18 June 2020 will mark one year since the EMIR1 Refit Regulation2 (the “EMIR Refit”) came into force.
On the same date, the reporting responsibility changes introduced by the EMIR Refit will take effect.3 In this alert we summarise those changes and look ahead to what is next for regulatory reporting in this space.
Who is in scope?
EMIR Financial Counterparties ("FCs")4 that are AIFs and UCITS and Non-Financial Counterparties ("NFCs")5 below the clearing threshold6, so-called “NFC-s”.
When do the changes take effect?
Thursday, 18 June 2020.
What are the changes?
The changes relate to the EMIR reporting obligation, which took effect in February 2014 and which requires in-scope entities to report the details of OTC and exchange traded derivatives to registered trade repositories on a T+1 basis.
Currently: Each in-scope entity that is principal to a relevant derivatives transaction is responsible for making its own report, so AIFs, UCITS and NFC-s are each responsible for, and must arrange, their own reporting.
Revised: For OTC derivatives only, UCITs, AIFs, and NFC-s will no longer be primarily responsible for their own reporting:
• UCITS: Instead of the UCITS itself, the UCITS management company (“ManCo”) will be responsible for reporting the details of OTC derivatives to which that UCITS is counterparty and ensuring the correctness of the reports.
• AIFs: Instead of the AIF, the authorised or registered AIFM will be responsible for reporting the details of OTC derivatives to which the AIF is counterparty and ensuring the correctness of the reports (non-EEA managers are not currently in scope). These changes may prompt management companies and EU AIFMs to revisit current reporting arrangements with sub-investment managers.
• NFC-s: Instead of the NFC- being responsible for its own OTC derivatives reporting, FCs will become responsible for reporting OTC derivatives between FCs and NFC-s and ensuring the correctness of the details reported. Whilst these changes signal a move towards one-sided reporting:
• NFC-s are free to do their own reporting and, if so, must inform their counterparties that the NFC- will remain responsible for its own reporting.
• Until there is an equivalence decision on EMIR reporting requirements, if an NFC- trades OTC with a third country entity (“TCE”), the reporting exemption in the EMIR Refit7 will not apply and the NFC- will remain responsible for reporting. The NFC- is, however, free to delegate reporting to such TCEs.
Changes consistent with those for UCITS and AIFMs will also apply to IORPs8 that do not have legal personality, where the responsibility for EMIR reporting will shift from the IORP to the authorised entity responsible for managing that IORP.
The general right to delegate reporting remains unchanged.
Which OTC trades?
All new OTC derivatives entered into on or after Thursday, 18 June 2020.
• Consider your own EMIR position. Are you in scope for the changes? If so, how do you currently satisfy your EMIR reporting obligations? Might these arrangements be affected by the changes?
• Check delegated reporting arrangements. If you already delegate reporting responsibilities, these changes may have little practical impact. However, for UCITS and AIFs, it will be the UCITS ManCo and AIFM respectively that will now be legally responsible for reporting. You should consider how any associated apportionment of liability will be addressed.
• Check you are set up operationally. ISDA have published a short note in relation to operational aspects of the changes.9 The note focuses on NFC-s and FCs but there are also more general takeaways: for example the primary text of the EMIR Refit does not address all aspects of reporting, such as lifecycle events for existing trades that occur after 18 June 2020.
• Brexit – I am a UK counterparty. Will I still be subject to the changes? Yes.
Watch this space
• ESMA EMIR Q&A. On Thursday, 28 May 2020, ESMA issued updated EMIR Q&As, including a new question on the reporting of OTC derivatives by an FC on behalf of an NFC-.10 Further updates may follow.
• ESMA March 2020 reporting Consultation Paper.11 Reporting arrangements will need to be reviewed in the light of this new Consultation Paper, which sets out new draft implementing technical standards (ITS) for reporting. The closing date for responses is 19 June 2020, with the final report expected to be published later in the year. There have been calls to extend the date for responses to later in the summer but at the time of writing the deadline remains unchanged.
• SFTR12 reporting. Although the first go-live date for SFTR reporting was delayed in March, the next go-live dates are looming, with phase 2 due to take effect in October 2020. Our previous SFTR-related Client Alerts13 provide further detail on this. The shift in responsibility to the UCITS ManCo and AIFM is hardwired into the primary text of the SFTR.
• MRRA. In late 2019, the new Master Regulatory Reporting Agreement (MRRA), covering delegated reporting under both EMIR and SFTR, was released.14 To date we have not seen a significant uptake of this agreement, but expect to do so ahead of the SFTR reporting requirement taking effect.
• Reporting standards still under the spotlight. More generally, as we reported in our May 2019 EMIR Refit note, the European authorities are seeking to improve reporting standards generally, with “harmonisation” and “effectiveness and efficiency” as strong themes. This is likely to lead to further developments.
1) The European Markets and Infrastructure Regulation, Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, whose primary text can be found here.
2) Regulation (EU) 2019/834 of the European Parliament and of the Council of 20 May 2019, amending EMIR as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories, whose primary text can be found here.
3) Our May 2019 EMIR Alert details the key changes introduced by the EMIR Refit. You can find that Alert here.
4) A "Financial Counterparty" or "FC" means:
(a) an investment firm authorised in accordance with Directive 2014/65/EU of the European Parliament and of the Council;
(b) a credit institution authorised in accordance with Directive 2013/36/EU of the European Parliament and of the Council;
(c) an insurance undertaking or reinsurance undertaking authorised in accordance with Directive 2009/138/EC of the European Parliament and of the Council;
(d) a UCITS and, where relevant, its management company, authorised in accordance with Directive 2009/65/EC, unless that UCITS is set up exclusively for the purpose of serving one or more employee share purchase plans;
(e) an institution for occupational retirement provision as defined in point (1) of Article 6 of Directive (EU) 2016/2341 of the European Parliament and of the Council;
(f) an alternative investment fund (AIF) as defined in point (a) of Article (4)(1) of Directive 2011/61/EU, which is either established in the Union or managed by an alternative investment fund manager (AIFM) authorised or registered in accordance with that Directive, unless that AIF is set up exclusively for the purpose of serving one or more employee share purchase plans, or unless that AIF is a securitisation special purpose entity as referred to in point (g) of Article 2(3) of Directive 2011/61/EU, and, where relevant, its AIFM established in the Union;
(g) a central securities depositary authorised in accordance with Regulation (EU) No 909/2014 of the European Parliament and of the Council.
5) "Non-Financial Counterparty" or "NFC" means an undertaking established in the Union other than the entities referred to in the definition of "financial counterparty" above. "Union" means any Member State of the European Economic Area (“EEA”).
6) All EMIR FCs and NFCs taking positions in OTC derivatives may calculate every 12 months their aggregate month-end average position for the previous 12 months by reference to certain clearing thresholds which differ depending on the OTC derivatives class in question – a gross notional value of EUR 1 billion for credit and equity derivative contracts and EUR 3 billion for interest rate, foreign exchange and commodity derivative contracts. EMIR as amended by the EMIR Refit prescribes all relevant detail. This includes differences in the calculation for FCs and NFCs and related notifications. We included detailed consideration of the changes the EMIR Refit introduced in that respect in our May 2019 note.
7) See new Article 9 1a of the EMIR (set out in Article 1 (7)(b) of the EMIR Refit).
8) An institution for occupational retirement provision, as defined in point (1) of Article 6 of Directive (EU) 2016/2341 of the European Parliament and of the Council of 14 December 2016 on the activities and supervision of institutions for occupational retirement provision.
9) ISDA’s ‘EMIR Refit operational considerations’ note can be found here.
10) The new ESMA EMIR Q&A can be found here.
11) The ESMA Consultation Paper issued by ESMA, “Technical Standards on reporting, data quality, data access and registration of Trade Repositories under EMIR REFIT” of 26 March 2020 can be found here.
12) Regulation (EU) 2015/2365 (the “Securities Financing Transactions Regulation”) of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012.
13) See “SFTR Alert: buy-side reporting reprieve”, February 2020, which can be found here and “SFTR Alert: Reporting Countdown”, April 2019, which can be found here.
14) The related ISDA press release and link to the MRRA itself and related explanatory note can be found here.