The final measures of the European Market Infrastructure Regulation (EMIR) came into force on 12 February 2014. All entities that enter into any derivative contract in the EU will be affected by EMIR, which was directly applicable in all Member States.
EMIR was introduced in light of the financial collapse in 2008. Many blamed the collapse on the lack of transparency in the Over the Counter (OTC) derivatives market and how the risk in this area was managed. EMIR covers three primary areas:
- clearing through a central counterparty; and
- risk mitigation.
Application of EMIR
All entities incorporated in the EU and that enter into derivative contracts come within the scope of EMIR. EMIR essentially applies to central counterparties (CCPs), trade repositories (TRs) and all counterparties who enter into derivative trades which are categorised into financial counterparties and non-financial counterparties (NFC). Financial counterparty is a very broad definition under Article 2(8) of EMIR with the following being caught within the definition:
- Alternative Investment funds (AIFs) authorised or registered in the EU
- Firms authorised under the Markets in Financial Instruments Directive (MiFID firms)
- Credit Institutions
- Undertakings for Collective Investment in Transferable Securities (UCITS) funds; and
- Insurance undertakings.
The definition of NFC is a catch-all to include any unregulated EU entity such as a special purpose vehicle or corporate finance structure entering into derivative contracts. It would also include those entities using OTC derivative contracts to protect themselves against commercial risks due to their commercial activities.
What is a Derivative?
Article 2 of EMIR cross refers to the definitions of "derivative" and "derivative contract" as they appear in Annex 1 of MiFID. However MiFID has been transposed into local laws differently across the various Member States. This issue is particularly evident in the context of foreign exchange forwards and physically settled forwards.
The European Commission has released a consultation document seeking views on where the boundary lies on what an FX instrument is and the definition of a spot FX instrument.
In the interim, the Central Bank has published a set of Frequently Asked Questions (FAQ) for reporting under EMIR. The FAQ may change once the European Authorities have decided on a uniform approach. The FAQ are available here.
Reporting Requirements and Deadlines
Article 9 of EMIR states all derivative contracts are subject to the reporting obligations of EMIR; be it traded on-exchange or OTC. While some intragroup transactions and pension scheme arrangements can gain exemptions under other EMIR obligations, there are no exemptions from the reporting obligations. All counterparties entering into derivatives contracts and CCPs to derivatives contracts must compile reports of the transactions to a trade repository (a TR).
All contracts entered into since 12 February 2014 must report to a TR no later than the next working day after the contract has been entered into, terminated or been modified. There are various deadlines for the reporting of contracts that were entered into before 12 February 2014, with the final reporting dates for the following contracts outlined below:
Click here to view table.
Annex 1 of the Regulation (E.U.) No. 148/2013 outlines exactly what must be reported to the TR and Annex 2 outlines what common data must be reported. The Regulations can be found here.
Reporting Responsibilities and Delegation
It is the responsibility of every counterparty to a derivative contract to ensure that the contract is reported to a TR. This can be done by the counterparty itself or alternatively it is also possible that the other counterparty in the transaction will take the responsibility of reporting. A CCP may also be designated to take on the responsibilities.
It is possible to delegate your reporting responsibilities to a third party. The third party must have access to all your trade information and ensure no duplication in reporting. It is important to note that the legal responsibility for reporting still lies with the original party, despite the delegation. As such it is crucial that checks are present to ensure the reporting is accurate and timely.
- When contracting in derivatives, decide who is responsible for the reporting; you or the counterparty?
- If it is you, will you be responsible for the report or will you appoint a third party?
- If a third party is appointed, how will this arrangement be documented?
- What checks and balances will be present to ensure the third party is fulfilling its obligations?
- We recommend live testing of your reporting procedures to ensure all data is being accurately captured, recorded and reported.