Emir

ESMA proposes to include ETDs in EMIR’s arrangements for CCPs

The European Securities and Markets Authority (ESMA) has issued today its final report on interoperability arrangements between EU-based clearing houses (CCPs) required under the European Markets Infrastructure Regulation (EMIR) and related Guidelines and Recommendations. In its report, ESMA recommends to extend the EMIR provisions related to interoperability arrangements to Exchange-Traded Derivatives (ETDs). A further extension to OTC derivatives will be assessed at a later stage.

The report provides a mapping and a description of the current interoperability arrangements between EU CCPs for different product types i.e. EU equities, EU government bonds and EU ETDs. In addition, it examines the reasons for extending the current EMIR framework to derivatives taking into account the corresponding costs and benefits to then conclude on the opportunity of such extension and its scope, i.e. restricted to ETDs and not yet to OTC derivatives.

ESMA will submit the final report to the European Commission, Parliament and Council so that its recommendation be endorsed and implemented. In the future ESMA may, if it deemed appropriate, ask to further extend the EMIR framework to OTC derivatives. ESMA will also cooperate with the Commission on the annual assessment of systemic risk and cost implication of interoperability arrangements.

Trade repository ICE Trade Vault Europe Ltd. adds forex derivatives to its services

The European Securities and Markets Authority (ESMA) has published today an update of its list of authorised trade repositories which are authorised under the European Markets Infrastructure Regulation (EMIR). Today’s update concerns ICE Trade Vault Europe Ltd. which has extended its services to forex derivatives.

ICE Trade Vault Europe Ltd. was first authorised on 5 December 2013 for commodities, credit, equities, interest rates derivatives. The authorisation for forex derivatives is effective as of 4 June 2015.

ESMA fosters derivatives market transparency

The European Union’s derivatives markets are becoming more transparent through the public availability of harmonised aggregate data reported to the six trade repositories (TRs) registered with the European Securities and Markets Authority (ESMA) under the European Markets Infrastructure Regulation (EMIR). The publically available data allows market participants to monitor the extent, dynamics and trends of derivatives trading in the European Union, including identifying what has been traded on and off-venue.

EMIR requires TRs to publish a breakdown of:

• the aggregate open positions per derivative class;
• aggregate transactions volumes per derivative class; and
• aggregate values per derivative class.

Since February 2014, when derivatives reporting began in Europe, the six European TRs have received more than 16 billion submissions, with average weekly submissions over 300 million.

In April 2015 alone, more than 200 million new trades were added:

• 55% were exchange-traded derivatives (ETD) trades;
• 31% OTC; and
• 14% listed derivatives traded off exchange.

The largest portion of OTC trades was made up of foreign exchange derivatives (56%); whilst ETD trades were mainly split into Commodities (33%), Equities (27%) and Interest rates (19%) trades.

Harmonisation of public data across TRs

All TRs started publishing aggregate data after February 2014, however the overall aggregation of publicly available data across TRs remained problematic due to different data granularity, level of consistency, presentation structure and formats chosen by TRs. In order to foster market transparency, ESMA, which supervises the six European TRs, asked for the implementation of different measures to improve the quality, harmonisation and access to data aggregates.

From April 2015, harmonised public data is available and updated weekly by all TRs. The information available includes: open positions, trades volume and values are broken down by derivative class, type, trade type (single-sided EEA, single-sided non EEA, or dual-sided) which enables to aggregate and compare data across TRs.

The links to the websites with aggregate public data are the following:

Opinion of ESMA on the composition of the CCP Colleges

The European Securities and Markets Authority (ESMA) has today published an opinion on the composition of the CCP Colleges to clarify which authorities qualify as a college member under Article 18(2)(c) of EMIR following the establishment of the SSM and to resulting voting rights.

The opinion clarifies that where the ECB has taken over the direct prudential supervision of any of the clearing members of the CCP that are established in the three Member States with the largest contributions to the default fund of the CCP, it should join the college pursuant to Article 18(2)(c) of EMIR.

For your convenience please find below the relevant articles from EMIR.

Article 18(2)(c)

The college shall consist of:

The competent authorities responsible for the supervision of the clearing members of the CCP that are established in the three Member States with the largest contributions to the default fund of the CCP referred to in Article 42 on an aggregate basis over a one-year period;

Article 42

Default fund

1. To limit its credit exposures to its clearing members further, a CCP shall maintain a pre-funded default fund to cover losses that exceed the losses to be covered by margin requirements laid down in Article 41, arising from the default, including the opening of an insolvency procedure, of one or more clearing members. The CCP shall establish a minimum amount below which the size of the default fund is not to fall under any circumstances.
2. A CCP shall establish the minimum size of contributions to the default fund and the criteria to calculate the contributions of the single clearing members. The contributions shall be proportional to the exposures of each clearing member.
3. The default fund shall at least enable the CCP to withstand, under extreme but plausible market conditions, the default of the clearing member to which it has the largest exposures or of the second and third largest clearing members, if the sum of their exposures is larger. A CCP shall develop scenarios of extreme but plausible market conditions. The scenarios shall include the most volatile periods that have been experienced by the markets for which the CCP provides its services and a range of potential future scenarios. They shall take into account sudden sales of financial resources and rapid reductions in market liquidity.
4. A CCP may establish more than one default fund for the different classes of instrument that it clears.
5. In order to ensure consistent application of this Article, ESMA shall, in close cooperation with the ESCB and after consulting EBA, develop draft regulatory technical standards specifying the framework for defining extreme but plausible market conditions referred to in paragraph 3, that should be used when defining the size of the default fund and the other financial resources referred to in Article 43.

ESMA consults on technical standard No 4 on central clearing of IRS

The European Securities and Markets Authority (ESMA) has opened today a consultation seeking stakeholders’ views on proposed regulatory technical standards on the clearing obligation under Regulation (EU) No 648/2012 of the European Parliament and Council on OTC derivatives, central counterparties and trade repositories (EMIR).

This paper follows the publication of three consultation papers on the clearing obligation on interest rate derivative classes, credit derivative classes, foreign-exchange non-deliverable forward classes, as well as the publication of a final report on the clearing obligation on interest rate derivative classes, and a feedback statement on non-deliverable forward classes.

The input from stakeholders will help ESMA in finalising the relevant technical standards to be drafted and submitted to the European Commission for endorsement in the form of Commission Regulations, i.e. a legally binding instrument directly applicable in all Member States of the European Union. One essential element in the development of draft technical standards is the analysis of the costs and benefits that those legal provisions will imply. Input in this respect and any supportive data will be highly appreciated and kept confidential where required.

This paper provides explanations on the draft regulatory technical standards establishing a clearing obligation on additional classes of OTC interest rate derivatives that were not included in the first RTS on the clearing obligation for interest rate swaps. The addition consists of the following classes: fixed-to-float interest rate swaps denominated in CZK, DKK, HUF, NOK, SEK and PLN as well as forward rate agreements denominated in NOK, SEK and PLN. The structure of this paper is the following: Section 3 provides an overview of the clearing obligation procedure. Section 4 provides clarifications on the structure of the classes of OTC interest rate derivatives that are proposed for the clearing obligation. Section 5 includes the determination of the classes of OTC derivatives that should be subject to mandatory clearing with an analysis of the relevant criteria. Section 6 presents the approach for the definition of the categories of counterparties, and the proposals related to the dates from which the clearing obligation should apply per category of counterparties. Section 7 provides explanations on the definition of the minimum remaining maturities for the application of frontloading.

Next Steps

As provided for by Regulation No 1095/2010 of the European Parliament and Council establishing ESMA, a public consultation is conducted on the draft technical standards before they are submitted to the European Commission for endorsement in the form of Commission Regulations. In addition ESMA shall consult the ESRB and, where relevant, the competent authorities of third-countries when developing the technical standards on the clearing obligation.

Fines for inaccurate EMIR reporting

According to art. 12 of EMIR the member states should lay down the rules on penalties applicable to infringements of the EMIR rules and shall take all measures necessary to ensure that they are implemented. Furthermore, at regular intervals they must publish assessment reports on the effectiveness of the penalty rules being applied.

The national competent authorities (NCAs) had the obligation to inform the EC by 17 Feb 2013 regarding the penalties and legal measures established in the local legislations. All NCAs except the one of Luxembourg have officially confirmed to ESMA the successful implementation of penalty regimes into their legislations regarding EMIR.

Please find below a table that outlines the official notifications to ESMA and refers to the texts in the local legislations that set the rules for penalties and fines imposed for inaccurate EMIR reporting and EMIR non-compliance as well as the minimum and maximum fines if indicated.

Although some of the NCAs failed to meet the deadline of 17 February 2013 for official confirmation about the legal transposition of the penalties and fines into the local legislations, one year after EMIR has been in force all member states except Luxembourg have successfully implemented the necessary rules and regulations. The maximum fine for inaccurate EMIR reporting and failure to comply with EMIR vary:

• from approximately EUR 35,000 in the Eastern European countries, for example: the lowest is 4,800 EUR (LTL 15,000) in Lithuania, EUR 32,000 in Estonia and EUR 40,000 in Bulgaria;
• within the range of EUR 150,000 and EUR 500,000 in Central and Western Europe, for example: EUR 150,000 in Austria, EUR 500,000 in Spain and Ireland. In Cyprus the maximum fine that can be imposed by CySEC is EUR 350,000 for the first time penalty for inaccurate EMIR reporting and up to EUR 700,000 for the second time.
• up to millions Euro. Few NCAs are given the option to impose maximum fines in million Euros, for example: Portugal with 1.5 million; Belgium with max 2.5 million; Greece: 3 million and the Netherlands with the highest figure of maximum 4 million according to the local legislations.

As an exception the British legislation has not defined any range. It gives freedom to FCA by implementing broad definitions about fines regarding EMIR. The fines are similar to those already imposed by FCA to the companies regarding MiFID: GBP 1 per line of inaccurately reported or non-reported transaction with up to GBP 1.5 per line for companies that repeatedly fail to comply with MiFID.

On 23 Oct 2017 FCA fined Merrill Lynch £34.5 million for failing to report 68.5 million exchange traded derivative transactions between 12 February 2014 and 6 February 2016. This is the first enforcement action in the UK against a firm for failing to report details of trading in exchange traded derivatives under the European Markets Infrastructure Regulation (EMIR). MLI agreed to settle at an early stage of the investigation and received a 30% reduction in their overall fine. Without this discount the fine would have been £49,320,000. More information is available here.

On 21 June 2017 and 26 July 2017 Covip in Italy has applied two sanctions to one pension fund for the infringements of Articles 9 and 11 of EMIR. The pension fund did neither comply with the reporting obligation under Article 9 nor with the risk mitigation techniques requirements of Article 11 of EMIR because of an erroneous assumption that certain OTC instruments were outside the scope of EMIR. The first fine amounts to 105,000 euros. The second fine is for the amount of 60,000 euros.

On 13 June 2018 ESMA has issued a Report on Supervisory Measures and Penalties under Articles 4, 9, 10 and 11 of EMIR. More information is available here.

It is important to establish the fully compliant EMIR reporting processes and procedures since day one. Back in Feb 2014 there was still some uncertainty about few rules and few definitions. For that reason we would urge the companies that are already reporting to perform internal audit of the accuracy of the first submitted transactions as well as back-dated reporting in order to avoid future fines and penalties related to EMIR reporting.

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

Fines for inaccurate MiFID reporting

According to art. 51 of MiFID member states must ensure the appropriate administrative measures can be taken or administrative sanctions be imposed against the persons responsible where the provisions adopted in the implementation of MiFID have not been complied with. Furthermore the member states should provide ESMA annually with aggregated information about all administrative measures and sanctions imposed.

MiFID came into force in Nov 2007. By now FCA is the only national competent authority (NCA) in the EU that has officially imposed fines to 12 companies. The first audits started in Oct 2008 when FCA (then FSA) noted discrepancies in Barclays’ transaction reports. Those actions were taken after a review of trading that was conducted by FSA due to an incident of suspected market abuse by a third party. The first fine for inaccurate MiFID reporting was imposed to Barclays Capital Securities Limited and Barclays Capital Division of Barclays Bank plc on 19 Aug 2009. The financial penalty amounts to GBP 2,45 million and covered the period between 1 October 2006 and 31 October 2008. The fine was imposed because:

• Barclays failed to submit accurate transaction reports as required in respect of an estimated 57.5 million transactions;
• failing to take reasonable care to organize and control its affairs responsibly and effectively, with adequate risk management systems, to meet the requirements to submit accurate transaction reports;
• failing to conduct its business with due skill, care and diligence in failing to respond sufficiently to opportunities to review the adequacy of its transaction reporting systems.

The financial penalty is in million GBP because Barclays failed to implement MiFID accurately during previous reviews and recommendations by FCA.

Since then FCA has imposed fines to:

• 6 more banks totaling almost GBP 30 million;
• 2 brokers: Plus500UK with GBP 205,128 and City Index Limited with GBP 490,000 and
• 3 other companies totaling GBP 2,5 million.

A detailed breakdown of the fines, dates and number of inaccurately reported / not reported transactions is below.

Please note that the figures listed above are after the 30% reduction of the fine because of an early settlement option by the regulator. In the last cases FCA imposed fines of GBP 1 per inaccurately reported or not reported transaction. For example James Sharp and Company failed to report all of its 71,000 transactions and the fine was GBP 71,000. As 30% reduction applies for early payment, the fine was reduced to GBP 49,000. According to FCA the sanctions are with the same amounts for wrong lines and missing lines in the reports. The UK legislation gives very broad definitions about the fines that FCA can impose. For that reason FCA has the freedom to decide on the case-by-case basis the amount of the financial penalties.

The last fine is imposed to Merril Lynch International and it is the biggest one for now: GBP 13,285,900. Merril Lynch International failed to correctly report 35 million transactions and did not report 121,387 transactions. For this case FCA has explicitly stated that the fine is GBP 1.5 per line due to the seriousness of the errors and because Merril Lynch International has failed to comply with MiFID during previous reviews.

Unfortunately, the FCA’s tendency regarding the financial penalties is that they are getting bigger and more frequent. Currently most of the biggest banks are affected. We expect FCA to continue conducting its supervisory activities and to ensure that the companies are fully compliant under MiFID. We would advise the financial companies to do a review of the previously submitted reports in order to ensure that full accuracy has been achieved. We would like to draw your attention to the fact that the revisions are always covering the periods that start with November 2007. The last fine to Merril Lynch International was covering transaction reports for the period between November 2007 and November 2014. For more information please feel free to contact us at office@emirreporting.eu.

Written by Mrs. Rady Petkova, CEO of EMIR Reporting Ready, Ltd.

ESMA recognises third-country CCPs

ESMA has today recognised ten third-country CCPs established in Australia, Hong Kong, Japan and Singapore.

The recognition by ESMA allows third country CCPs to provide clearing services to clearing members or trading venues established in the EU. Those CCPs are established in jurisdictions which have been assessed as equivalent by the European Commission with regard to their legal and supervisory arrangements for CCPs. Several other steps led to the recognition of those third-country CCPs, including the conclusion of cooperation agreements with the relevant third-country authorities, as well as the consultation of certain European competent authorities and central banks, as foreseen by EMIR.

As a result, ESMA has published a list of the recognised third-country CCPs as well as the classes of financial instruments covered by the recognition of the following CCPs: ASX Clear (Futures) Pty Ltd, ASX Clear Pty Ltd, HKFE Clearing Corporation Limited, Hong Kong Securities Clearing Company Limited, OTC Clearing Hong Kong Limited, SEHK Options Clearing House Limited, Japan Securities Clearing Corporation, Tokyo Financial Exchange Inc, Singapore Exchange Derivatives Clearing Limited and The Central Depository (Pte) Limited.

ESMA will update this list after each new decision on the recognition of third-country CCPs.

ESMA publishes updated Q&As including Level 2 validation rules

The European Securities and Markets Authority (ESMA) has today issued the 13th update of its Q&As document on the implementation of the European Markets Infrastructure Regulation (EMIR). This update relates to the second level of the EMIR validation specifications to be commonly applied by the Trade Repositories (TR) to ensure that reporting is performed according to the EMIR regime. Full details about the level 2 field validation can be found in the excel file here.

A failure to comply with the requirements will trigger a rejection of the report by the TR. This is a key step for achieving better data quality as a rejected report will indicate which fields are not reported in compliance with EMIR and need to be corrected, which will allow counterparties to improve their reporting to meet the EMIR standards. The validation controls that TRs will put in place are based on the original rules specified in the EMIR technical standards which were published in December 2012 and entered into force on 12 February 2014. No additional reporting requirements are introduced.   In order to allow sufficient lead time to implement the second level validation, ESMA expects the TRs to be able to implement the validation by end October 2015.

Information about Fines for inaccurate EMIR reporting.

ESMA publishes updated Q&As on the implementation of EMIR

The European Securities and Markets Authority (ESMA) has today issued the 12th update of its Q&A document on the implementation of the European Markets Infrastructure Regulation (EMIR). The Q&As provide answers and guidance related to questions received regarding the implementation of EMIR.

This update includes further guidance on:

• the authorisation of CCP services;
• the clearing obligation;
• the Regulatory Technical Standards (RTS) on direct, substantial and foreseeable effect of contracts within the Union;
• Intragroup transactions (articles 3, 4(2), 11(6), 11(10) of EMIR.

The document is available via this link.