EMIR Refit – white elephant regulation

Many firms are waking up to the fact that ‘EMIR Refit’ is being implemented on 17 June 2019 and they may be having a coronary over how it might impact EMIR trade reporting. For once, firms can relax as the only big(ish) change for trade reporting takes effect from June 2020.

Before diving into the detail, let’s take a step back and remind ourselves what EMIR Refit is all about.

The aim of EMIR Refit is to make its compliance burden more proportionate, particularly for the non-financial counterparties (NFCs). Now that is an absolutely splendid aim, so how has it worked out with trade reporting? After the colossal amount of time spent on the debate, I have to conclude that it’s a massive disappointment for reporting, resulting in the following meagre pickings:

  1. Mandatory delegated reporting on behalf of NFC- firms from 18 June 2020. This is the only meaningful change from Refit. From 18 June 2020 (repeat 2020, not 2019) ‘financial counterparties’ will become responsible and legally liable for reporting the details of derivative contracts they have concluded with an NFC-  on behalf of both. The NFC- can still choose to report on its own behalf if it wants to, but it must give its counterparty notice of its intentions to avoid duplicative reporting.
  2. Removal of the back-loading obligation. There is no longer an obligation for counterparties to report historic data on derivatives that were outstanding on or after 16 August 2012 and which terminated before the EMIR reporting start date of 12 February 2014. This might sound like a welcome dispensation for the industry, but it wasn’t a very practical requirement in the first place – what possible value could the regulators extract from trades terminated five years in the past? The revised reporting technical standards also virtually forced this change as it is highly unlikely that any counterparty will have the required information to report these ancient trades in the post-2017 standards.
  3. Intra-Group Exemption – There may be too many conditions to be met for this to be of much use, but an exemption from the reporting obligation is available for intra-group transactions where all the following criteria are met:
    • at least one counterparty is an NFC;
    • both counterparties are fully consolidated;
    • both counterparties are subject to appropriate centralised risk evaluation, measurement and control procedures;
    • the parent undertaking is not a financial counterparty.

Additionally, counterparties must notify their NCA of their intention to apply this exemption

  1. Fund management company reporting obligations. Fund management companies and Alternative Investment Fund Managers will become solely responsible and liable for reporting derivative trades made by their UCITS, AIFs and institutions for occupational retirement provision.

Delegated reporting

So the only substantial change to trade reporting introduced by EMIR Refit is the mandatory delegated reporting by financial counterparties on behalf of their NFC minuses. Although many financial counterparties provide delegated reporting already, they will be concerned by the addition of legal responsibility for the accuracy of the delegated reporting they provide. This concern may highlight one of the loopholes of EMIR trade reporting – although delegated reporting may boost the pairing rates, it might not actually be very good. There is a great temptation to simply ‘flip’ elements of a trade report and present this as delegated reporting on behalf of the counterparty. The true requirements of delegated reporting could be far more onerous, particularly with the increased complexity of many elements introduced in the 2017 revised reporting technical standards. This is evidenced by Refit stressing the obligation on the NFC- firms to supply all the required information to their financial counterparties in order for them to report accurately on their behalf.

It is also questionable whether the mandatory delegated reporting will help the NFC- firms that much. It will only work as planned if all their counterparties are EU firms. Many of their current counterparties may already be non-EU counterparties, so they will have to maintain their trade reporting infrastructure. Of course, a hard Brexit would seriously negate the value of this new measure as ESMA would not have any power to force a UK financial counterparty to provide delegated reporting for a non-EU NFC- (but maybe it could force the NFC- to only deal with EU firms).

A lost opportunity

Many firms had hoped that the Commission’s review of EMIR during 2015 and 2016 could lead to fundamental changes in the trade reporting requirements. Expectations included the removal of ETDs from the reporting obligation and the removal of the dual-sided reporting obligation. At the very least, many financial counterparties hoped that the review would lead to the removal of the obligation to report individual ETD trades and to rely on the end-of-day position reports. Since the main purpose of EMIR trade reporting is to monitor for systemic risk, there appears to be little value in collecting reports of ETD trades when they are immediately netted into an end of day position report. Additionally, key elements of EMIR trade reporting like lifecycle events and collateral reporting can only really be sensibly applied to the end of day positions for ETDs. Perhaps the only value of ETD trade reports is for the detection of market abuse – but this is the driver behind MiFIR transaction reporting and their inclusion in EMIR is expensive duplication.

If the purpose of EMIR Refit is to address disproportionate compliance costs and to streamline reporting, then it can only be described as a lost opportunity. The existing EMIR trade reporting regime might be considered white elephant regulation – expensive and onerous to comply with, yet difficult to understand how it meets its objectives. Even the November 2017 revisions failed to disguise the fact that ETDs have been shoe-horned into reporting regime primarily designed around OTC derivatives.

If you have concerns about whether you are meeting your EMIR trade reporting requirements or would like confirmation your reporting is accurate and complete, please get in touch with us for a conversation with one of regulatory experts.