Emir

Revised EMIR RTS and ITS published in OJ

According to article 85 of EMIR ESMA is obliged to prepare and submit a general report with appropriate proposals that ensure a better implementation of the Regulation. The current revised RTS and ITS are focused mainly on the better quality of the data received by the trade repositories and ESMA.

On 13 Nov 2015 a final report – review of the regulatory and implementing technical standards on reporting under article 9 of EMIR has been issued by ESMA.

The most important parts of the EMIR Q&As documents have been included in the revised EMIR regulatory technical standards (RTS) and implementing technical standards (ITS). This has been done because EMIR Q&As document is not legally binding and it serves to promote common supervisory approaches and practices in the application of EMIR. It is aimed at competent authorities to ensure that in their supervisory activities their actions are converging along the lines of the responses adopted by ESMA. Information regarding the penalties for inaccurate EMIR reporting is available here.

On 21 January 2017 the revised RTS and ITS have been published in the Official Journal. They enter into force on 10 February 2017 and shall apply from 1 November 2017.

Commission Delegated Regulation (EU) 2017/104 introduces the following amendments to the EMIR RTS:

• New rules on the reporting of a contract composed of a combination of several other derivative contracts. In case the fields in the report do not allow reporting of a complex products by a single line, then the counterparties should decompose the contract and agree on the number of lines (with separate UTIs) that should be submitted. The transaction reports should be identified by using the new field ‘Complex Trade Component ID’ for any transaction reports resulting from the same derivative contract.
• New rules on the reporting of a previously reported contract which is subsequently cleared by a CCP. The existing contracts shall be reported as terminated and the new contracts resulting from the transaction shall be reported. For contracts concluded and cleared on the same date, only the cleared contract shall be reported.
• New rules for the reporting of collateral exchanged by the counterparties, including specifying what exactly should be reported, by whom, and how it should be valued.
• Rules for the reporting of the notional amount for different classes of derivatives. For swaps, futures and forwards (traded in monetary units) the notional amount should be the reference amount from which the contractual payments are determined in derivatives markets. For options the notional amount should be calculated using the strike price. Financial CFDs and commodities denominated in units (like barrels or tons) – the resulting amount of the quantity at the relevant price set in the contract.
• A new section of asset class specific fields for credit default swaps (CDS) with 10 fields and other new or renamed fields.
• More fields are included to correctly reflect the different types of collaterals: initial margin posted; variation margin posted; initial margin received; variation margin received; excess collateral posted; excess collateral received and the relevant fields that identify the currency of the new types of the margin fields.
• More new fields like: “Level” to indicate whether the reporting is done on a trade level or a position level, etc.

Commission Implementing Regulation (EU) 2017/105 covers the following amendments in EMIR ITS:

• Rules for clearly identifying the counterparty side depending on the different asset classes.
• Identification and classification of the derivatives. The ETDs will be identified by ISIN or AII. The OTC derivative contracts will be identified by their types. Two more categories are added: ‘SB’ for spread bet and ‘ST’ for swapton.
• Unique Trade Identifier (UTI). The UTIs of the cleared trades should be generated by the CCPs. For centrally-executed bit not centrally cleared trades the UTI shall be generated by the trading venue. For centrally confirmed and cleared trades the UTI generation obligation is placed to the clearing member. For trades that were centrally confirmed by electronic means but were not centrally cleared the UTI should be generated by the trade confirmation platform at the point of confirmation. Financial counterparties (FC) trading with non-financial counterparties – the FCs. For all other cases – the seller is responsible to generate the UTI and communicate it to the buyer. The UTIs should be generated and communicated in a timely manner so that the other counterparty can meet its reporting obligations.
• Clear rules about identifying the venue of execution.
• Extending the deadline for backloading from 12 February 2017 to 12 February 2019.

For further information and clarification please feel free to contact us at office@emirreporting.eu.

EC adopted delegated Regulation on margin requirements for non-cleared OTC derivatives

On 4 October 2016 the European Commission adopted a delegated regulation that specifies how margin should be exchanged for OTC derivatives contracts that are not cleared by a CCP. The Commission adopted the draft regulatory standards submitted by the European Supervisory Authorities with amendments.

For those derivatives not centrally cleared EMIR requires bilateral exchange of collateral to mitigate risks. Should one counterparty to the transaction default, the margin collected will protect the non-defaulting counterparty against resulting losses. The draft regulatory technical standards (RTS) under EMIR were submitted jointly by the three European Supervisory Agencies (ESAs). The Commission decided to endorse these standards with certain amendments, in particular concerning the concentration limits for pension scheme arrangements and the timeline for implementation. Today’s decision takes the form of a Delegated Regulation and is now subject to an objection period by the European Parliament and the Council after which it will be published in the Official Journal. The full text of the press release is available here.

The text of the delegated Regulation is available here.

The text of the Annex to the delegated Regulation is available here.

For more information please feel free to contact us at office@emirreporting.eu.

ESMA updates list of recognised third-country CCPs

On 28 Sept 2016 the European Securities and Markets Authority (ESMA) has updated its list of recognised central counterparties (CCPs) based in third countries. The update concerns the recognition of the US-based CCPs ICE Clear Credit LLC (ICC) and the Minneapolis Grain Exchange Inc. (MGEX).

The European Markets Infrastructure Regulation (EMIR) requires third-country CCPs to be recognised by ESMA in order to operate in the European Union.

ESMA adds ICE Clear Europe Ltd to list of authorised CCPs under EMIR

On 19 Sept 2016 ESMA has added ICE Clear Europe Ltd to its list of authorised central counterparties (CCPs) under the European Markets Infrastructure Regulation (EMIR). EMIR requires EU-based CCPs to be authorised and non-EU CCPs to be recognised in the European Union (EU). Once a CCP has been authorised or recognised within the EU, EU firms can use these CCP to fulfil their clearing obligations.

The updated list of authorised CCPs and the public register of cleared derivative classes is available on ESMA’s website.

Draft RTS on risk-mitigation techniques for OTC derivative contracts not cleared by a CCP under Article 11(15) of EMIR

The Regulatory Technical Standards (RTS) are developed by the Joint Committee of the European Supervisory Authorities (ESAs) in order to define the risk mitigation techniques to be put in place for OTC derivatives not cleared by a central counterparty (CCP). In the official table showing the current status of all draft RTS ESMA uses the title “RTS on margin requirements for non-centrally cleared derivatives”.

On 8 March 2016 the European Supervisory Authorities (European Banking Authority, European Insurance and Occupational Pensions Authority, European Securities and Markets Authority) published the final draft Regulatory Technical Standards (RTS) on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP under Article 11(15) of Regulation (EU) No 648/2012 – EMIR. A feed-back table has also been published.

The RTS cover the risk mitigation techniques related to the exchange of collateral to cover exposures arising from non-centrally cleared over-the-counter (OTC) derivatives. They also specify the criteria concerning intragroup exemptions and the definitions of practical and legal impediments to the prompt transfer of funds between counterparties. These standards aim at increasing the safety of the OTC derivatives markets in the EU.

The draft RTS contain the following provisions:

• For OTC derivatives not clear by a Central Counterparty (CCP), the draft RTS prescribe that counterparties have to exchange both initial and variation margins. This will reduce counterparty credit risk, mitigate any potential systemic risk and ensure alignment with international standards.
• The draft RTS outline the list of eligible collateral for the exchange of margins, the criteria to ensure the collateral is sufficiently diversified and not subject to wrong-way risk, as well as the methods to determine appropriate collateral haircuts.
• The draft RTS lay down the operational procedures related to documentation, legal assessments of the enforceability of the agreements and the timing of the collateral exchange.
• The draft RTS cover the procedures for counterparties and competent authorities related to the treatment of intragroup derivative contracts.

The draft RTS have been developed on the basis of Article 11(15) of Regulation (EU) No 648/2012 (EMIR), which establishes provisions aimed at increasing the safety and transparency of the over-the-counter (OTC) derivatives markets in the EU.

In developing these standards, the ESAs have taken into consideration the need for international consistency and have, therefore, used the framework established by the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO) and the BCBS supervisory guidance for managing risks associated with the settlement of foreign exchange transactions, while taking into account the specific features of the European financial market.

The deadline for adoption by the Commission was 8 June 2016.

On 9 June 2016, the European Commission notified the ESAs of a delay in the endorsement process. On 28 July 2016 the letter regarding the Commission’s intention to endorse with amendments the draft RTS was published. According to the letter the Commission is intending to make a number of clarifications and restructure the legal text in line with applicable principles of legislative drafting. This includes the correction of a number of apparent oversights and omissions that have been identified through staff discussions. The most important ones relate to:

• The introduction of a recital containing the reasoning for a delayed phase-in of the requirements for equity option;
• The clarification on the fact that Union counterparties wishing to obtain an intragroup exemption from the requirements may submit the relevant application after the entry into force of the RTS;
• The clarification that cash initial margin may be held, in additional to credit institutions authorized in accordance with the Capital Requirement Directive, with equivalent third country institutions;
• The clarification on the fact that requirements concerning FX derivative contract should start to apply from the date of application of the relevant Delegated Act under the Markets in Financial Instruments Directive II framework, as opposed to the date of entry into force of this Regulation.

According to the Commission it is necessary to amend one particular provision concerning the concentration limits for pension scheme arrangements. This amendment is based on new evidence and should be taken into consideration in order to ensure the proportionate application of those requirements. Given the fact that the application of such concentration limits to certain pension scheme arrangements would require them to enter into foreign currency transactions introducing the costs and risks of foreign currency mismatches, it would be disproportionate to apply the concentration limits in the same manner as other counterparties. Therefore the Commission intends to remove the limits for pension scheme arrangements, in order to prevent such costs and risks, in line with the co-legislators intention to avoid excessive burden on the retirement income of future pensioners as reflected in Rectail 26 of EMIR. The Commission considers that it is more appropriate to replace the concentration limits by specific management risk tools to monitor and address potential risks.

As communicated to the European Parliament and Council and the ESAs on 8 June 2016, the Commission believes that the implementation dates proposed by the ESAs, although they are in line with international principles, they are not viable given the timeframe available to the Commission to complete its adoption procedure and for the European Parliament and Council to conduct scrutiny. The Commission is proposing an adjusted timeline for implementation of the requirements.

The Commission intends to amend the draft RTS in a way that is explained above and detail in the Annex to the letter. The ESAs may amend the draft RTS within 6 weeks on the basis of the Commission’s proposed amendments and resubmit it in the form of a formal opinion to the Commission.

On 9 Sept ESAs published their Opinion (dated 8 Sept 2016) addressed to the European Commission expressing disagreement with its proposed amendments to the final draft Regulatory Technical Standards (RTS) on risk mitigation techniques for OTC derivatives not cleared by a central counterparty, which were originally submitted for endorsement on 8 March 2016.

Following the European Commission’s communication on 28 July 2016, of its intention to endorse the ESAs’ final draft RTS with amendments, the ESAs issued an Opinion rejecting some of the proposed changes.

In particular, the ESAs disagree with the European Commission’s proposal to remove concentration limits on initial margins for pension schemes and emphasise that these are crucial for mitigating potential risks pension funds and their counterparties might be exposed to.

In addition, in the Opinion the ESAs observed the following:

• As with other thresholds in the RTS submitted to the European Commission, the calculation of the threshold against non-netting jurisdictions should consider both legacy and new contracts.
• With reference to covered bonds, the additional condition included in the European Commission’s proposed amendments would have the effect of ranking derivatives counterparties after bond holders, which is contrary to the reasoning established in European Market Infrastructure Regulation (EMIR) to grant a preferred treatment to cover bonds.
• The ESAs recommend providing clarity that non-centrally cleared derivatives concluded by central counterparties (CCPs) are not covered by this regulation. This has been a source of concern for stakeholders.
• More clarity should also be brought to the application of the RTS to transactions concluded with third country counterparties, in particular non-financial counterparties.
• The delayed application to intragroup transactions should be maintained to allow national competent authorities to complete the relevant approval process before the obligation will start applying.

The ESAs believe that the introduction of a number of wording changes proposed by the European Commission may lead to a different application of the provisions compared to their original text of the RTS and, therefore, advise amending them accordingly.

A version of the draft RTS containing all the aforementioned corrections in detail is included as an Annex to the Opinion.

For further information please contact us as office@emirreporting.eu.

EMIR Q&As updated by ESMA

On 27^th July 2016 European Securities and Markets Authority (ESMA) has published an update of its Questions and Answers (Q&A) document regarding the implementation of the European Market Infrastructure Regulation (EMIR).

The updated document includes a new question regarding trades cleared by a clearing house that is not a CCP. More information is available at page 95 of the file.

The Q&As are only guidelines.

CySEC Circulars regarding Brexit

On 24^th June CySEC has issued the Circular C140 that comprises of two parts. The CySEC requires from the investment firms to inform CySEC on the effects that brexit has on their activities, including any contingent liability.

Every investment firm must calculate their own funds and capital adequacy ratio and inform CySEC accordingly. The investment firms should submit the above information by COB (close of business) at the electronic address: supervision@cysec.gov.cy. The first part of the Circular 140 is available here.

The second part of the Circulat C140 clarifies the parameters of the required information and amends the deadline for submitting the information:

• The reference date that the investment firms should use is Friday, 24^th of June, 2016, 12:00 midnight.
• The date of the submission of the information requested in Circular 140, is amended to Tuesday, 28^th of June, 2016, COB (close of business).

The text of the second part of Circular C140 is available here.

Updated EMIR Q&As

Today, 6^th of June, 2016 ESMA has issued an updated implementation Q&As regarding EMIR.

The update concerns the clearing obligations – categories of counterparties:

Categories 1 and 4

CCPs have published the list of counterparties classified in Category 1 (see Section 1.3 of the Public Register on the Clearing Obligation). It is therefore assumed that counterparties in Category 1 have completed their self-classification and made this information available to their counterparties. In addition, for Category 1 counterparties, frontloading started to apply on 21 February 2016.

Category 4 is composed of some non-financial counterparties only. The counterparty classification be-tween financial and non-financial counterparties should have been already completed as it is relevant for the compliance with other applicable requirements under EMIR (e.g. Article 11).

Categories 2 and 3

For counterparties which are neither in Category 1 nor in Category 4, the determination of the category of counterparty depends on the aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives for January, February and March 2016 (at group level).

In addition, the frontloading start date for counterparties in Category 2 is set at 21 May 2016.

Updated Q&As on MiFID

On 1st of June 2016 the European Securities and Markets Authority (ESMA) has published an updated version of its question and answer document (Q&A) on the application of the Markets in Financial Instruments Directive (MiFID) to the marketing and sale of financial contracts for difference (CFDs) and other speculative products to retail clients (such as binary options and rolling spot forex).

The Q&A includes a new question and answer in section 2, which addresses conflicts of interests arising from business models that firms offering speculative products to retail investors may adopt. In particular, ESMA clarifies the conflicts of interest aspects that national competent authorities should consider where a firm uses other parties to perform activities on its behalf and highlights that firms must manage conflict of interests that may arise as a result of remuneration between the parties, which could incentivise behaviours that are not in the best interests of retail clients.
The complexity of CFDs and other speculative products means it may be difficult for the majority of retail investors to understand the risks involved although they are widely advertised to the retail mass market by a number of firms, often via online platforms. There is also a considerable degree of cross-border activity across Europe in these products. Many competent authorities have concerns about the protection of investors in this area and the purpose of the Q&A is to promote common supervisory approaches and practices in the application of MiFID and its implementing measures to key aspects that are relevant when CFDs and other speculative products are sold to retail clients.

Next steps

ESMA will continue to work on this topic and aims to publish further Q&As in the coming months. ESMA will also consider the need for any further work, in the medium term, in light of MiFID II requirements.
The Q&As are targeted at competent authorities. However, the answers are also intended to help firms by providing clarity on MiFID rules.

ESMA adds credit derivatives to Public Register for clearing obligation under EMIR

The European Securities and Markets Authority (ESMA) has published today an updated Public Register for clearing obligations under EMIR.

Today’s update concerns the addition of credit derivatives, notably for iTraxx main and iTraxx crossover contracts, to the clearing obligation. The public register lists the derivatives that have to be centrally cleared under the European Markets Infrastructure Regulation (EMIR). Credit derivatives will have to be centrally cleared following the publication of the relevant EMIR technical standard in the Official Journal of the European Union.