ESMA provides additional detail in latest Q&A
June 18 is a key date in the calendar for EMIR trade reporting. Financial counterparties (FCs) will become legally liable for the timely and accurate reporting of OTC derivatives contracts for themselves and their NFC clients below the clearing threshold (NFC-s).
This sounds like good news for NFCs and it appears to meet one of the EMIR Refit’s major objectives in making its compliance burden on firms more proportionate, particularly for the non-financial counterparties (NFCs). However, the devil is always in the detail and it can be argued that it has actually increased the compliance burden on financial counterparties without offering enormous benefit to the NFCs.
What are the problems?
The first problem is that the FCs are only obligated to trade report on behalf of their NFC- counterparties; not those NFCs above the clearing thresholds. As NFCs can move above or below the clearing threshold over time, this becomes a moving target which clearly needs to be taken into consideration and monitored.
Secondly, whilst EMIR requires the reporting of all derivatives, the FC is only obliged to report OTC derivatives on behalf of their NFC- clients; not the exchange traded derivatives (ETDs). Whilst it is more likely that an NFC- will trade OTC rather than ETD, those that do trade ETD need to be aware that their counterparty is not obligated to report these and they may be required to continue reporting. If the NFC- has to continue reporting ETDs, there will be precious little savings for them as they will have to maintain their reporting infrastructure.
To compound these issues, the NFC- may choose to continue reporting trades itself either by asset class or in total. This means their FC counterparties need to be aware of what they are required to report as a duplicate report must not be sent to a trade repository.
Trade repository migration
As there are multiple trade repositories, it is very possible that the FC and their NFC- clients will be using different repositories. It is probable that the FC will not want to report to multiple repositories as this will involve multiple contracts and workflows – it will make far more sense for the FC to send all the reports to a single trade repository. The big issue here is that it is not simply new trades from 18 June that need to be reported – it is also any modification or termination of existing contracts still open. This means that any open trades and positions will need to be migrated from the trade repository used by the NFC- to the trade repository used by the FC. The trade repositories have been busy planning for this data migration, but they cannot perform magic – it is essential that firms should inform trade repositories what reports should be migrated well in advance of 18 June.
Communication is key
It is absolutely essential that the FCs and their NFC- clients communicate and agree what needs to be reported by the FC and what needs to be provided by the NFC-. There might be a temptation by the NFC- to assume they no longer have any role to play in trade reporting as the FC is legally liable for the timely and accurate reporting. This is not the case. The NFC- has to provide the FC with “the details of the OTC derivative, which the FC cannot be reasonably expected to possess”. The latest Q&A from ESMA details ten data items that the NFC- will need to provide. In practice some of these will be ‘static’ data items that will apply to all trades and some other items may not be applicable. Perhaps the key item that the NFC- needs to consider is its Legal Entity Identifier (LEI). It is the NFC-‘s responsibility to ensure that the LEI is renewed every year – if it doesn’t, the trade report will be rejected by the trade repository.
This is not the end of Refit!
ESMA is currently consulting on changes to the Implementing Technical Standards to bring them into line with international standards proposed by CPMI IOSCO. There are many sensible proposals in this consultation, but firms may judge some of the proposed changes to be less sensible than others. We are preparing an additional blog detailing their potential impact, which could be as significant and onerous as the changes to the reporting technical standards in November 2017.