On the heels of the initial reporting requirements under Article 9 of EMIR and the ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol, the next stage of reporting requirements has come into effect. As of 11 August 2014 (180 days after the start of the 12 February 2014 reporting obligations) EMIR now requires valuation and collateral reports for all outstanding derivative positions and collateral posted.
WHAT DOES THE REPORT REQUIRE?
The report must include the mark to market value of OTC or exchange traded derivatives (ETDs), if the trade is collateralised, as well as the value of the collateral. Valuations must be reported both by the dealer and the client at the end of the day following the execution of the contract. Collateral valuations must be reported by the end of the day following the valuation date by the trade party posting collateral. For ETDs and cleared trades, valuations must be reported by the clearing house (CCP), clearing broker and the client to a Trade Repository (TR) that is monitored and regulated by ESMA in accordance with Article 55 of EMIR or a non-EU trade repository recognized in accordance with Article 77 of EMIR.
WHO IS AFFECTED?
It is important to understand your status under EMIR in order to decide whether or not to adhere to the Protocol. Although reference to “counterparties” initially caused some confusion, ESMA clarified the position: the reporting requirement applies only to FCs and NFCs. FCs, or financial counterparties, are entities subject to certain EU legislation, such as banks, investment firms, insurance companies, pension funds, UCITS funds and alternative investment funds managed by fund managers authorized under AIMFD.
The level of reporting by NFCs, or non-financial counterparties, under EMIR depends on the volume of OTC derivatives trading activity in which they are engaged. If above a certain level, they are called NFC+s, and if below this level, NFC-s, which do not bear the same reporting requirements. This could include large corporations or investment funds established in the EU but managed by a US manager. Note that once such funds (or funds established outside the EU) are managed by EU AIFMs authorised or registered under the AIFMD, then they will be considered FCs and thereby subject to more stringent regulatory reporting requirements.1
WHAT AGREEMENTS ARE COVERED?
According to the ISDA/EMIR guidance notes, the reporting obligation applies to derivative contracts which:
- Were entered into before 16 August 2012 and remained outstanding on that date: or
- Are entered into on or after 16 August 2012.2
The Protocol does not relate solely to ISDA Master Agreements and includes ISDAs that have been executed between two adhering parties prior to the implementation start date, as well as to “deemed” ISDA master agreements that have arisen by adhering parties executing (again, prior to the implementation date) any long-form confirmation entered into before or after implementation. As well as any pre-implementation executed ISDA Master Agreement and any pre-implementation date umbrella agreement signed by an agent.3 The ISDA Master Agreements covered by the Protocol are called “Covered Master Agreements”.4
CAN I USE A DELEGATE?
Reporting may be done directly or through the use of counterparties by delegation. Market participants using delegated reporting services are obliged to provide any counterparty data required in order to facilitate the reporting delegate’s compliance with its obligations. These counterparties are required to report the details of any derivative contract they have concluded and any modification or termination of the contract to a registered or recognised trade repository.
WHAT IF INCORRECT OR MISLEADING INFORMATION IS PROVIDED?
If there has been a proven misrepresentation, with the result that an OTC derivative contract subject to these regulations has not been cleared or the prescribed mitigation procedures have not been applied, while this may not constitute a default, parties are subject to additional mitigation requirements. If these procedures are not adhered to, either party may terminate the relevant OTC derivative contract. In either case, a balancing payment may be payable.5
It is important to note that clearing obligations for NFC+s (“systemically important” non-financial counterparties) will begin in 2015. Collateral exchange requirements will also be phased in in 2015.