Measure for measure: ESMA’s assessment of EU-wide supervisory measures for EMIR

Measure for Measure is classed as a comedy yet it is also considered one of Shakespeare’s problem plays as it has aspects of a tragedy. Dealing with the concepts of justice and virtue, the play sprang to mind when reading ESMA’s recently published report on EMIR supervisory measures.

This is because the report, which runs to some 40 pages, highlights some significant differences in approach by the national competent authorities (NCAs) on supervision and enforcement of EMIR requirements, as well as the fines and other supervisory actions that have been undertaken to date. The report has both good and bad news for financial firms.

Let’s start with the good: There have only been three fines raised for EMIR breaches to date across Europe. Two of these fines were levied by COVIP (Italy), one for €105k and the other for €60k both in relation to article 9 reporting breaches and article 11 breaches in respect of clearing activities. Within each jurisdiction, the maximum fines that can be levied are almost consistently low.

And the bad news: the third fine in our list is the eye-watering £35m fine raised by the FCA for the non-reporting of 68 million exchange-traded derivative contracts.  The per-record penalty applied by the FCA was increased because of prior breaches under the MiFID I transaction reporting regime. That points to the FCA treating reporting failures as a single type of breach irrespective of the reporting obligation concerned. In its final notice, the FCA also took the time to highlight that insufficient testing was carried out to ensure the accuracy and completeness of reports as well as weaknesses in oversight arrangements. And in another piece of bad news, the largest potential fine for those countries that have a cap is France’s €100m. 

Few investigations across Europe

Perhaps it’s unsurprising, but not all authorities have been active in conducting investigations since the inception of EMIR.  What is surprising is how few investigations have been carried out across Europe when the number of entities, both financial and non-financial, falling within the scope of EMIR is so vast.  We can’t tell the true number of investigations conducted as the “more than 20” category (as shown below) could hold a great many but we would expect ESMA to have stopped there because it was closer to 20 than 40. 

In terms of investigations carried out, Belgium is the standout performer with more than 20 investigations being run across reporting, clearing obligation, reporting, risk mitigation techniques and Article 11 in respect of Non-Financial counterparties. On the other end of the scale, we have a number of countries that haven’t undertaken any investigations at all including Ireland, Finland, Norway and the Netherlands.

Number of investigations carried out on the reporting obligation by country in 2017:

None

BU

CZ

FI

HR

IE

LV

MT

NL

NO

SI

1 to 5

FR

EL

SK

UK

 

 

 

 

 

 

6 to10

AT

DK

PL

SE

 

 

 

 

 

 

11 to 20

CY

ES

PT

 

 

 

 

 

 

 

>20

BE

DE

LU

IT

 

 

 

 

 

 

 

Another piece of bad news (at least for firms) is that we can expect ESMA to push for more harmonisation and more investigative activity.  ESMA and other competent authorities have been concerned with the quality of reporting under EMIR and MiFID. This, combined with the EMIR regime being in its 4th  year and matching rates across repositories remaining challenging, pressure to improve reporting will continue.  Pressure to ensure compliance with the clearing obligation and risk mitigation techniques can also be expected in the coming year.  

The report also drew attention to the fact that no work seems to have been carried out in terms of the anti-evasion provisions of EMIR.  This would be a complex area to assess but firms should be prepared for questions on this which means having a handle on what guarantees are in place between EU group entities and non-EU entities.

Penalties across the EU

The report highlights the approach to penalties as an area where there is a low level of harmonisation. We’ve created the table below which shows the divergence in percentage terms of the maximum caps (France at €100m) and minimum penalties (Bulgaria €40k) across the EU. 

In the UK and Spain, there is no stated penalty cap. In the case of the UK, a per record penalty is applied which means that the penalty regime scales to the level of reportable activity and degree of non-compliance for the firm concerned. 

Country

Percentage of maximum

Max € (000)

Notes

Spain

n/a

Variable no stated maximum

France

100.00%

100,000

Capped at less than 10x gain made or loss avoided

United Kingdom

n/a

Variable no stated maximum

Finland (articles 4 & 10)

10.00%

10,000

Capped at less than 10% turnover

Sweden

5.00%

5,000

Now capped at 10% of turnover but figures relate to a decision when the old rules applied.

Belgium (National Bank)

5.00%

5,000

Capped at less than 10% turnover

Italy

5.00%

5,000

Capped at less than 10% turnover

Greece

3.00%

3,000

 

Ireland

2.50%

2,500

 

Poland

2.50%

2,500

< 10% of turnover

Belgium (FSMA)

2.50%

2,500

Capped at 3x gain made or loss avoided

Luxembourg

1.50%

1,500

Capped at 5x gain made or loss avoided

Netherlands

1.00%

1,000

 

Cyprus

0.70%

700

Capped at 2x gain made or loss avoided

Germany

0.50%

500

 

Czech Republic

0.40%

400

 

Austria

0.15%

150

 

Malta

0.15%

150

 

Latvia (legal persons)

0.14%

142

 

Finland (articles 9 & 11)

0.10%

100

 

Slovenia

0.10%

100

 

Croatia

0.07%

67

 

Latvia (natural persons)

0.06%

57

 

Bulgaria

0.04%

40

 

 

NCA powers across the EU

NCA powers are relatively consistent allowing them to: summon and interview personnel, conduct on-site investigations and inspect documents. They also all have the power to issue fines, issue binding and non-binding letters whilst some NCAs have the power to issue criminal sanctions against individuals. 

Actions firms should be taking for EMIR reporting

Firms should be reviewing their EMIR control environment. This means assessing the more difficult activities of regular accuracy testing, reference data testing and front to back reconciliations as well as ensuring the governance process is robust and up-to-date. 

Governance arrangements need to be looking at the operation of the reporting process itself, the assurance process around accuracy and completeness of reporting but also the remediation process, ensuring that known issues are being appropriately escalated, prioritised and remediated which includes replaying records to correct historic errors. 

While we are known for providing market-leading testing and reconciliation services, we also help our clients mature their broader reporting controls with our Control Framework – all are key components of our ReportShield™ quality assurance service. We also, in conjunction with our consultancy partner Elixirr, run remediation programmes to bring firms’ trade repository records into line. 

If you would like to discuss your reporting controls please contact us.