Upcoming changes to EMIR reporting requirements
On December 14, 2022, the European Securities and Markets Authority (ESMA) published its final report (ESMA74-362-2281) (Report) – Guidelines for reporting under EMIR (Guidelines), outlining ESMA’s clarifications on the obligations under Regulation (EU) No 648/2012 of the European Parliament and the Council of July 4, 2012, on OTC derivatives, central counterparties, as amended (by Regulation (EU) 2019/834 of the European Parliament and of the Council of May 20, 2019 (EMIR Refit)) (EMIR).
ESMA published the Guidelines and technical documentation on reporting under the EMIR Refit on December 20, 2022, after getting feedback on its consultation paper back in July 2021.
The Report and Guidelines help market players regarding products and situations under EMIR that needed more guidance and clarification at the level of the European Union (EU).
Entities falling within the scope of EMIR – or any entities that report on their behalf – have to take the new reporting requirements into account going forward.
The Guidelines apply to the derivatives reporting obligation in article 9 of EMIR and the trade repositories’ obligations under articles 78 and 81 of EMIR from April 29, 2024.
The underlying technical standards will also be applicable from April 29, 2024.
Counterparties that fall within the scope of EMIR and that submit reports to trade repositories from or after this date will have to comply with the amended reporting requirements. Any amendments or terminations of existing derivative contracts after this date also fall within this new reporting requirement.
Counterparties have to update reports of any outstanding derivative contracts within 180 calendar days from the reporting start date to be compliant with the revised reporting requirements. They then need to submit a report with the event type “Update,” unless they submitted a report with the action type “Modify” or “Correct” for the derivative contracts during the transition period.
Here we take a look at some of the key points provided by ESMA:
Scope of derivatives
Some products and contracts clearly fall within the definition of a derivative contract under Directive 2014/65/EU of the European Parliament and of the Council of 15 March 2014 on markets in financial instruments (MiFID II)1 and particularly its annex 1, section C, however, others do not clearly fall within the list provided under MiFID II leaving room for interpretation.
ESMA has provided a non-executive list of derivatives that do not fall within the definition of a derivative under EMIR within the meaning of MiFID II and hence provided now some clear examples:
- Securities derivatives, such as leverage certificates, negotiable rights, investment certificate, plain vanilla or exotic covered warrants. These are transferable securities within the meaning of article 4(1)(44) of MiFID II and are different from structured finance products.
- Structured finance products/structured products within the meaning of article 2(2)(28) of the Regulation (EU) NO 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012. These are securities created to securitize and transfer credit risk associated with a pool of financial assets entitling the security holder to receive regular payments that depend on the cash flow from the underlying assets.
- Convertible bonds – financial instruments with embedded derivatives (eg option to buy the underlying equity).
Reporting responsibilities of funds
ESMA has considered the clarification needed on allocating responsibility affecting the reporting obligation of investment funds (eg undertakings for collective investment in transferable securities, alternative investment funds (AIF), institutions for occupational retirement provision) particularly because they have no legal personality under local law.
While usually the fund or sub-fund signs a derivative contract, as applicable, in cases when a fund manager executes a derivative contract for different funds, it has to report it and allocate the respective part of the derivative contract to the respective fund.
When the fund manager reports the trade, it must indicate the ID of the respective fund and not the ID of the fund manager. For the avoidance of doubt, as the fund manager is only reporting on behalf of the respective fund, the ID of the fund manager would be included in the field for the reporting entity. Only where the fund manager would report on its behalf, it would include its ID in the field of a submitting entity.
An alternative investment fund manager (AIFM) should always check whether the respective AIF qualifies as financial counterparty to the derivative contract, being domiciled in the EU or a third country. If the AIF does qualify as a financial counterparty, an authorized and registered AIFM2 would have to report the trade.
Attention should be paid to scenarios in which non-European AIFs are only set up as securitization special purpose vehicles or to serve employee share purchase plans. These types of AIF do not quality as AIFs within the meaning of EMIR and are not subject to the reporting obligation (noting that the other counterparty to a trade with such specific AIF would still need to report under EMIR, in case it itself falls within the scope thereof).
Reporting clarifications concerning investment firms and management companies
ESMA outlined that investment firms do not fall within the reporting obligation when they act as principal and are not a counterparty to a derivative contract. However, it should be noted that in scenarios where such an investment firm acts as investment fund manager, it would need to report under EMIR. This is because it is responsible and legally liable for reporting on behalf of the counterparty, using its own Legal Entity Identifier number (LEI) when specifying the reporting entity.
This is also important when management companies manage their client’s portfolio and sign a derivative contract in which the client is considered the counterparty and not the management company (unless the management company bears the risk of the derivative contract directly). It should be noted that management companies can report on behalf of their clients.
Finally, brokers to derivative contracts shall identify themselves as counterparty to the derivative contract and as such, do not need to indicate their LEI number in the field for “broker ID”, but only in the case where they act as intermediary for the counterparty.
Intragroup reporting exemption
ESMA also mentions intragroup derivative contracts available under article 9 (1) of EMIR and the makes reference to the term of parent undertaking. A parent undertaking is understood as the highest consolidating entity in the group, established in the EU, but not a third country.
Parties can ask for the exemption if (i) the ultimate parent undertaking of the group in charge of the consolidation on a full basis is the parent undertaking for that purpose (ii) and if the centralized risk evaluation, measurements and control procedures are applicable for the counterparties notifying the intragroup reporting exemption.
ESMA has not touched on an amendment to the requirement that the parent undertaking no longer has to be established in the EU. Intragroup transactions for which the parent undertaking is established in a third country cannot benefit from the exemption, even if the transactions occur between two counterparties which are both established in the EU.
Reporting delegation and allocation of responsibility
Another new requirement is the need for entities responsible for reporting to notify the competent authority of any significant reporting issues.3 The Guidelines clarify when an issue is considered significant and reportable to the competent authority.
ESMA has published a notification template for any notifications to the competent authorities that agreed to adhere to the template. The Commission de Surveillance du Secteur Financier (CSSF) confirmed it would implement the template once the Guidelines become applicable (ie from April 29, 2024).
The CSSF published a press release 22/33 on December 21, 2022, reminding the concerned entities falling within the scope of EMIR or any entity responsible for reporting on their behalf that the reporting requirement is new but that several entities already applied a careful approach and notified the CSSF of any reporting issues so that there was existing market practice.
The CSSF underlined that the requirement is enforceable under the law of March 15, 2016 on OTC derivatives, central counterparties and trade repositories (2016 Law) to all entities responsible for reporting that are supervised by the CSSF under the 2016 Law.
The CSSF also stressed that the end-of-day response mechanism of trade repositories and the information made available through it must be used to catch any potential misreporting (either made by them or on their behalf). The CSSF underlined that there is enough time for the entities to implement the changes until April 29, 2024. Any failure to report accurately from April 29, 2024, will be considered as non-compliance with Article 9 of EMIR.
1 Amending Directive 2002/92/EC and Directive 2011/61/EU (recast).
2 Pursuant to Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on alternative investment fund managers, as amended.
3 The reporting issues fall within the scope of article 9(1) of the Commission Implementing Regulation (EU) 2022/1860 of June 10, 2022, laying down implementing technical standards for the application of Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to the standards, formats, frequency and methods and arrangements for reporting (ITS).