The countdown is on: EMIR 2024

This article was originally published in AGEFI Luxembourg, [December 2023] and is reproduced with permission from the publisher.

The new year is almost here and with it comes the countdown for entities falling within the scope of the Regulation of the European Parliament and of the Council of 4 July 2023 on over-the counter (OTC) derivatives, central counterparties and trade repositories, as amended by Regulation (EU) 2019/834 of the European Parliament and of the Council of 20 May 2019 (EMIR Refit) (EMIR) as well as any parties reporting on their behalf (Entities), to ensure compliance with the new reporting obligations by 29 April 2024, as applicable. Next year will also bring work on a further amendment to EMIR.

 

What it’s all about?

EMIR imposes several obligations on the Entities. The general requirements are reporting, clearing and risk mitigation obligations, as applicable. It also foresees requirements for activities of central counterparties (CCP) and trade repositories (TR). When reporting under EMIR to TR, Entities need to take into account:

• the data that has to be reported
• the format and frequency of trade reports to TR
• the validation rules of TR

The European Union (EU) strives at improving the clarity and coherence of the legal framework related to derivatives in order to contribute to safe and efficient financial markets and financial stability. It also wants to harmonise data collection, align data quality and reduce the reporting burden and related costs.

Back in December 2022, the European Securities and Markets Authority (ESMA) published its final report containing the guidelines for reporting under EMIR (Guidelines). The Guidelines clarify the reporting obligation and the underlying regulatory technical standards on reporting, the implementing technical standards on reporting, the regulatory technical standards on the reconciliation and verification of data and the regulatory technical standards on data access (together, TS) to be complied with.

 

What is the timing and the next steps?

The Guidelines and TS apply as from 29 April 2024 (Date), as also reminded by Circular CSSF 23/846 published on 6 December 2023.

Entities will have to:

• comply with the amended reporting requirements for any reports to be submitted to the TR from or after the Date, while any amendments or terminations of existing derivative contracts after the Date also fall within the new reporting requirement;
• update reports of any outstanding derivative contracts within 180 calendar days from the reporting start date to be compliant with the revised reporting requirements and submit a report with the event type “Update,” unless they submitted a report with the action type “Modify” or “Correct” for the derivative contracts during the transition period;
• take into account the Guidelines, the validation rules applied by the TRs, the ISO 20022 XML schemas and the reconciliation tolerances to ensure that reporting is performed in accordance with the Guidelines, EMIR and TS.

 

What were the clarifications of ESMA for EMIR?

Here are some of the clarifications provided by ESMA:

Intragroup reporting exemption

ESMA clarifies the term of parent undertaking for the purposes of intragroup derivative contracts under article 9 of EMIR, being the highest consolidating entity in the group.

Entities can ask for the exemption if:

• the ultimate parent undertaking of the group in charge of the consolidation on a full basis is the parent undertaking for that purpose; and
• the centralised risk evaluation, measurements and control procedures are applicable to the Entities notifying the intragroup reporting exemption.

ESMA did not amend the requirement of the parent undertaking to be established in the EU so that any parent undertaking established in a third country would not be accepted for the purposes of the intragroup reporting exemption, even if the transactions occur between two Entities that are both established in the EU.

Reporting delegation and allocation of responsibility

The Guidelines clarify when an issue is considered significant and reportable to the competent authority in the context of Entities facing problems with the reporting, which going forward, will become subject to a notification to the competent authority.

ESMA published a notification template for any notifications to competent authorities and the CSSF confirmed it would implement the template once the Guidelines become applicable, reminding Entities in its press release 22/33 of 21 December 2022 that:

• the notification requirement is enforceable under the law of 15 March 2016 on OTC derivatives, central counterparties and trade repositories; and
• any failure to report accurately as from the Date will be considered as non-compliance with Article 9 of EMIR.

Scope of derivatives

ESMA provided a non-executive list of derivatives that do not fall within the definition of a derivative under EMIR within the meaning of Directive 2014/65/EU of the European Parliament and of the Council of 15 March 2014 on markets in financial instruments, amending Directive 2002/92/EC and Directive 2011/61/EU (recast) (MiFID II). It provided clearer examples:

• Convertible bonds are financial instruments with embedded derivatives (eg option to buy the underlying equity).
• Structured finance products/structured products within the meaning of article 2(2)(28) of the Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012, are securities created to securitise and transfer credit risk associated with a pool of financial assets entitling the security holder to receive regular payments that depend on the cash flow from the underlying assets.
• Securities derivatives, such as leverage certificates, negotiable rights, investment certificates, plain vanilla or exotic covered warrants, are transferable securities within the meaning of article 4(1)(44) of MiFID II and are different from structured finance products.

Investment firms and management companies (ManCo)

ESMA clarified that brokers to derivative contracts need to identify themselves as counterparty to the derivative contract and as such, do not have to indicate their Legal Entity Identifier number (LEI) in the field for “broker ID”, but only where they act as intermediary for the counterparty.

ESMA also outlined that investment firms do not fall within the reporting obligation when they act as principal and are not a counterparty to a derivative contract. However, it should be noted that in scenarios where an investment firm acts as investment fund manager, it would need to report under EMIR. This is because it is responsible and legally liable for the reporting on behalf of the counterparty, using its own LEI when specifying the reporting entity.

This is also important when ManCo manage their client’s portfolio and sign a derivative contract in which the client is considered the counterparty and not the ManCo (unless the ManCo bears the risk of the derivative contract directly). It should be noted that ManCo can report on behalf of their clients.

Investment funds

ESMA provided clarity on the allocation of responsibility affecting the reporting obligation of investment funds (eg undertakings for collective investment in transferable securities, alternative investment funds (AIF), institutions for occupational retirement provision) given they have no legal personality under local law.

Where the derivative contract is executed by a fund manager for different funds, it has to report it and allocate the respective part of the derivative contract to the respective fund. The fund manager reporting the trade must indicate the ID of the respective fund and not the ID of the fund manager. For the avoidance of doubt, as the fund manager is only reporting on behalf of the respective fund, the ID of the fund manager would be included in the field for the reporting entity. Only where the fund manager would report on its behalf, it would include its ID in the field of a submitting entity.

An alternative investment fund manager (AIFM) should verify whether the respective AIF qualifies as financial counterparty to the derivative contract, being domiciled in the EU or a third country. If the AIF does qualify as a financial counterparty, an authorized and registered AIFM – pursuant to Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on alternative investment fund managers, as amended – would have to report the trade.

Attention should be paid to scenarios in which non-European AIFs are only set up as securitisation special purpose vehicles or to serve employee share purchase plans, as those types of AIF do not quality as AIFs within the meaning of EMIR and are not subject to the reporting obligation (noting that the other counterparty to a trade with such specific AIF would still need to report under EMIR, if it itself falls within the scope thereof).

 

What further developments to expect?

On 6 December 2023, the EU Council adopted its mandate to enter into negotiations with the European Parliament in order to revise EMIR aiming at adapting the clearing services and streamlining the underlying procedures and requiring, amongst others, an active account requirement with an EU CCP.