Emir

EMIR Q&As updated by ESMA

On 4^th April 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 Q&A regarding the population of the “Clearing obligation” field in the trade reports. In particular, this Q&A explains how the description of the field should be interpreted, how it should be populated during the frontloading period and how long the counterparties are allowed to report value “X” (standing for “not available”).

We remind that the Q&As are currently only guidelines and are not legally binding. ESMA shall transpose the Q&As into the updated RTS.

ESMA fines DTCC €64,000 for data access failures

On 31^st March, 2016 ESMA fines DTCC Derivatives Repository Limited €64,000 for data access failures.

The European Securities and Markets Authority (ESMA) has fined the trade repository DTCC Derivatives Repository Limited (DDRL) €64,000, and issued a public notice, for negligently failing to put in place systems capable of providing regulators with direct and immediate access to derivatives trading data. This is a key requirement under the European Markets and Infrastructure Regulation (EMIR) in order to improve transparency and facilitate the monitoring of systemic risks in derivatives markets.

This is the first time ESMA has taken enforcement action against a trade repository registered in the European Union (EU). DDRL is the largest EU registered trade repository.

ESMA found that DDRL failed to provide direct and immediate access to derivatives data from 21 March 2014 to 15 December 2014, a period of about nine months in which access delays increased from two days to 62 days after reporting and affected 2.6 billion reports. This was due to its negligence in:

• failing to put in place data processing systems that were capable of providing regulators with direct and immediate access to reported data;
• failing, once they became aware, to inform ESMA in a timely manner of the delays that were occurring; and
• taking three months to establish an effective remedial action plan even while delays were worsening.

DDRL’s failures caused delays to regulators accessing data, revealed systemic weaknesses in its organisation particularly its procedures, management systems or internal controls and negatively impacted the quality of the data it maintained.

Reference 2016/468

Main document.

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Final draft technical standards on margin requirements for non-centrally cleared derivatives

On 9 March 2016 the Joint Committee of the European Supervisory Authorities (EBA, EIOPA, ESMA – ESAs) published the final draft Regulatory Technical Standards (RTS) outlining the framework of the European Market Infrastructure Regulation (EMIR):

• RTS on Risk Mitigation LegisWrite
• Annexes to RTS on Risk Mitigation LegisWrite
• Final Draft RTS on Risk Mitigation Techniques final
• FeedbackTable CP1 and CP2 RTS OTC 01022016

These 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:

1. For OTC derivatives not cleared 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.
2. 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.
3. 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.
4. The draft RTS cover the procedures for counterparties and competent authorities related to the treatment of intragroup derivative contracts.

The RTS will be applied in a proportionate manner to allow counterparties to phase in the requirements.

Legal framework and background

These 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.

In order to address risks related to the derivative markets, the European Parliament and the Council have adopted the European Market Infrastructure Regulation (EMIR) – formally known as Regulation EU No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (EMIR).

EMIR establishes provisions aimed at increasing the safety and transparency of the OTC derivatives markets and requires OTC derivative contracts to be cleared, derivative transactions to be reported to trade repositories and sets a framework to enhance the safety of central counterparties (CCP).

The EMIR was published on 4 July 2012 and entered into force on 16 August 2012. It is directly applicable in all EU Member States.

CySEC Circular regarding EMIR

On 15^th February CySEC has issued Circular No C115 regarding EMIR. CySEC reminds the Regulated Entities about their obligations under EMIR and gives an update about the latest developments in this field.

The Circular covers the clearing obligation, reporting obligation, risk mitigation techniques and the information that CySEC requests from the Regulated Entities in order to verify the extend of EMIR implementation by them.

CySEC requires all Regulated Entities to fill in the form and submit it to the electronic address supervision@cysec.gov.cy no later than Tuesday, March 8, 2016. The form is very detailed and requires information about specific OTC derivatives (covered by the clearing obligation), whether derivatives are already cleared with a CCP, to which TR are the different OTC contracts reported, what are the risk mitigation techniques in place and the current status of the record keeping.

The Circular is available here. The zipped files (Circular No C115 and the form) are available here.

MiFID II one year delay

The European Commission has proposed a one year delay for MiFID II.

The EC has proposed granting national competent authorities and market participants one additional year to comply with the rules set out in the revised Markets in Financial Instruments Directive, known as MiFID II. The new deadline is set to 3 January 2018.

The reason for the extension lies in the complex technical infrastructure that needs to be set up for the MiFID II package to work effectively. The European Commission was informed by ESMA that neither the competent authorities (NCAs), nor the market participants, would have the necessary systems ready by 3 January 2017.

Although the press release states that “this extension will not have an impact on the timeline for adoption of the ‘level II’ implementing measures under MiFID II/MiFIR” it is expected that the Council will probably grant a one year delay for the implementation too. However at this stage the proposed changes in the legislation do not cover changes in Article 93(1) MiFID II that requires the Member States to transpose MiFID II in national legislation by 3 July 2016.

The full text of the European Commission’s press release is available here.

New EMIR Q&As issued by ESMA

On 4^th Feb, 2016 ESMA has issued updated EMIR Q&As. The new information published by ESMA concerns:

• The notional value in position reports;
• More information about CCP default management;

The updated EMIR Q&A is available under this link.

EMIR swap clearing obligation in June 2016

The first technical standards on the clearing obligation under EMIR were published in the Official Journal on 1 December 2015 which gives them legal force and establishes the first application dates regarding the clearing obligation for certain classes of interest rate swaps.

The first EMIR swap clearing obligation requires EU firms to clear the below-mentioned OTC derivatives through CCPs. ESMA’s Public Register lists the classes of OTC derivatives covered by the clearing obligation and those CCPs authorised to clear them.

The Regulation establishes four categories of counterparties:

• In Category 1 fall the the counterparties which, on the date of entry into force of this Regulation (i.e. 21^st Dec 2015), are clearing members for at least one of the classes of OTC derivatives mentioned above and of at least one of the CCPs authorised or recognised before that date to clear at least one of those classes. On 21^st June 2016 the clearing obligation takes effect for the counterparties in Category.
• In Category 2 fall the financial counterparties and alternative investment funds that are non-financial counterparties whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives for January, February and March 2016 is above EUR 8 billion. On 21^st December 2016 the clearing obligation takes effect for Category 2.
• In Category 3 fall the financial counterparties and alternative investment funds that are non-financial counterparties whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives for January, February and March 2016 is below EUR 8 billion. On 21^st June 2017 the clearing obligation takes effect for Category 3.
• In Category 4 fall all other counterparties that do not belong to Category 1, Category 2 or Category 3. The clearing obligation takes effect on 21^st December 2018.

The forthcoming EMIR clearing obligation covers the following classes of OTC interest rate.

• Basis swaps classes (float-to-float swaps)

• Fixed-to-float interest rate swap classes (plain vanilla)

• Forward rate agreement classes

• Overnight index swaps classes

ESMA’s next steps

The next clearing obligations will cover index credit default swaps as well as interest rate swaps denominated in NOK, PLN and SEK, regarding which ESMA has submitted draft regulatory technical standards to the Commission in October and November 2015 respectively. The press release issued by ESMA on 1^st Dec 2015 is 2015/1798 Press release.

What is the impact?

The impact is that the financial companies should carefully decide which of the authorised CCPs are the best option to comply with the legislation. Only certain CCPs clear certain classes of OTC interest rate. Another aspect in the decision-making process is the increased costs for clearing once the clearing obligation come into force compared to the fees that currently apply.

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

ESMA will not exempt the collateralisation of bank guarantees for energy derivatives under EMIR

The European Securities and Markets Authority (ESMA) has decided not to further extend the existing grace period of three years for the non-financial firms’ use of non-collateralised bank guarantees to cover transactions in energy derivatives cleared by European central counterparties (CCPs). ESMA therefore reminds firms concerned that from 15 March 2016 CCPs authorised under the European Market Infrastructure Regulation (EMIR) will need to fully collateralise commercial bank guarantees used to cover transactions in derivatives relating to electricity or natural gas produced.

ESMA assessed the need to further extend the grace period and has considered that an extendsion would not be appropriate for the following reasons:

• allowing fully uncollateralised commercial bank guarantees could mean an undue source of risk for CCPs;
• the existing 3y-grace period seems sufficient for the wholesale energy market to prepare for the incoming collateral obligations;
• some European CCPs already have implemented the EMIR requirements;
• EMIR requires that a CCP only accepts highly liquid collateral with minimal credit and market risk; and
• a new postponement would maintain a discrepancy with international standards such as the CPMI-IOSCO Principles for Financial Market Infrastructures.

ESMA expects the concerned stakeholders to take the necessary steps to be ready to implement the collateral obligation regarding commercial bank guarantees by March 2016.

2015/1750 EMIR statement re bank guarantees energy market

Updates of EMIR standards on data reporting by ESMA

The European Securities and Markets Authority (ESMA) has published today an update of existing technical standards regarding data reporting requirements under the European Markets Infrastructure Regulation (EMIR). EMIR requires counterparties to report their derivative trades to trade repositories following a defined data format.

Since the implementation of EMIR reporting, ESMA has issued several Q&As, clarifying some interpretations of data fields of the technical standards and the most appropriate way of populating them.  In order to ensure a consistent and harmonised population of data fields and reporting of complex derivatives, ESMA decided to transpose its existing Q&As together with some other improvements into the technical standards by reviewing the existing EMIR TS which entered into force in 2013. The updated TS:

• Clarify data fields, including their description, format or both;
• Adapt existing fields to the reporting logic prescribed in existing Q&As or to reflect specific ways of populating them; and
• Introduce new fields and values to reflect market practice or other necessary regulatory requirements.

EMIR requires ESMA to develop draft regulatory (RTS) and implementing technical standards (ITS) in relation to the application of the reporting obligation for counterparties and CCPs.

Overall, EMIR aims at reducing systemic risk by, among others, introducing greater transparency to the OTC derivatives markets. Reporting of OTC derivatives contracts to trade repositories is part of the G20 commitments aimed at reducing risk in the financial system.

Next steps: ESMA’s final draft TS have been sent for endorsement to the European Commission. The Commission now has three months to approve these. Once endorsed, both the European Parliament and the Council have an objection period.

2015/1645 Final report EMIR Article 9 RTS ITS

2015/1674 Cover letter to COM – EMIR Technical Standards

ESMA consults on indirect clearing arrangements

The European Securities and Markets Authority (ESMA) has opened today a Public consultation on draft requirements regarding indirect clearing. Indirect clearing is in practice understood as when clients of a clearing member sign up clients of their own.

ESMA’s draft rules on indirect clearing both refer to the European Market Infrastructure Regulation (EMIR) and the Markets in Financial Instruments Regulation (MiFIR) as they cover arrangements for OTC derivatives and exchange-traded derivatives (ETD) respectively. The aim of this consultation is to address issues raised by stakeholders in prior consultations and ensure consistency in the application of MiFIR and EMIR.

ESMA’s draft regulatory technical standards (RTS) on indirect clearing cover:

• Rules for ETDs that are developed under MiFIR; and
• Rules for OTC derivatives to amend existing RTS under EMIR.

ESMA is seeking stakeholder’s comments to its draft RTS by 17 December 2015.

The final RTS are expected to be delivered early next year.