In this case report, we consider the High Court’s judgment in European Securities and Markets Authority v DTCC Derivatives Repository Limited [2015] EWHC 1085 (Ch), in which the High Court clarified the process that the European Securities and Markets Authority (ESMA) will need to follow in order to obtain authorisation to carry out an inspection of a trade repository in England for the purposes of EMIR (Regulation 648/2012).

In this case report, we consider the High Court’s judgment in European Securities and Markets Authority v DTCC Derivatives Repository Limited [2015] EWHC 1085 (Ch), in which the High Court clarified the process that the European Securities and Markets Authority (ESMA) will need to follow in order to obtain authorisation to carry out an inspection of a trade repository in England for the purposes of EMIR (Regulation 648/2012).

In its judgment, the High Court also made some interesting comments regarding the importance of allowing firms to preserve privilege over privileged information and documents. Although these comments were made in the context of ESMA inspections, it is interesting to note the importance attached to the preservation of privilege in regulatory matters by the High Court. This is especially so given the increasingly aggressive stance that the FCA appears to be taking in relation to legal privilege in supervisory and enforcement matters, as well as the pressure that firms are coming under to waive privilege over certain categories of documents at the request of the FCA in these situations.

ESMA

ESMA is an independent EU authority that contributes to safeguarding the stability of the European Union's financial system by ensuring the integrity, transparency, efficiency and orderly functioning of securities markets, as well as enhancing investor protection.

Functions are conferred on ESMA by various EU instruments, including EMIR.

One of ESMA’s responsibilities under EMIR is to register and supervise trade repositories (that centrally collect and maintain the records of derivatives) to ensure that they are subject to certain operational, record-keeping and data management requirements that are intended to help improve the transparency of the OTC derivatives market.

ESMA’s power to undertake inspections of trade repositories

Under Article 63 of EMIR, ESMA may carry out on-site inspections at any business premises or land of a trade repository. Where the proper conduct and efficiency of the inspection requires it, ESMA may carry out the on-site inspection without prior announcement. The officials authorised by ESMA to conduct the inspection may enter any business premises or land of a trade repository that is subject to an investigation decision and may, if appropriate, seal premises, books and records.

The exercise of ESMA’s powers under Article 63 of EMIR is subject to Article 60 of EMIR, which provides:

"The powers conferred on ESMA or any official of or other person authorised by ESMA by Articles 61 to 63 shall not be used to require the disclosure of information or documents which are subject to legal privilege".

If ESMA intends to exercise its power of inspection under Article 63 of EMIR then it must inform the competent authority of the member state concerned. In the UK, the competent authority that must be informed is the FCA. ESMA may also request that the FCA undertakes an inspection on its behalf or assists ESMA officers in carrying out an inspection.

The need for judicial authorisation for ESMA to carry out an inspection

The UK’s implementation of EMIR has made ESMA’s power to order on-site inspections of trade repositories subject to authorisation by the High Court (Financial Services and Markets Act 2000 (Over the Counter Derivatives, Central Counterparties and Trade Repositories) Regulations 2013 (SI 2013/504) (the Domestic Regulations)). This means that ESMA must obtain authorisation from the High Court before any official of, or person authorised by, ESMA carries out an inspection under Article 63 of EMIR.

The Domestic Regulations state that the High Court may grant authorisation for an inspection for the purposes of Article 63 of EMIR if an application is made to the High Court by ESMA or the FCA and the High Court is satisfied that:

- ESMA has initiated an inspection under Article 63 of EMIR.
- The Article 63 inspection would not be arbitrary or excessive having regard to the subject matter of the inspection.

The High Court’s decision

In this case, ESMA was seeking authorisation to inspect a trade repository, DTCC Derivatives Repository Limited (DTCC). ESMA wanted to undertake an inspection of DTCC’s premises in the UK as part of its general supervisory functions. DTCC was not suspected of any wrongdoing and had indicated to ESMA that it would comply fully with the inspection.

However, given that this was the first time that ESMA had applied to the High Court under the procedure set out above for authorisation to undertake an inspection using its powers in EMIR, the High Court decided to produce a short judgment setting out the principles that apply to the exercise of this power. In future, the High Court commented that it would be appropriate for most applications of this kind made by ESMA or the FCA to be dealt with on paper, unless they were contested or sought to seal business premises or books.

In this case, the High Court was satisfied that ESMA had initiated an inspection under Article 63 of EMIR and that the inspection would not be arbitrary or excessive in the light of the subject matter.

Comments made by the High Court regarding privilege

In exercise of its power to ensure that the inspection would not be arbitrary or excessive in light of the subject matter, the High Court made one amendment to the draft order that had been produced by ESMA for the purposes of obtaining authorisation to proceed with the inspection. This amendment explicitly stated that the order authorising the inspection was made subject to Article 60 of EMIR. The effect of this amendment was to explicitly state on the face of the order giving authorisation for ESMA’s inspection that the inspection should not be used to require DTCC to disclose information or documents which are subject to legal privilege. Rose J described this as an ‘important safeguard’ and one that should be reflected in documents authorising the inspection.

Although Rose J’s comments were made in the context of ESMA’s powers under EMIR, it is interesting to note the importance attached to the preservation of privilege in regulatory matters by the High Court. This is especially so given the increasingly aggressive stance that the FCA appears to be taking in relation to legal privilege in supervisory and enforcement matters, as well as the pressure that firms are coming under to waive privilege over certain categories of documents at the request of the FCA in these situations.

Case

European Securities and Markets Authority (ESMA) v DTCC Derivatives Repository Ltd [2015] EWHC 1085 (Ch) (25 April 2015)

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