|Confirmations requirements under EMIR|
The term 'confirmation' is defined in Article 1(c) of the regulatory technical standards (Commission Delegated Regulation (EU) No 149/2013 of 19 December 2012 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory technical standards on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, and risk mitigation techniques for OTC derivatives contracts not cleared by a CCP - ‘Commission Delegated Regulation on Clearing Thresholds’ or ‘RTS’)) and means the documentation of the agreement of the counterparties to all the terms of an OTC derivative contract.
The confirmation of OTC derivative contracts may refer to one or more master agreements, master confirmation agreements, or other standard terms.
"Confirmation of non-centrally cleared OTC derivatives transactions is critical to enhance downstream operational risk management, including accurate valuations, risk exposure assessments, margin requirements calculations, and discharge of settlement obligations. It also allows for early identification of discrepancies in the terms of non-centrally cleared OTC derivatives transactions, thereby assisting in more prompt resolution of such discrepancies. By promoting legal certainty and operational efficiency, timely trade confirmation can help to ensure safe and efficient financial markets" (IOSCO Risk Mitigation Standards for Non-centrally Cleared OTC Derivatives FR01/2015 of 28 January 2015 p. 9).
RTS clarifies that the confirmation may take the form of an electronically executed contract or a document signed by both counterparties.
The underlying feature of the EMIR regime for confirmations is that the requirement applies equally to:
- financial counterparties and
- non-financial counterparties (irrespective of whether they exceed the clearing threshold or not).
Only the timing will differ between non-financials that exceed the clearing threshold and those that do not (note different rules applying in the US - see below).
EMIR Regulation in Article 11(1) requires that counterparties that enter into an OTC derivative contract not cleared by a CCP, must have, exercising due diligence, appropriate procedures and arrangements in place to measure, monitor and mitigate operational risk and counterparty credit risk, including at least formalised processes which are robust, resilient and auditable, for the timely confirmation, where available, by electronic means, of the terms of the relevant OTC derivative contract.
Article 12 of the RTS provides for confirmations' maximum timeframes. Given that, the ISDA Commentary on ESMA RTS on Confirmations (European Commission Delegated Regulation C(2012) 9593 final (19 December 2012)) of 29 January 2013 has highlighted some ambiguities.
Using electronic means 'where available'
Article 12 of the RTS uses the language that the derivatives contracts at issue should be 'confirmed, where available via electronic means'.
In the above document ISDA has interpreted this wording in the way that counterparties are required to confirm via electronic means where electronic means are available to the counterparties at the time of entry into the transaction and it does not imply an obligation for counterparties to ensure that they are able to confirm via electronic means in relation to all types of transaction they may enter into where electronic means of confirmation may be possible.
In effect, the said organisation suggested in that regard that electronic confirmation should not be required where there are practical commercial (e.g. low volume of trades vs high cost of gaining access), legal or security-related concerns with confirming a trade electronically. Pursuant to ISDA view, where a market participant has not signed up to an electronic confirmation platform, a paper/non-electronic confirmation should comply with the requirement as electronic means would not be 'available'.
Pursuant to ISDA observations, 'there are currently no EU trading venues that qualify as 'electronic execution' and the impact of electronic execution on confirmation timeliness is therefore not fully understood'.
In turn, ESMA's understanding of the phrase used in Article 12 of the RTS ("where available by electronic means") is that electronic confirmation may be available to the market (e.g. confirmation platforms) but not to a specific counterparty for a variety of legitimate reasons. If the counterparty is able to justify that electronic confirmation is not available to it, then confirmation may be performed by fax, paper, or manually processed emails (see ESMA's Questions and Answers on EMIR as updated on 4 June 2013).
ISDA in the above document expressed the view that a confirmation may also take other (than electronically executed contract or a document signed by both counterparties) form, provided it meets the definition of a 'confirmation', for instance affirmation (e.g. enabling the counterparty to agree the confirmation by clicking on a link on the website operated by one of the counterparties).
For example, a financial counterparty may post an electronic version of a confirmation on a password-protected internet website of the financial counterparty combined with notification to the client of that posting (including by e- mail or by agreeing to the timings for such posting in advance), provided this process has been agreed with the client.
As ISDA argues, the counterparty may then accept the confirmation either through negative affirmation (as described above), or a form of positive affirmation (e.g. enabling the counterparty to agree the confirmation by clicking on a link on the website).
Although negative/passive affirmation has not been specifically addressed in the technical standards, ISDA believes it should be viewed as an acceptable and compliant form of confirmation, where combined with an appropriate legal framework (e.g. a 'Master Confirmation Agreement') between the parties providing for confirmations to be issued and take effect in this way, and within the timeframe prescribed by the RTS.
Confirmation by performance
ISDA suggested that where trades are fully settled, with no further obligations remaining to be met - within the time limits set out for confirmations in different asset classes and market participants in the RTS - there should be no requirement to seek evidence of agreement to the terms thereafter.
As ISDA argues, in this case it is clear that the parties have accepted the terms by performance.
Apart from the above ambiguities further uncertainties were also submitted, for instance whether confirmation refers to (1) the sending part (i.e. each party must meet the deadline to send the confirmation to the other party) or (2) the signature or matching part (i.e. both parties must meet the deadline to sign or match the confirmation).
ESMA and IOSCO stance
ESMA in its Q&A document as updated on 4 June 2013 made a clearance in general language only that "to comply with the confirmation requirements, the counterparties must reach a legally binding agreement to all the terms of an OTC derivative contract.
The RTS implies that both parties must comply with it and agree in advance on a specific process to do so.
Processes under which documentation is deemed to be finalised and accepted by both parties after a fixed deadline has expired would be compliant provided that both counterparties have agreed in advance to confirm by this process."
This approach is broadly shared by measures of a more general reach.
Pursuant to the IOSCO Risk Mitigation Standards for Non-centrally Cleared OTC Derivatives FR01/2015 of 28 January 2015 "negative affirmation may be used as long as it is not prohibited under the applicable laws and regulations of a jurisdiction, and the outcome of the confirmation is legally binding on both parties."
Timely confirmation is not addressed in the ISDA 2013 Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol published by the International Swaps and Derivatives Association, Inc. (the "ISDA Protocol") but is the subject of other ISDA documentation.
EFET's form of EMIR Risk Mitigation Techniques Agreement (ERMTA) contains an elective provision providing for negative affirmation for confirmation.
The same approaches apply for the treatment by the ERMTA and ISDA Protocol of the counterparty statuses under EMIR.
Remedies for breach of the ERMTA when it comes to EMIR confirmation requirements (as well as other EMIR risk mitigation techniques) have been arranged in the specific manner, namely a failure by a party to comply with the obligations set forth in the ERMTA does not amount to a circumstance that permits termination of the EMIR relevant transaction; and neither will such a failure amount to an event of default, termination event, material reason, or any similar such term, which may permit the termination of the EMIR relevant transaction or any other transactions.
Interesting and useful feature of ERMTA is that parties may choose to apply its terms to transactions that are not EMIR-relevant transactions and to transactions, in respect of which there is some doubt as to whether or not they are embraced by EMIR risk mitigation requirements.
Application of extended deadlines
The RTS provide - in Article 12(3) - for an extended deadline in some circumstances.
ISDA believes that there are two situations where an extended deadline may be necessary:
(1) where the trade is concluded after 4pm local time in the time zone of either of the (trading or operations units of either of the) counterparties or
(2) where a (trading or operations unit of a) counterparty is located in a different time zone (to the trading or operating unit of its counterparty) which doesn't allow for confirmation by the set deadline (the set deadline is not practicable whether due to translation requirements, daylight overlap, impracticability of efficiently and safely executing confirmation very late in the day etc).
"Business day" meaning
There is no definition in the RTS of 'business day', a term used in Article 12 of the RTS, and there is also no consistent definition of this term in other EU financial services legislation.
ISDA made an observation that when dealing with different jurisdictions, it is essential to be able to determine which jurisdiction determines whether something is a business day and which time zone determines the end of a business day.
The ESMA stance in that regard is that for the purposes of the confirmation time limits only days which are business days in the jurisdictions of both counterparties should be counted (see ESMA's Questions and Answers on EMIR as updated on 4 June 2013).
Inconsistencies in Article 12(4) regarding reporting of outstanding unconfirmed transactions
There were also underlined inconsistencies in the language of Article 12(4), which:
1) does not specify when the five business days timeframe should be counted from,
2) requires reporting when the transaction has been outstanding for five business days following the conclusion of the contract, even if the maximum period allowed for confirmation is longer than five business days e.g. 7 days under Article 12(2)(d).
When it comes to the first of the above issues ESMA in its Q&A document as updated on 4 June 2013 explained that a trade is deemed outstanding for more than 5 business days if it is still unconfirmed 5 business days after the required confirmation date, which is set out on article 12(1) and 12(2) of the RTS.
In turn, the latter of the above issues seems to be within a larger context, namely the ambiguity at which frequency are financial counterparties expected to report the number of transactions outstanding for more than 5 business days: at the end of each month, or by request from the national competent authority.
1) the recording of all unconfirmed trades for more than 5 business days and
2) for the production of a monthly report of these unconfirmed trades that occurred the month before.
Furthermore, the ESMA's answer made the crucial determination that he report does not need to be provided to the competent authorities that have not asked to receive it.
Extra-territorial application of confirmations requirements
Another ambiguity that has been raised is based on the fact that the definitions of 'financial counterparty' and 'non-financial counterparty' are limited to EU entities and appear, therefore, not to cover transactions between EU entities and non-EU entities.
This leads to legal uncertainty in respect of the extra-territorial application of the all risk mitigation requirements, including confirmations requirements.
In the ISDA opinion, in particular, clarity is required as to whether the requirements are intended to apply when EU counterparties enter into contracts with third country entities.
The drafting of Article 12 of the RTS appears to exclude non-EU counterparties from its scope, given the use of the reference to the terms 'financial counterparties' and 'non-financial counterparties' under EMIR.
The RTS expressly only address transactions concluded by financial counterparties and non-financial counterparties with each other.
ISDA also highlighted a further complication, which relates to the fact that EMIR does not impose any obligation on a non-EU counterparty to co-operate in meeting the deadlines for timely confirmation.
ESMA in its Questions and Answers on EMIR as updated on 4 June 2013 observed that Article 11 of EMIR, which provides the basis of these requirements, applies wherever at least one counterparty is established within the EU.
Therefore, where an EU counterparty is transacting with a third country entity, the EU counterparty would be required to ensure that the requirements for portfolio timely confirmation are met for the relevant portfolio and/or transactions even though the third country entity would not itself be subject to EMIR.
However, if the third country entity is established in a jurisdiction for which the Commission has adopted an implementing act (under Article 13 of EMIR), the counterparties could comply with equivalent rules in the third country.
Confirmations with counterparties in the EU that are not classified as financial counterparties or non-financial counterparties
Similar difficulties with enforcing confirmation requirements may be encountered in relation to transactions between financial counterparties and non-financial counterparties on the one hand and:
- counterparties in the EU that are not classified as financial counterparties or non-financial counterparties e.g. natural persons and sovereign entities which are not 'undertakings' and which are not subject to obligations under Article 11;
- certain particular counterparties listed in Article 1(4) and (5) of EMIR who are exempt from obligations under Article 11.
Comparisons of EMIR regime for timely confirmation with other jurisdictions - equivalence
ESMA has advised the European Commission to grant equivalence and allow for the disapplication of EMIR for the purpose of Article 11(1)(a) of EMIR only if the following conditions are respected:
a) the relevant transaction is executed between a European counterparty and a swap dealer or major swap participant subject to the CFTC jurisdiction;
b) reporting of unconfirmed trades to European competent authorities is not disapplied.
The process for granting equivalence status to the US confirmation legal framework has been finalised by the Commission Implementing Decision (EU) 2017/1857 of 13 October 2017 on the recognition of the legal, supervisory and enforcement arrangements of the United States of America for derivatives transactions supervised by the Commodity Futures Trading Commission as equivalent to certain requirements of Article 11 of Regulation (EU) No 648/2012 of the European Parliament and Council on OTC derivatives, central counterparties and trade repositories.
The US counterpart CFTC issued the parallel media report: CFTC Comparability Determination on EU Margin Requirements and a Common Approach on Trading Venues, Release: pr7629-17, October 13, 2017).
The confirmation requirements as a operational risk mitigation technique for OTC derivative contracts not cleared by a CCP are added in a section 4s(i) to the Commodity Exchange Act (CEA) by section 731 of the Dodd-Frank Act and apply to swap dealers and major swap participants, as defined in the CEA.
Consequently, it should be noted that the said Commission Implementing Decision (EU) 2017/1857 of 13 October 2017:
- covers the legal, supervisory and enforcement arrangements regarding confirmations applicable to swap dealers and major swap participants established in the USA that are authorised and supervised in accordance with the CFTC Regulations;
CFTC Regulations on operational risk mitigation techniques for OTC derivative contracts not cleared by a CCP contain similar obligations to those provided for in Article 11(1) EMIR.
In particular, Subpart I of Part 23 of the CFTC Regulations contains specific detailed requirements regarding, among others, timely confirmation applicable to OTC derivative contracts not cleared by a CCP.
The CFTC deadlines for timely confirmation match to the relevant EMIR requirements regarding confirmations.
The said Commission Decision (EU) 2017/1857 concludes in Recital 9 that in relation to swaps that are under the jurisdiction of the CFTC, as defined in section 1a(47) of the CEA, the CFTC's legal, supervisory and enforcement arrangements applicable to swap dealers and major swap participants are equivalent to the confirmation requirements set out in the EMIR applicable to OTC derivative contracts not cleared by a CCP, as laid down in Article 11(1) EMIR.
The effect of the above statement is that market participants are allowed to comply with only one set of rules and to avoid duplicative or conflicting rules, i.e. where at least one of the counterparties is established in the US, it is deemed to have fulfilled EMIR timely confirmation requirements by complying with the requirements set out in the US legal regime.
However, it is noteworthy, the CFTC’s equivalence determination applies only where both the entity and the transaction are otherwise subject to both the CFTC and EU regulations on timely confirmation, and not when a swap dealer voluntarily complies with the respective regime.
The regime for risk mitigation techniques in Japan does not include requirements equivalent to those of EMIR. This assessment covers also the relevant timely confirmation's procedures.
For this reason the current ESMA's advise to the European Commission is not to grant equivalence on confirmations regime in Japan for the purpose of Article 11 of EMIR.
Other regulatory clarifications
ESMA in its Q&A document as updated on 5 August 2013 made a clearance with respect to several other issues:
- under what circumstances the provision for later confirmation of transactions "with a counterparty located in a different time zone which does not allow confirmation by the set deadline" applies,
- whether the timely confirmation requirement applies only to the conclusion of the original contract or also to subsequent amendments to that contract (e.g. novation, result of portfolio compression), and
- regarding the reference point in time from which the confirmation deadline applies.
As regards counterparties located in a different time zone the regulatory stance is that Article 12(3) of Regulation 149/2013 "is intended to apply to transactions executed after 4 pm, local time of one or both counterparties.
The Article requires that the confirmation is done as soon as possible and, at the latest, one business day after the expiration of the confirmation time limit which would otherwise have applied."
With respect to the latter question ESMA explained the timely confirmation of OTC derivative contracts "applies wherever a new derivatives contract is concluded, including as a result of novation and portfolio compression of previously concluded contracts.
The requirement does not apply to terminations provided that the termination removes all residual obligations in respect of that transaction." However, it still rises doubts whether, for example, an exchange between the counterparties of a deal list as an enclosure to the novation contract fulfil in itself the respective requirements or not.
Moreover, the point in time which serves as a starting point to calculate the confirmation deadline is the date of execution of the transaction, irrespective of the execution process (e.g. voice, electronic).
Therefore, if a transaction is executed over the phone on date T, the reference day to start calculating the confirmation deadline is T, as opposed to the date on which the counterparties start to exchange electronic information related to the confirmation of the transactions, before reaching a legally binding confirmation.
Confirmations in the EMIR transaction reports
The EU regulations:
- Commission Delegated Regulation (EU) 2017/104 of 19 October 2016 amending 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;
- Commission Implementing Regulation (EU) 2017/105 of 19 October 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;
require the inclusion of the data on confirmations in the EMIR transaction reports.
The respective Fields in the EMIR reporting format are 32 (Confirmation timestamp) and 33 (Confirmation means) of the Table 2 (Common data).
Confirmation timestamp in the Field 32 should indicate the date and time of the confirmation, and be expressed as the ISO 8601 date in the UTC time format YYYY-MM-DDThh:mm:ssZ.
Field 33 (Confirmation means) is intended to be filled in with information on whether the contract was electronically confirmed, non-electronically confirmed or remains unconfirmed. The pertinent codes are:
Y = Non-electronically confirmed,
E = Electronically confirmed.
Confirmations reporting under REMIT
Confirmations are not expected to be reported under REMIT reporting framework as a confirmation is not an activity related to the execution or modification of a transaction entered into a wholesale energy market.
Hence the reporting of lifecycle events under REMIT differs from lifecycle events reported under other EU legislations.
Special treatment for C6 energy derivatives contracts
It is noteworthy that pursuant to MiFID II Directive EMIR timely confirmation requirements will not apply during the 42-month transitional period (counted from the entry into application of the said Directive) to C6 energy derivatives (i.e. physically settled coal and oil traded on an OTF) entered into:
- by non-financial counterparties below EMIR clearing threshold, or
- by non-financial counterparties that will be authorised for the first time as investment firms as from the date of entry into application of the MiFID II.
Do post-trade confirmation services qualify as a multilateral system under MiFID II?
Post-trade confirmation services do not constitute a multilateral system under MiFID II by itself. However, if a firm operates a system that comes within the definition of a multilateral system under MiFID II without taking into account these activities, any post-trade confirmation services that it provides for that system can form part of the multilateral system that the firm is operating (Financial Conduct Authority, Markets in Financial Instruments Directive II Implementation – Consultation Paper I (CP15/43), December 2015, p. 265).
In principle, systems providing post-trade confirmation services are beyond OTF's category since there is no genuine trade execution or arranging taking place within such systems (MiFIR Recital 8).
Starting date for EMIR timely confirmation requirements
EMIR requirements for timely confirmation apply from 15 March 2013.
EMIR Regulation, Article 11(1)
Commission Implementing Decision (EU) 2017/1857 of 13 October 2017 on the recognition of the legal, supervisory and enforcement arrangements of the United States of America for derivatives transactions supervised by the Commodity Futures Trading Commission as equivalent to certain requirements of Article 11 of Regulation (EU) No 648/2012 of the European Parliament and Council on OTC derivatives, central counterparties and trade repositories
Commission Delegated Regulation (EU) 2017/104 of 19 October 2016 amending 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
Commission Implementing Regulation (EU) 2017/105 of 19 October 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
|Last Updated on Saturday, 28 October 2017 19:54|