|Reporting obligation under EMIR|
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The reporting requirement represents the most sweeping EMIR (Regulation 648/2012) innovation as all counterparties to all derivatives contracts (OTC and exchange-traded) need to comply and there are virtually no exceptions, all exchange and OTC derivative trades, intragroup trades, trades with non-financial counterparties must be reported alike.
In this context there is no surprise, derivatives reporting under EMIR is a massive process with an average weekly submissions over 300 million (assessments of the European Securities and Markets Authority (ESMA) in the Communication of 29 May 2015).
Six EU trade repositories collected in total nearly 44 billion derivatives reports in 2016 (Steven Maijoor, Chair of the European Securities and Markets Authority, PRIME Finance 6th Annual Conference, Keynote speech The Hague, 23 January 2017, ESMA71-844457584-329).
However, it should be borne in mind that OTC derivatives reporting is a global initiative and different jurisdictions in different ways define the scope of OTC derivatives transactions that are reportable and the respective modalities.
Overall, approximately 26 trade repositories in 16 jurisdictions are either operational or have announced that they will be (Technical Guidance, Harmonisation of the Unique Transaction Identifier, Committee on Payments and Market Infrastructures, Board of the International Organization of Securities Commissions, February 2017, p. 2, 3).
Thus a transaction that is reportable in one jurisdiction may not be reportable in another jurisdiction or may have to be reported in a different way, for example:
− the definition of “OTC” varies between jurisdictions,
To facilitate compliance the relevant EU requirements and context have been described in greater detail in the table below.
It should be noted that there is no exemption for intragroup trades from the EMIR reporting obligation. They should be reported as any other trades.
The applicable field "Intragroup" for reporting such information initially was Field 32, and later, under amendments made by:
- Commission Delegated Regulation (EU) of 19.10.2016 amending Commission Delegated Regulation (EU) No 148/2013 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards on the minimum details of the data to be reported to trade repositories, and
- Commission Implementing Regulation (EU) of 19.10.2016 amending Implementing Regulation (EU) No 1247/2012 laying down implementing technical standards with regard to the format and frequency of trade reports to trade repositories according to Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories;
Field 38 in the Table 2 (Common data).
This field is intended to be populated with information on "whether the contract was entered into as an intragroup transaction, defined in Article 3 of Regulation (EU) No 648/2012."
The said field in the case of intragroup transactions should be filled with the value "Y" = "Yes", and, in the opposite situation, with the value "N" = "No".
Transactions within the same legal entity
Non-European subsidiaries of a group for which the parent undertaking is established in the European Union
Therefore, non-European subsidiaries of European entities are not subject to the reporting obligation.
In the case of contracts between a EU counterparty and a non-EU counterparty, the EU counterparty will need to identify the non-EU counterparty in its report.
Note, ESMA made a specific remark with respect to reporting deadlines for the EU-relocated businesses (Q&A document referred to above).
Reporting compliance strategy
When it comes to EMIR reporting compliance strategy the fundamental choice for market participants is whether to report derivatives themselves or to delegate reporting to their counterparty or another service provider.
Where firms choose the option to report themselves, they face, in turn, the dillema which trade repository to use.
There are the following possibilities regarding practical configurations as regards reporting:
1) one counterparty delegates on the other counterparty;
2) one counterparty delegates on a third party;
3) both counterparties delegate on a single third party;
4) both counterparties delegate on two different third parties.
A third party may perform the function of reporting for the counterparties to the trade only through a previous agreement (on behalf of one or both counterparties), nevertheless the obligation to report lies always on the counterparties to a trade.
When reporting is delegated it is advisable for firms to safeguard free access to data included in their EMIR reports, in order to check that their reports are being correctly submitted to the trade repository. Trade repositories often offer such a type of membership (enabling only access to trade reports already entered by other counterparties), which involves significantly reduced membership fees.
When it comes to contractual tools for the EMIR reporting delegation, see, for instance, ISDA/FOA EMIR Reporting Delegation Agreement.
The brokers' role
It is important to take into account that investment firms that provide investment services (like execution of orders or receipt and transmission of orders) do not have any obligation to report under EMIR unless they become a counterparty of a transaction by acting as principal; nothing prevents counterparties to a derivative to use an investment firm (as a broker) as a third party for TR reporting, but this is a general possibility in all cases.
When counterparty is dealing bilaterally with another counterparty through a broker, which acts as agent (introducing broker) the said broker is not signing or entering into any derivative contract with any of the counterparties and, consequently, is not considered as a counterparty under EMIR, thus also not being under the duty to report.
Moreover, in the particular case when the investment firm is not involved in the process of receiving and/or posting any collateral for the client because of direct arrangements between the client and the clearing member, the investment firm is not expected to submit any report on the value of the collateral, or on any subsequent modification as well as termination of the concluded derivative contract.
So, when reporting the conclusion of a derivative contract in the trading venue the two trading scenarios should be distinguished: one in which the investment firm is itself a counterparty to the trade (in the sense meant by EMIR) and the other in which it is not, but just acted on the account of and on behalf of the client to execute the trade.
In the case of an investment firm that is not a counterparty to a derivative contract and it is only acting on the account of and on behalf of a client, by executing the order in the trading venue or by receiving and transmitting the order, such firm will not be deemed to be a counterparty to the contract and will not be expected to submit a report under EMIR.
In turn, where an entity is fulfilling more than one of these roles (for example, where the investment firm is also the clearing member) then it does not have to report separately for each role and should submit one report identifying all the applicable roles in the relevant fields.
Technical rules for reporting trades with the broker participation are as follows:
- if a counterparty is itself the beneficiary to a trade it should be reported in both the "counterparty" and "beneficiary" fields;
- if a counterparty is itself the Clearing Member (CM) to a trade, it should it be reported in both the "counterparty" and "CM" fields;
-if a CM is itself the broker to a trade, it should be reported in both the "CM" and "broker" fields;
- if a broker is itself the counterparty (legal principal) to a trade, it should it be reported in both the "broker" and "counterparty" fields (ESMA Q&A, TR Question 9).
CCPs in derivatives' reporting under EMIR
The CCP's role in the reporting process has been explained by ESMA in the following way:
Article 9 provides that counterparties and CCPs should ensure reporting, not only CCPs. Counterparties and CCPs should ensure that there is no duplication of the reporting details by way of agreeing on the most efficient reporting method, to avoid duplication.
In the scenario where the CCP and counterparties use different TRs, it is possible that the CCP reports that the contract has been cleared in a TR different from the TR in which the contract has been originally reported by the counterparties.
CCPs and counterparties should then do so with consistent data, including the same trade ID and the same valuation information to be provided by the CCP to the counterparties.
When it comes to the CCP's ID the practical issue arose with respect to derivative contract cleared by an entity which is not a CCP within the meaning of EMIR (e.g. a clearing house). The ambiguity was whether the clearing house be identified in the field "CCP ID".
ESMA referred to this point in its Q&As on EMIR and its answer was in the negative. Pursuant to the EU financial regulator the field "CCP ID" should only be populated with the identifier of a CCP, i.e. a central counterparty which meets the definition of Article 2(1) of EMIR.
In the same interpretation issued on 26 July 2016 ESMA also explained that if the transaction is executed in an anonymised market and cleared by a clearing house the counterparty executing the transaction should request the trading venue or the clearing house that matches the counterparties to disclose before the reporting deadline the identity of the other counterparty.
Under Article 9 of EMIR, both the counterparties and the CCP have an obligation to ensure that the report is made without duplication, but neither the CCP nor the counterparties have the right to impose on the other party a particular reporting mechanism.
However, when offering a reporting service the CCP can choose the TR to be used and leave the choice to the counterparty on whether to accept or not the service for its trade to be reported by the CCP on its behalf.
The requirement to report without duplication means that each counterparty should ensure that there is only one report (excluding any subsequent modifications) produced by them (or on their behalf) for each trade that they carry out. Their counterparty may also be obliged to produce a report and this also does not count as duplication.
Where two counterparties submit separate reports of the same trade, they should ensure that the common data are consistent across both reports.
Article 2 of the Commission Delegated Regulation (EU) No 148/2013 of 19 December 2012 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards on the minimum details of the data to be reported to trade repositories (OJ L 52, 23.02.2013, p. 1) initially stipulated that where an existing contract is subsequently cleared by a CCP, clearing should be reported as a modification of the existing contract.
This rule has been changed in the subsequent amendment - see the box.
Population of the field on the clearing obligation
The applicable field for reporting data on the clearing obligation initially was Field 28, and later, under amendments made by the aforementioned Commission Delegated Regulation of 19.10.2016 and Commission Implementing Regulation of 19.10.2016, Field 34 in the Table 2 (Common data).
This field is intended to be populated with information on "whether the reported contract belongs to a class of OTC derivatives that has been declared subject to the clearing obligation and both counterparties to the contract are subject to the clearing obligation under Regulation (EU) No 648/2012, as of the time of execution of the contract".
Hence, this field is required to be be populated with "Y" only if a specific contract is subject to the clearing obligation, meaning that:
(i) the contract pertains to one of the classes declared as subject to the clearing obligation and
(ii) the contract is concluded between the counterparties that are subject to the clearing obligation as of the time of execution of the contract.
Contracts that are entered into during the frontloading period and will have, at the date of application of the clearing obligation for that contract, a remaining maturity higher than the minimum remaining maturity specified in accordance with Article 5(2)(c) of EMIR should be flagged with "Y" in the Clearing Obligation field.
These contracts are subject to the clearing obligation from the moment the contract is entered into, even if the counterparties will effectively be required to clear them only at the date when the clearing obligation takes effect.
Until the beginning of the frontloading period for Category 1 counterparties there will be no contracts pertaining to the given classes of OTC derivatives that are subject to the clearing obligation, therefore it is considered that counterparties should report "X".
Upon the beginning of the front-loading period for Category 1 counterparties, all the counterparties shall report either "Y" or "N" for the contracts pertaining to the given classes.
The example below (included in the TR Question 42 ESMA's EMIR Q&As) illustrates how the field 28 Table 2 should be populated by the Category 1 and Category 2 counterparties for the contracts pertaining to the classes in the scope of Regulation (EU) 2015/2205 i.e. IRS derivatives.
Collateral and valuations' reporting
Reporting rules for the collateral and valuations (mark-to-market or mark-to-model) are specific when compared to general EMIR arrangements.
There was a delay of 180 days after the reporting standard start date (12 February 2014), hence it effectively began on 11 August 2014 (see ITS Article 5(5) in connection with RTS Article 3).
The second distinctive feature is it only applies to financial counterparties and non-financial counterparties above the clearing threshold (NFCs+), while non-financial counterparties below the clearing threshold are not required to report collateral, mark to market, or mark to model valuations (RTS Article 3(4)).
Unique Trade Identifier (UTI)
Each reported derivative contract is required by Commission Delegated Regulation (EU) No 148/2013 to have a Unique Trade Identifier (UTI).
EMIR imposes the general obligation according to which counterparties need to agree the report's contents before submitting it to TRs.
According to this rule the existing technical standards prescribe that the Unique Trade Identifier must be agreed with the other counterparty (see Table 2, field 8 of the RTS).
In light of the low pairing rates of the TR reconciliation process, ESMA considers that an additional prescriptive rule should be included to account for the cases where counterparties fail to agree on the responsibility to generate a UTI.
That said, it was proposed (ESMA Consultation Document, Review of the technical standards on reporting under Article 9 of EMIR of 10 November 2014 (ESMA/2014/1352)) to introduce Article 6 in the Draft Implementing Technical Standards prescribing which reporting entity is responsible for the creation and transmission of the UTI in the absence of agreement between counterparties.
This was upheld in the ESMA's Final Report of 13 November 2015 and, finally, implemented in the aforementioned Commission Regulations of 19.10.2016 and 19.10.2016.
Legal Entity Identifiers (LEIs)
Legal Entity Identifiers (LEIs) are required for EMIR reporting (see Article 3 of Commission Implementing Regulation (EU) No 1247/2012).
For customers being individuals who do not have a BIC or LEI ESMA initially adopted the view to be acceptable to use for EMIR reporting a client code, e.g. account number or member id, while for customers other than individuals LEI (and not BICs) was mandatory to identify counterparties.
However, it appears this stance has changed with the publication of the ESMA Consultation Document, Review of the technical standards on reporting under Article 9 of EMIR of 10 November 2014 (ESMA/2014/1352, where the European financial authority said:
"[t]o avoid any misuse of Interim Entity Identifier, BIC or Client codes, ESMA assessed the necessity of allowing all of those code types in all relevant fields. According to the assessment, in certain instances, a private individual could not be identified in a particular field and therefore it is proposed to delete the possibility of using a client code in that field. As LEIs, fulfilling the ROC principles and the ISO 17442 standard are already in place, there is no need to provide the possibility of using less robust identifiers like BICs or Interim Entity Identifiers any longer and therefore these are proposed to be deleted as well."
LEI for EMIR reporting purposes needs to be issued by, and duly renewed and maintained according to the terms of, any of the endorsed LOUs (Local Operating Units) of the Global Legal Entity Identifier System (see How to obtain an LEI).
One should be mindful of the fact, at its first phase, LEI does not cover branches or desks which are not legal entities, hence the same legal entity under the EMIR reporting scheme would only have one LEI (it is an issue for early review due to a need for separate identification under some cross-border resolution schemes - see Recommendation 10 of the FSB Report on a Global Legal Entity Identifier for Financial Markets).
Moreover, on 1 October 2015 ESMA explained in greater detail the issue of the LEI updates due to mergers and acquisitions (Q&As TR Question 40). The relevant question was:
"How are TRs expected to treat situations where the counterparty identified in a derivative transaction reported to them a change in LEI due to a merger or acquisition or where the identifier of the counterparty has to be updated from BIC (or other code) to LEI? How are counterparties expected to notify the change to their relevant TR?"
ESMA commented that the entity with the new LEI (i.e. merged or acquiring entity or entity which updates its identification to LEI – further "new entity") or the entity to which it delegated the reporting should notify the TR(s) to which it reported its derivative trades about the change and request update of the identifier in the outstanding trades as per letter (a) below.
If the change of the identifier results from a merger or acquisition, the merged or acquiring entity is also expected to duly update the LEI record of the acquired/merged entity no later than the next LEI renewal date according to the terms of the endorsed LOU/accredited LOU who issued the old LEI.
The TR shall identify all the outstanding trades, where the entity is identified with the old identifier in any of the following fields: counterparty ID, ID of the other counterparty, broker ID, reporting entity ID, clearing member ID, Beneficiary Id, Underlying and CCP ID, and replace the old identifier with the new LEI.
This is done through the following controlled process:
a) The new entity or the entity to which it delegated the reporting, submits written documentation to the TR(s) to which it reported its derivative trades and requests the change of the identifier due to a corporate event or due to the LEI code being assigned to the entity. In the documentation, the following information should be clearly presented:
b) The TR broadcasts this information to all the other TRs through a specific file, where the
c) Each of the counterparties to the trades, where any of the merged entities is identified, is informed of the modification by the TR to which they report.
d) TR(s) shall notify also the regulators who have access to the data relating to the trades that have been updated.
e) The change is kept in the reporting log by each of the TRs.
f) Subsequent reports with the old LEI should be rejected by the TRs.
Exchange-traded derivatives (ETDs) reporting
The EMIR reporting obligation covers all derivative contracts (it doesn't matter OTC or exchange-traded (ETD)).
The said rule is expressed literally by Article 9 of EMIR, which stipulates that financial and non-financial counterparties must ensure that the details of the said derivative contracts they have concluded and of any modification or termination are reported to a registered or recognised trade repository.
Derivative contracts admitted to trading on regulated markets represent the vast majority of ETDs, however, they don't exhaust the entire ETD's scope. ETDs are not defined under European legislation.
EMIR defines OTC derivatives as contracts the execution of which does not take place on a regulated market or on a third country regulated market.
ESMA's Q&As on EMIR Implementation OTC Q.1 (d) clarifies the following:
"Derivatives transactions, such as block trades, which are executed outside the trading platform of the regulated market, but are subject to the rules of the regulated market and are executed in compliance with those rules, including the immediate processing by the regulated market after execution and the clearing by a CCP, should not be regarded as OTC derivatives transactions. Therefore, these transactions should not be considered for the purpose of the clearing obligation and the calculation of the clearing threshold by NFC that only relates to OTC derivatives.
ESMA regards ETDs as "derivative contracts which are subject to the rules of a trading venue and are executed in compliance with those rules, including the processing by the trading venue after execution and the clearing by a CCP".
In fact, ESMA has proposed draft Commission Implementing Regulation amending Commission Implementing Regulation (EU) No 1247/2012 of 19 December 2012 laying down implementing technical standards with regard to the format and frequency of trade reports to trade repositories according to Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories recommending the addition in Article 5 of the Commission Implementing Regulation (EU) No 1247/2012 the paragraph 6 stating that derivative contracts which are subject to the rules of a trading venue and are executed in compliance with those rules, including the processing by the trading venue after execution and the clearing by a CCP within one working day of execution, should be reported to a trade repository by 1 January 2015. However, the said proposition to delay the ETDs' reporting starting date has not been approved by the European Commission and not become binding law.
EMIR vs. MiFID/MiFIR and REMIT reporting
EMIR (Article 9) and MiFID (Article 25 of Directive 2004/39/EC of 21 April 2004 of the European Parliament and of the Council on Markets in Financial Instruments) require that transactions on derivatives admitted to trading to a regulated market are subject to both reporting under MiFID (direct reporting to competent authorities) and under EMIR (reporting to trade repositories for the purpose of making the data available to the relevant authorities in accordance with their regulatory needs).
Following the start of EMIR reporting to trade repositories on 12 February 2014, firms are reminded that their MiFID transaction reporting obligations remain unchanged and they are expected to continue transaction reporting as per current arrangements. Reporting to trade repositories under EMIR does not replace any transaction reporting obligation under MiFID and firms should continue to submit their transaction reports under MiFID.
The more convenient regulatory framework brings MiFIR, which established the rule that trade-matching or reporting systems, including trade repositories registered or recognised in accordance with EMIR, may be approved by the competent authority as an ARM in order to transmit transaction reports to the competent authority.
In cases where transactions have been reported in accordance with EMIR to a trade repository, which is approved as an ARM, and where these reports contain the details required by MiFID 2 and are transmitted to the competent authority by the trade repository within the time limit set in MiFID 2, the obligation to report data laid down on the investment firm by MiFID 2 is considered to have been complied with.
Trade repository with an ARM functionality is for instance UnaVista Limited (entity operates as a European Approved Reporting Mechanism (ARM) under the MiFID regime for all asset classes and markets and by becoming a trade repository also for all asset classes across all venues, customers will only need to connect once to meet both their EMIR and MiFID reporting requirements). Such a solution really eases the regulatory reporting burden, so it can be expected will soon become more common.
The MiFID I, MiFIR and REMIT reporting frameworks concentrate on the prevention of market abuse, while the reporting regimes under EMIR centre on the monitoring of systemic risk in specific markets.
The MiFID I and MiFIR reporting schemes apply to EU regulated investment firms and banks, while unregulated end-users are not subject to reporting requirements at issue.
As opposite, apart form some exceptions, EMIR and REMIT apply to any person who trades the relevant products, and their regulated status is negligible (see: The new EU transaction reporting regimes, Comparing MiFIR, MiFID1, EMIR, REMIT and SFTR, February 2015).
The EU regulatory authorities try "to align requirements with EMIR where possible but this is only possible to a limited extent since the purposes of EMIR and transaction reporting are quite different and reporting for EMIR takes place at the position level rather than the transaction level" (ESMA's Final Report Draft RegulatoRy and Implementing Technical Standards MiFID II/MiFIR, 28 September 2015 (ESMA/2015/1464), p. 364).
Collateral portfolio code
As regards Collateral portfolio code ESMA has clarified, it is up to the counterparty making the report to determine what unique value to put in this field, however, it should only be populated if the Collateral portfolio field has the value 'Y' ("Yes").
It is, for example, permissible to use a value in this field that is supplied by the CCP, but this is not required and other values could be used.
Collateral portfolio was initially reported in the Field 23 and Collateral portfolio code in the field 24 of the Table 1, but, under amendments made by the aforementioned Commission Delegated Regulation of 19.10.2016 and Commission Implementing Regulation of 19.10.2016, the applicable fields are 22 and 23 (respectively).
Under the amended framework Collateral portfolio Field (22) indicates "Whether the collateralisation was performed on a portfolio basis. Portfolio means the collateral calculated on the basis of net positions resulting from a set of contracts, rather than per trade."
The permissible values in the said field are "Y" = "Yes", and "N" = "No".
In turn, the description of the Collateral portfolio code in the field 23 of the Table 1 is "If collateral is reported on a portfolio basis, the portfolio should be identified by a unique code determined by the reporting counterparty" (up to 52 alphanumerical characters).
Answering to the question: "[a]re all fields specified in the Annex of the Commission Delegated Regulation (EU) No 148/2013 mandatory? Can some fields be left blank?" ESMA adopted the following stance (TR Answer 20):
In general, all fields specified in the RTS are mandatory. Nevertheless, two different instances need to be acknowledged, namely:
1. The field is not relevant for a specific type of contract/trade, for example:
- settlement date field where the underlying is an index,
- commodity underlying field in case of equity derivatives,
- Domicile of the Counterparty in case of coverage by LEI.
2. The field is relevant for a given type of contract/trade, however:
a. there is a legitimate reason why the actual value of this field is not being provided at the time the report is being submitted, or
b. none of the possible values provided for in the Annex of the Commission Implementing Regulation (EU) 1247/2012 for a given field apply to the specific trade (e.g. in the case of report submitted by the CCP, field No 7 in the Table 1 Counterparty Data).
In order to enable the TRs distinguishing between the two instances above and allow them to comply with requirements of Article 19 of the Commission Delegated Regulation (EU) 150/2013 (in particular to verify the compliance of the reporting counterparty or submitting entity with the reporting requirements), a different approach should be envisaged when it comes to population of the not relevant and relevant fields.
In the first case, since the field is not relevant for a given trade, it should be left blank.
In the second case, the mandatory relevant field should not be left blank and should include the Not Available (NA) value instead.
To manage the above issues reporting validation tables have been implemented - see below.
Mark-to-market value reporting
The aforementioned ESMA Consultation Paper of 10 November 2014 proposed to clarify how the mark to market value (Table 1 field 17) should be calculated and reported. It was proposed to recognise market practice in how different types of derivative contracts are valued and to allow for more than one way of calculating the mark to market value depending on the type of derivative contract:
1. For futures and options the mark to market valuation should be calculated using the size of the contract and the current market price (or model price, when appropriate). This is generally expected to be a positive number.
2. For CFDs, Forwards, Forward Rate Agreements, Swaps and other derivative types the value reported should represent the replacement cost of the contract, taking into account the delivery of the underlying. For a majority of these products, the initial value would be typically close to zero, when conducted at market rates. Subsequent values would then be positive if the value of the trade had moved in favour of the reporting counterparty since execution and negative if it had moved against the reporting counterparty. Under this approach, the value reported by the first counterparty should be approximately equal to the value reported by the second counterparty multiplied by minus one, with any differences being attributable to differences in the specific valuation methodology.
3. For cleared trades, this calculation should be based on the CCP's settlement price.
4. An alternative would be to adopt the replacement cost approach for all derivative contracts, although ESMA understands that this may pose challenges for some of them.
5. In performing the above calculations, no account should be taken of any cash flows that may have been posted/received in the form of variation margin or, generally, occurred as part of a mark to market process, operated by a CCP or bilaterally.
See in the box Article 3 of the RTS as amended by the Commission Delegated Regulation of 19.10.2016.
Description of the relevant Field 17 in the Table 1 (Value of the contract) in the Annex to the said Commission Delegated Regulation is:
"Mark to market valuation of the contract, or mark to model valuation where applicable under Article 11(2) of Regulation (EU) No 648/2012. The CCP's valuation to be used for a cleared trade."
Notional amount reporting
Notional amount field requires particular attention.
In the EMIR reporting format it initialy existed as Field 14 Table 2 (Common data), described as: "Notional amount" and intended for the reporting of the "original value of the contract".
Under amendments made by the aforementioned Commission Delegated Regulation of 19.10.2016 and Commission Implementing Regulation of 19.10.2016, this is the Field 20 (in the same Table) named, briefly, "Notional", and to be populated with "the reference amount from which contractual payments are determined. In case of partial terminations, amortisations and in case of contracts where the notional, due to the characteristics of the contract, varies over time, it shall reflect the remaining notional after the change took place."
As regards notional amount reporting there were multiple, practical ambiguities, dealt with by ESMA on an ongoing basis with the use of the Q&As documents. Many of these clarifications became incorporated into the aforementioned Commission Delegated Regulation of 19.10.2016 and Commission Implementing Regulation of 19.10.2016.
With respect to instruments like options, contracts for difference (CFD) and commodity derivatives which are designated in units such as barrels or tons ESMA has clarified that nominal or notional amounts are the reference amount from which contractual payments are determined in derivatives markets. It can also be defined as the value of a derivative's underlying assets at the applicable price at the transaction's start (in the case of options, this is not the premium).
Another ambiguity arose when determining a notional amount with respect to contracts where prices will only be available by the time of settlement.
In such a case the notional amount should be evaluated using the price of the underlying asset at the time the calculation of the positions in OTC derivatives to be compared to the clearing thresholds is made.
With respect to contracts with a notional amount that varies in time OTC the notional amount to be considered is the one valid at the time the calculation of the positions in OTC derivatives to be compared to the clearing thresholds is made.
An ambiguity also arose as to the EMIR reporting procedure for some derivative contracts, like Contracts For Difference (CFDs), lacking specified maturity date and, at the moment of their conclusion, specified termination date.
It was observed, counterparties may at any moment decide to close the contract, with immediate effect. They can also close it partially as counterparties may terminate only a part of the volume on one day and the other part or parts of the contract on any other day.
ESMA requires each opening of such new contract to be reported by the counterparties to the trade repository as a new entry. Once the contract is closed, the counterparty should send a termination report to the initial entry, completing the field "Termination date". If the contract is closed partially, counterparties must send a modification report to the initial entry, reducing only its "Notional amount" (remaining volume is equal to the not yet terminated volume).
If there is another partial close, yet another modification report is sent – until the contract is finally closed in whole. Then, the counterparties need to send a termination report marked as "cancelled", completing the field "Termination date". In these cases, the opening price of the contract is reported only in the first report (new) and it is not updated in the following modification reports.
The observation was made that trades are regularly terminated or novated in part or increased or decreased.
In this context an ambiguity arouse, which type of values is the notional amount field intended to capture.
Referring to this issue ESMA recalled when an opening of a new contract occurs, the notional amount field represents the "original value of the contract".
Furthermore, when the nominal value is increased or decreased as result of lifecycle events, counterparties should send a modification report to the initial entry, modifying the quantity and/or the "Notional amount" accordingly to reflect the remaining volume. If the quantity changes then the "Notional amount" should be updated accordingly.
When it comes to the OTC derivatives novations (understood in the way that for the exiting party, the existing transaction terminates, whilst for the entering party, a new transaction arises) the EMIR reporting procedure is as follows:
Moreover, in the Consultation Paper of 10 November 2014 ESMA also proposed clarifying derivatives' notional in the following way:
- In the case of swaps, futures and forwards traded in monetary units, original notional shall be defined as the reference amount from which contractual payments are determined in derivatives markets;
- In the case of options, contracts for difference and commodity derivatives designated in units such as barrels or tons, original notional shall be defined as the resulting amount of the derivative's underlying assets at the applicable price at the date of conclusion of the contract;
- In the case of contracts where the notional is calculated using the price of the underlying asset and the price will only be available at the time of settlement, the original notional shall be defined by using the end of day settlement price of the underlying asset at the date of conclusion of the contract;
- In the case of contracts where the notional, due to the characteristics of the contract, varies over time, the original notional shall be the one valid on the date of conclusion of the contract.
As was said above, these propositions have been transferred into binding regulations in 2016.
The above ESMA's Consultation Paper of 10 November 2014 suggested the following reporting specification with regard to the collateralisation of derivatives contracts:
(a) uncollateralised (U) – when the reporting counterparty to such derivative contract is not posting any collateral (neither initial margin nor variation margin) at any time;
(b) partially collateralised (PC) – when the agreement between the counterparties states that either one or both counterparties will regularly post variation margin and either they do not exchange initial margin at all or only the reporting counterparty receives initial margin;
(c) one-way collateralised (OC) – when the agreement between the counterparties states that only the reporting counterparty to such derivative contract agrees to post initial margin, regularly post variation margin or both with respect to the derivative contract;
(d) fully collateralised (FC) – when the agreement between the counterparties states that initial margin must be posted and variation margin must regularly be posted by both counterparties.
In the aforementioned ESMA's Final Report of 13 November 2015, given the margin requirement implementation, for which counterparties will have in any way to make distinction between initial and variation margin for OTC derivatives, the proposed approach of disaggregating initial and variation margin was maintained.
Moreover, given the different valuable information brought by the distinction between collateral received and posted, the approach described in the Consultation Paper was also maintained.
In the said Final Report of 13 November 2015, based on the feedbacks, and to better fit with industry practices, ESMA decided to introduce additional fields to capture excess collateral posted or received.
The above ESMA's recommendations has been incorporated into the aforementioned Commission Delegated Regulation of 19.10.2016 and Commission Implementing Regulation of 19.10.2016 (Article 3b and Table 1 Field 21).
Pursuant to these regulations the population of this field should "indicate whether a collateral agreement between the counterparties exists" and relevant formats are exactly the same as the ESMA proposed.
TRs should apply validation rules to ensure that reporting is performed according to the EMIR regime, including the specifications of the Technical Standards.
Accordingly, reporting counterparties or submitting entities should comply with the reporting requirements specified in the ESMA's EMIR reporting validation table.
The first level validation refer to determining which fields are mandatory in all circumstances and under what conditions fields can be left blank or include the Not Available (NA) value.
The second level validation refer to the verification that the values reported in the fields comply in terms of content and format with the rules set out in the technical standards.
Where applicable, the logical dependencies between the fields are taken into account to determine the correct population of the fields. The second level validations are complemented with instructions on the fields which should be populated depending on the action type.
The first level validation is already in place since 1 December 2014.
ESMA finalised its work on the definition of Level 2 validations and published the validation rules in April 2015.
Validation rules were updated in July and November 2015.
In order to allow sufficient lead time to implement the second level validation, ESMA expected the TRs to be able to implement the second level validation by end October 2015.
The second level validation applies to all the reports, irrespective of the action type, relating to the trades reported with Action type "New" upon this validation coming into force.
Updates to the reports of the transactions reported before the start date of the second level validations are not be subject to this validation.
In order to be compliant with the requirements of Article 19 of the Commission Delegated Regulation (EU) 150/2013, TRs are required to reject the reports which are not submitted in line with the reporting requirements specified in the Validation Table.
On 4 July 2016 the updated version of the ESMA's EMIR reporting validation table has been published.
According to Article 4(3) of the Commission Implementing Regulation (EU) No 1247/2012 in cases where a unique product identifier (UPI) does not exist and a derivative contract cannot be identified by using the combination of ISIN or AII with the corresponding CFI code, the type of derivative contract should be identified through the Interim taxonomy (see boxes).
The general provision of Article 4(3)(c) of ITS 1247/2012 sets the following rule: for cases where a derivative does not fall into a specific derivative class or type, counterparties need to agree on the derivative class and type the derivative contract most closely resembles.
Considering the above guiding principle, the above-mentioned ESMA Consultation Document of 10 November 2014 (p. 7) proposed to remove, by the ITS amendment, the "other" category from the derivative type and derivative class.
The aforementioned Final Report of 13 November 2015 observes, however, most respondents prefer to keep the "other" category for both asset class and derivatives type until a global UPI is endorsed.
The respondents to the consultation have raised many reasons to maintain the category "other", such as:
Considering the feedback received, the ESMA's view expressed in the above Final Report was to keep the category "other" for the derivatives type.
However, ESMA considers that any derivative will fall under one or more of the five asset classes specified in the technical standards. In case of the derivatives comprising more than one asset class, there is already a provision in the regulatory technical standards which states that where there is an uncertainty over which asset class the contract falls into, counterparties should report using the asset class to which the contract most closely resembles. Thus, in the aforementioned Final Report presented the stance that it appropriate to remove the category "other" from the asset class.
Another issue is that in the absence of UPI taxonomy endorsed in Europe, no other taxonomy, classification or code should be used to populate these fields (i.e. Fields No 2 and 3 in the Table 2 Common data).
If the Trade Repository offers a proprietary classification or taxonomy it could be used to populate other additional fields provided for by the given Trade Repository but it should not be used for population Fields No 2 and 3 referred to above.
Position level reporting
ESMA made the point that it is possible to use position level reporting as a supplement to trade level reporting provided that all of the following conditions are met:
1. The legal arrangement is such that the risk is at position level, the trade reports all relate to products that are fungible with each other and the individual trades have been replaced by the position. This could be the case, for example, between a clearing member and a CCP.
2. The original trades, i.e. at transaction level, have been correctly reported. It is not permissible to report only positions. All contracts concluded on or after 12 February 2014 must be reported at the transaction level in all cases, starting 12 February 2014.
3. Other events that affect the common fields in the report of the position are separately reported.
4. The original trade reports (point 2 above) and reports relating to other events (point 3 above), where applicable, have reached a suitable "end of life state". This should be achieved by marking the original trades/event reports as compressed (i.e. putting the value 'Z' into the Action type (Table 2 Field 58) via a modification) and then reporting the resulting net position (either as a new position or as an update to an existing position) marked as being the result of a compression (i.e. with the value 'Y' in the Compression field (Table 2 Field 11)).
5. The report of the position is made correctly filling in all the applicable fields in Tables 1 and 2.
6. The applicable Trade Repository is capable of receiving reports at position level as described above and is also capable of providing both trade and position level data to authorities in a consistent way as defined by ESMA.
The significance of the position level reporting lies in that if the above conditions are met, then subsequent updates, including valuation updates, collateral updates and other modifications and lifecycle events can be applied to the report of the position (as modifications etc., and keeping the same value of the Trade ID on the position) and not to the reports of the original trades/events.
Specific regulatory comments were made on issues of notional in position level reporting.
ESMA reminded, where a report is made at a position level, all applicable fields should be populated.
This means that all the data elements that are required in trade reports are mandatory as well in position reporting, with the exception of those that are relevant only at trade level.
Hence, the field "Notional" must always be populated also in reports made at position level.
It was also explained how to populate the field "Notional" in position level reports with respect to options and futures.
Pursuant to ESMA, notional should be calculated as follows:
For options: Notional = Quantity x Price Multiplier X Strike Price
For futures: Notional = Quantity x Price Multiplier x Settlement Price
The reporting of modifications to the Notional for positions should take place only if an event relevant for the position has taken place, e.g. a new trade relevant for the position has been concluded and re- ported.
It should be noted that if any field used to calculate a Notional is populated with "999999999999999,99999" (standing for "not available" in numeric fields), such value should not be used for the relevant calculations (ESMA's Q&As on EMIR, TR Question 41).
The aforementioned Commission Delegated Regulation of 19.10.2016 and Commission Implementing Regulation of 19.10.2016, added the Field 94 into the EMIR reporting format (Table 2 (Common data)).
According to the said regulations this field should indicate "whether the report is done at trade or position level. Position level report can be used only as a supplement to trade level reporting to report post-trade events and only if the individual trades in fungible products have been replaced by the position."
The values to be filled in with this field are: T = Trade and P = Position.
ECC approach for backloading
Exchange traded derivatives, which were entered into before 16th August 2012 and were still outstanding on 12th February 2014 had to be backloaded within 90 days of the reporting start date.
Furthermore, exchange traded derivatives, which were entered into before 16th August 2012 and outstanding on that date as well as entered into on or after 16th August 2012 and that were not outstanding on or after the reporting start date must be reported to a trade repository within 3 years (note that Commission Implementing Regulation of 19.10.2016 extended this term to 5 years).
Lifecycle events for those transactions don't have to be reported.
Pursuant to ECC (European Commodity Clearing AG) circular, ECC reports all positions that were open on 16th August 2012 (ECC has chosen Regis-TR as its trade repository).
It should be noted, for derivative contracts where ECC holds all reportable information, it offers a full delegation service without further need for interaction with the customer. Yet, for transactions where ECC does not hold all reportable information, it only offers a partial delegation service.
Another situation where, according to the ECC rules, trades have to be reported by the respective counterparties themselves are any previous bilateral trades that are replaced by the registered trade (including cancellation).
This is due to the fact that contracts registered for clearing are unaffected by any previous arrangements between the parties, including the question whether a trade has been previously concluded or whether said conclusion has been subject to clearing. Possibly existing OTC derivatives prior to novation are therefore not included in ECC's reporting offering.
Financial counterparties or CCPs no longer authorised, change their corporate purpose or liquidated within the backloading period
Besides, in Q&As ESMA has presented its stance on the procedure in the case where financial counterparties and CCPs that should report their contracts within 90 days or 3 years are no longer authorised, they change their corporate purpose or even are liquidated within the backloading period (note that Commission Implementing Regulation of 19.10.2016 replaced the term 3 years with 5 years).
Pursuant to ESMA, under the above circumstances any undertaking assuming the obligations of a liquidated or insolvent undertaking (e.g. merger by incorporation or similar) should ensure EMIR reporting of the contracts it entered into via that transfer.
The identifier (LEI) to be used should be the one of the undertaking assuming the obligations of a liquidated or insolvent undertaking.
If no undertaking is assuming the obligations of the liquidated or insolvent undertaking, the relevant derivative contracts would be reported as terminated contracts only by the counterparty of the liquidated undertaking (if subject to EMIR).
In this case the counterparty of the liquidated undertaking will use a BIC or client code, if the liquidated undertaking did not have an LEI.
EMIR reporting review process
Note that the EMIR reporting review process is underway - see for more detail the above ESMA's Consultation Paper, Final Report and the Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories, COM(2017)208, May 2017.
|Last Updated on Sunday, 21 May 2017 17:17|