EMIR Refit delegated reporting rules go live despite industry concerns
18 June 2020 Belgium
Image: frankie's/Shutterstock.com
The next phase of the European Market Infrastructure Regulation (EMIR) comes into effect despite lingering concerns around unclear reporting rules and clear risks with double reporting and counterparty miscommunication around the new designations for reporting responsibilities.
The latest implementation of EMIR Refit hands the responsibility for reporting over-the-counter (OTC) derivatives trades to financial counterparts (FC) on behalf of their non-financial counterparts that are deemed NFC- under new designations.
EMIR Refit is the multi-phase and multi-year project to retroactively streamline EMIR and bring it in line with other regulatory frameworks that have come about since EMIR first appeared in 2012.
EMIR Refit was designed to make EMIR more comprehensible by simplifying the rules and reduce regulatory and administrative burdens where possible, especially for non-financial counterparties, without compromising the regulatory goal of EMIR.
Market participants across the spectrum have questioned whether it has achieved this aim.
Many of the changes, including the delegated reporting rules are based on the Securities Financing Transactions Regulation (SFTR) reporting rules, which comes into effect next month.
EMIR Refit first began its implementation in June 2019 by redefining what is considered an FC and an NFC and also introducing the category of a small FC (FC-) and an NFC- based on a clearing threshold for OTC derivatives.
The clearing obligation requires all counterparties, including those already subject to it, to calculate the notional month-end average positions for the previous 12 months for each asset class to determine whether any asset classes cross a clearing threshold.
If any asset class exceeds the threshold, related trades must be cleared and reported to the relevant national competent authority (NCA) via a trade repository (TR).
The designation of whether an entity is an NFC- or an NFC+ will now also determine whether it is responsible for its own reporting of OTC derivatives or if that must be delegated to its FC.
NFCs must review their status at least once every 12 months and notify their FC if their designation changes, as well as the relevant NCA and the European Securities and Markets Authority (ESMA).
Among the issues with today’s reporting delegation rules is that a breakdown in communication between an NFC and its FC on the former’s latest designation will lead to double reporting of the same OTC trades, or no reporting at all.
If the FC and the NFC use the same TR, these duplicates should be caught by the TR’s systems, but if they use different repositories then those double reports will only be caught in the reconciliation phase with the regulator.
Ian Thomas, regulatory solutions specialist at financial services consultancy Quorsus, tells SLT that there is a lot of concern among market participants around the risks of duplicate reporting as a result of poor communication between NFCs and their FC.
Elsewhere, Tomas Bremin, head of business product management at REGIS-TR, an EU TR, predicts there will be some double reporting by the NFC that don’t inform their FC that they will report for themselves.
In the instance where the NFC and the FC use different TRs, ESMA is suggesting that the TRs use a process called ‘portability’ to migrate the open trades across from the NFC’s TR to the FC’s TR.
However, Bremin explains that a high volume of portability events will consume time and resources for the TRs for a long period and also introduces the complex issue of ‘partial portability’ events.
“In some cases, the NFC has FCs that don’t all use the same TR, and this requires partial portability which until now has not been in the scope of the inter-TR procedures for portability,” Bremin states.
Thomas concludes that “portability was not designed for this reason and EMIR Refit has potentially very messy and complicated consequences”.
The latest implementation of EMIR Refit hands the responsibility for reporting over-the-counter (OTC) derivatives trades to financial counterparts (FC) on behalf of their non-financial counterparts that are deemed NFC- under new designations.
EMIR Refit is the multi-phase and multi-year project to retroactively streamline EMIR and bring it in line with other regulatory frameworks that have come about since EMIR first appeared in 2012.
EMIR Refit was designed to make EMIR more comprehensible by simplifying the rules and reduce regulatory and administrative burdens where possible, especially for non-financial counterparties, without compromising the regulatory goal of EMIR.
Market participants across the spectrum have questioned whether it has achieved this aim.
Many of the changes, including the delegated reporting rules are based on the Securities Financing Transactions Regulation (SFTR) reporting rules, which comes into effect next month.
EMIR Refit first began its implementation in June 2019 by redefining what is considered an FC and an NFC and also introducing the category of a small FC (FC-) and an NFC- based on a clearing threshold for OTC derivatives.
The clearing obligation requires all counterparties, including those already subject to it, to calculate the notional month-end average positions for the previous 12 months for each asset class to determine whether any asset classes cross a clearing threshold.
If any asset class exceeds the threshold, related trades must be cleared and reported to the relevant national competent authority (NCA) via a trade repository (TR).
The designation of whether an entity is an NFC- or an NFC+ will now also determine whether it is responsible for its own reporting of OTC derivatives or if that must be delegated to its FC.
NFCs must review their status at least once every 12 months and notify their FC if their designation changes, as well as the relevant NCA and the European Securities and Markets Authority (ESMA).
Among the issues with today’s reporting delegation rules is that a breakdown in communication between an NFC and its FC on the former’s latest designation will lead to double reporting of the same OTC trades, or no reporting at all.
If the FC and the NFC use the same TR, these duplicates should be caught by the TR’s systems, but if they use different repositories then those double reports will only be caught in the reconciliation phase with the regulator.
Ian Thomas, regulatory solutions specialist at financial services consultancy Quorsus, tells SLT that there is a lot of concern among market participants around the risks of duplicate reporting as a result of poor communication between NFCs and their FC.
Elsewhere, Tomas Bremin, head of business product management at REGIS-TR, an EU TR, predicts there will be some double reporting by the NFC that don’t inform their FC that they will report for themselves.
In the instance where the NFC and the FC use different TRs, ESMA is suggesting that the TRs use a process called ‘portability’ to migrate the open trades across from the NFC’s TR to the FC’s TR.
However, Bremin explains that a high volume of portability events will consume time and resources for the TRs for a long period and also introduces the complex issue of ‘partial portability’ events.
“In some cases, the NFC has FCs that don’t all use the same TR, and this requires partial portability which until now has not been in the scope of the inter-TR procedures for portability,” Bremin states.
Thomas concludes that “portability was not designed for this reason and EMIR Refit has potentially very messy and complicated consequences”.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
