LEI changes due to mergers and acquisitions
In TR Question 40, ESMA attempts to close some of the gaps in its previous guidance on handling LEI changes due to mergers and acquisitions. The changes bring obligations on reporting counterparties to inform their TR when their “non-EEA counterparty” has a change of LEI and to request the TR to update the LEI in the “other counterparty id” field for all outstanding derivatives. Whilst this change might initially seem attractive from a regulatory perspective, it clearly brings operational challenges for reporting firms and seems to be an imperfect solution as “non-EEA counterparty” is a poor proxy for firms with no EMIR reporting obligation.
The new TR Question 40 also clarifies the obligations for firms when they have used an incorrect LEI, either to identify themselves as reporting counterparty or to identify their counterparty (“other counterparty id”). On these occasions, the reporting counterparty should “cancel” the incorrect reports with an action type of “E” and re-report them with a correct LEI and the previously agreed UTI. Some may question whether this guidance is consistent with the technical standards which state that an action type of “E” should only be used for the “a cancellation of a wrongly submitted entire report in case the contract never came into existence or was not subject to Regulation (EU) No 648/ 2012 reporting requirements but was reported to a Trade Repository by mistake…” It also may also be inconsistent with the validation which requires: “After a report with action type “E” is submitted, the only allowed action type to be submitted by the other counterparty, if reporting to the same TR, is “E”. No additional reports shall be allowed for that UTI”.
New but not new
The new Q&A marks TR Question 47 as being “new” but, in fact, it isn’t – it is the same text as the previous Q&A published on 29 May. However, some participants may have overlooked this addition and may be surprised by the instructions. We are aware that, for cross currency instruments, some participants presumed that “deliverable currency” should be populated with the code for the currency they would be delivering as reporting counterparty and the common data 61 “delivery currency 2” field should be populated with the code of the cross currency they would receive (as suggested by the technical standards). However, Q&A 47 states that “the Delivery currency 2 field should be populated for those derivatives with an FX component for which two currencies are delivered. If both Deliverable currency and Delivery currency 2 are populated, the field Deliverable currency should be populated with the first currency sorted in alphabetical order.” The industry would certainly benefit from some worked examples of derivative reporting much like the ESMA guidelines for MiFIR reporting.
When a management company can be considered a counterparty
ESMA also clarified that there are occasions when a fund management company can be considered to be the counterparty to a transaction. Whilst the client is still generally considered to be the counterparty when a management company enters into derivative contracts when providing a portfolio management service, the new Q&A highlights that the management company should be considered the counterparty when it “bears the risk” of the derivative contract. This principle is also borne out in a new trading scenario (“Case 4: Counterparties in the context of portfolio management) where the portfolio manager is shown to have reporting obligations against both a counterparty and a client where it is deemed to ”bear the risk” against the counterparty.
Here’s the link to ESMA announcement here.
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