a prescribed contravention is being or has been committed, the assessment must include the grounds for that assessment,
a summary of the evidence upon which it is based and a statement of the sanctions which the assessor considers appropriate.
Unlike a report undertaken by a reviewer, which is expressly stated not to be binding on, or to constitute a decision or opinion of, the Central Bank, an assessor’s assessment is deemed to constitute a decision of the Central Bank.
The Irish EMIR Regulations set out requirements for, among other matters, the notification of the assessee, the procedure for undertaking assessments and form of the assessment, the assessee’s right of appeal to the High Court against an adverse assessment and any specified sanctions, the nature of the sanctions that may be imposed and the taking effect and enforcement of assessments and specified sanctions. Any appeal against an adverse assessment has generally to be filed within 28 days of receipt of a copy of the assessment.
The Irish EMIR Regulations contain specific provisions allowing the High Court:
- to make interim and interlocutory orders in connection with any appeal against an adverse assessment; and
- in certain circumstances to hear proceedings relating to appeals against adverse assessments in private.
The Central Bank may apply to the High Court for an order confirming the adverse assessment (including the sanctions).
Sanctions include public and private cautions and reprimands, directions to cease committing the relevant
contravention, directions to pay monetary penalties (not exceeding €2,500,000) and payment of the Central Bank’s costs of the investigation. The Irish EMIR Regulations identify matters to which the Central Bank is required to have regard in imposing sanctions. The Central Bank is required
to publish details of sanctions imposed, provided that it does not consider that such publication would seriously jeopardise the financial markets or cause disproportionate damage to the parties involved.
Central Bank powers – implications of designation as a “designated enactment”
By designating EMIR, certain EMIR- related EU Commission regulations and the Irish EMIR Regulations as “designated
enactments” for the purposes of the Central Bank Act 1942, as amended, various existing Central Bank powers (including to gather
information, appoint authorised officers and request reports) under the Central Bank (Supervision and Enforcement) Act 2013 are extended to encompass them.
The Irish EMIR Regulations provide for the following offences:
- obstructing or impeding a reviewer in respect of, or providing to a reviewer information known to the provider
to be false or misleading in a material particular in relation to, the preparation of a report or the provision by a reviewer to the Central Bank of information known to the reviewer to be materially false or misleading, in respect of which the offender is liable upon summary conviction, to a maximum fine of
€5,000 or imprisonment for a term not exceeding 12 months, or both, or on conviction on indictment, to a fine not exceeding €250,000 or imprisonment for a term not exceeding 3 years, or both;
- a central counterparty or a trading venue contravening EMIR or the Irish EMIR Regulations, in respect of which the offender is liable upon summary conviction to a maximum fine of
€5,000 or imprisonment for a term not exceeding 6 months, or both, or on conviction on indictment to a fine not
exceeding €500,000 or imprisonment for a term not exceeding 36 months, or both;
- a central counterparty, clearing member of a central counterparty, trading venue or counterparty to a derivative contract obstructing or interfering with an authorised officer in the exercise of a power conferred on it by the Irish EMIR Regulations or, without reasonable excuse, refusing or failing to comply with a request or requirement of an authorised officer made in accordance with such a power, in respect of which the offender
is liable upon summary conviction to a maximum fine of €5,000 or
imprisonment for a term not exceeding 12 months, or both;
- a central counterparty, clearing member of a central counterparty, trading
venue or counterparty to a derivative contract, in purported compliance with a requirement imposed on it under EMIR or the Irish EMIR Regulations, providing to the Central Bank information knowing it to be false or misleading in a material particular, in respect of which the offender is liable upon summary conviction to a maximum fine of
€5,000 or imprisonment for a term not exceeding 12 months, or both.
Where a body corporate commits an offence under the Irish EMIR Regulations, a person who is a director, manager, secretary or other officer of that body corporate,
or who purported to act as such, may in certain circumstances also be treated as having committed an offence.
As anticipated, given the approach taken to this issue by the Department of Finance in the related consultation paper, the Irish EMIR Regulations do not address the issue
of the categories of FX forward transactions that are to be treated as derivative contracts for the EMIR purposes. The Central
Bank’s August 2014 guidance remains on its website, being that, in the absence of further initiatives by EU authorities:
- all FX transactions with settlement before or on the relevant spot date are not to be reported;
- all FX transactions with settlement beyond seven days are to be reported;
- all FX transactions with settlement between the spot date and seven days (inclusive) are to be reported only if, in a jurisdiction where one counterparty to the trade is located, local laws, rules or guidance would deem the transaction
reportable. Further, in respect of such FX transactions:
- where one counterparty is located in a jurisdiction other than Ireland,
the Irish counterparty should rely on documentation from that counterparty to inform it that there is a requirement in that counterparty’s jurisdiction; and
- where both counterparties are located in Ireland they:
- should not currently consider themselves as obliged to report such transactions (this guidance is expressed to be a “temporary measure”);
- should report such transactions where they have systems in place to do so; and
- for the purpose of building systems that will continue to operate in the medium to longer term, should build capacity to report such transactions.
The Central Bank has further indicated that its advice in this regard is likely to remain unchanged at least until the EU Commission indicates whether and how it might use powers due to be conferred on it under (MiFID II) in this regard.