Further Update on EMIR Regulation: Important Deadlines for Corporate Users of OTC Derivatives
This note provides an update to our 23rd August 2013 blog entry on relevant developments relating to the European Markets and Infrastructure Regulation (“EMIR”), the new regulation governing the Over the Counter (“OTC”) derivatives markets in Europe.
Non-Financial Counterparties (“NFCs”) which have derivatives portfolios below a certain size threshold (€3bn gross notional in the case of interest rate derivatives) will be exempt from the EMIR clearing regulations, but will still be required to:
i) Promptly report all new OTC derivative transactions to registered trade repositories. There is also an obligation to report historic derivative trades in place after 16th August 2012, and this needs to be done by specific deadlines (please see below)
ii) Following any new derivative trade, promptly exchange confirmations with their counterparties
iii) Periodically reconcile their derivative positions with their counterparties
As part of the latest guidance, significant information has been communicated regarding the requirement to report derivative trades to registered Trade Repositories.
By 12 February 2014, all NFCs will be required to either be in compliance with these regulations, or, to be registered with a Legal Entity Identifier (“LEI”) number and have a remediation plan to be in compliance within 90 days of this date.
All NFC companies should obtain an LEI as soon as possible. There are suggestions that a rush to register may occur immediately before the deadline which companies should ideally seek to avoid. More information on LEI numbers can be found from www.leiroc.org and they can be obtained from the London Stock Exchange, for £100+VAT initial cost plus £55+VAT at each annual renewal (http://www.lseg.com/LEI).
Further information relating to the key deadlines for reporting derivatives trades to the Trade Repositories is summarised in the table below:
Since our last EMIR update a number of European Trade Repositories have registered with ESMA (e.g. DTCC Derivatives Repository based in the UK) and test environments are now available. NFCs can choose which Trade Repository they wish to report to.
The reporting template which is required to be submitted to the Trade Repositories consists of 85 fields, 28 client identifying fields and 57 trade related fields. Not all trade related fields will be need to be filled out for all trade types, and NFCs will not be required to submit trade valuations to the Trade Repository. Discussions are still ongoing as to the final form of the templates and items such as the Unique Trade Identifier (UTI) for each trade are still under discussion.
Both sides of each derivative trade need to be submitted. However, the submissions can be done by one or both parties, or by a third party on behalf of one of the counterparties. Importantly, even if the other party to a trade or a third party provide the submission on a counterparty’s behalf then that counterparty will still be liable with regards to the accuracy of the information submitted. However, we understand that some banks have offered to indemnify their clients against any penalties incurred through delegated reporting failures.
There is also a risk that some banks may be too busy administering their own portfolios to consider providing a reporting service to their counterparties in the near term, so companies may not consider it prudent to assume that all their bank counterparties will be ready and prepared to report on their behalf from the Reporting Start Date in February.
In summary, at the earliest opportunity, we recommend that clients with standalone derivative portfolios:
i) Obtain an LEI number
ii) If you have not already done so, begin planning around compliance with the EMIR regulations, particularly in respect of their Trade Repository submissions. Clients should confirm their bank counterparties’ ability to report on their behalf. Even if reliance is placed on bank counterparties to fulfil the reporting obligation, clients may determine they still need a contingency reporting system in place.
iii) Ensure that any Trade Repository data submitted on their portfolio is done so accurately and by the appropriate deadline.
Further information on the EMIR developments can be found at the FCA website (http://www.fca.org.uk/firms/markets/international-markets/emir) or at the European Association of Corporate Treasurers (EACT http://www.treasurers.org/otc).