From 12 February 2014, all UK companies will be required to report certain information relating to their derivative contracts, whether traded over-the- counter (OTC) or on an exchange, to a registered or recognised trade repository (TR).

Background

The reporting obligation forms part of the requirements imposed by EU Regulation on OTC derivative transactions, central counterparties and TRs (Regulation 648/2012) (also known as the European Market Infrastructure Regulation (EMIR)). EMIR aims to implement within the European Union the G-20 leaders’ commitment to improve the transparency of, and reduce the risks associated with, the derivatives market.

The primary obligations imposed by EMIR relate to clearing, reporting and risk mitigation of derivatives trades.

The Reporting Obligation

Despite a request from the European Securities Markets Authority (ESMA) that the reporting obligation in respect of exchange traded derivatives be delayed by one year, in order to give market participants sufficient time to put in place the necessary systems and procedures, the reporting obligation will come into full effect on 12 February 2014.

The obligation to report trades will apply in respect of: (i) any historic trades that were in existence on 16 August 2012 (even if now terminated); (ii) any new trades since that date; and (iii) any future trades. Unlike certain of the other obligations under EMIR, there is no exemption from reporting for intra- group derivative trades. Below is a summary of the deadlines for the reporting obligations in relation to new and historic trades:

Click here to view table.

The details to be reported to the TR relate to both the parties themselves and the contract, and are laid down in the secondary legislation implementing EMIR.

Reporting must be to a TR registered in accordance with EMIR (or a non-EU TR recognised under EMIR). There are currently six registered TRs. These are:

  • DTCC Derivatives Repository Ltd.;
  • Krajowy Depozyt Papierów Wartosciowych S.A.;
  • Regis-TR S.A.;
  • UnaVista Ltd.;
  • CME Trade Repository Ltd.; and
  • ICE Trade Vault Europe Ltd.

ICE Trade Vault Europe Ltd. has been registered as a TR for commodities, credit, equities, interest rates derivatives only, while the other TRs have been registered for all asset classes.

The reporting obligation applies to both parties, but can be delegated to a third party or to the counterparty to the contract. However, while the reporting may be delegated, the legal responsibility for reporting cannot. Where a company and its counterparty submit separate reports of the same trade, they should ensure that the common data is consistent in both reports.

The sanctions for breaches of EMIR are to be implemented by way of national laws in each EU Member State, though they must include, at least, administrative fines. In the UK, the Financial Services and Markets Act 2000 (Over the Counter Derivatives, Central Counterparties and Trade Repositories) Regulations 2013 appoint the Financial Conduct Authority (FCA) as the competent authority for financial counter- parties, non-financial counterparties and trading venues and give the FCA powers to impose penalties for contravention of EMIR “of such amount as it considers appropriate”. The FCA has also recently published an FAQ on EMIR which can be found at: http://www.fca.org.uk/firms/markets/international-markets/emir.

Required Action

Any existing transaction documentation should be updated to take account of the obligations imposed by EMIR. The International Swaps and Derivatives Association (ISDA) published the ISDA 2013 Reporting Protocol (the Reporting Protocol) which is designed to allow multiple ISDA Master Agreements to be simultaneously amended to facilitate reporting. The Reporting Protocol provides that each party consents to the disclosure of information as required by transaction reporting rules, including required disclosures to a TR under EMIR.

In addition, UK companies should agree with their counterparties how to satisfy the reporting obligation and to determine whether reporting can be delegated. Many sell-side counterparties are offering delegated reporting services to their customers and have developed standard form reporting agreements. ISDA has also published an EMIR Reporting Delegation Agreement (produced jointly with the Futures and Options Association) which could form the basis of documenting any delegation of reporting. This is a standalone reporting agreement governed by English law. Its terms contemplate that one party will submit data relating to certain derivative contracts to a TR agreed by the parties on behalf of the other party.

In practical terms, unless the reporting obligation can be outsourced or delegated, this will require all UK companies that enter into derivatives to develop contractual arrangements with one or more TRs.

Finally, in order to report, a company will be required to obtain a pre-Legal Entity Identifier (LEI) code which is a global reference code that uniquely identifies the relevant legal entity. UK companies can apply for a pre-LEI code through the London Stock Exchange at http://www.lseg.com/LEI.