Blog: Financial Services and Markets - Capturing commodities

April 2012

Contacts

Introduction

Welcome to the Capturing Commodities blog. The aim of this blog is to provide market participants in commodities markets with regular updates on the latest financial services and markets regulatory issues that might affect their business. This blog is relevant to both regulated and unregulated firms who are active in the commodities space, including traders of wholesale energy products, hard and soft commodities and carbon products.

About the Financial Services and Markets -  Capturing Commodities blog

This blog is produced by our commodities regulatory experts within the Financial Services Group in the London office of Norton Rose LLP.

ACER opens public consultation on technical requirements for data reporting under REMIT, 25 March 2013

On 25 March 2013, ACER opened to public consultations on documents aimed at further building out certain of the requirements of the Regulation on Wholesale Energy Market Integrity and Transparency (Regulation (EU) No 1227/2011) (REMIT). ACER has published the following consultation documents:

Draft Technical Standards for Trade Reporting (the Technical Standards Consultation)

REMIT requires market participants to report transactions (including orders to trade) to ACER in accordance with Article 8 of REMIT. ACER has previously published recommendations to the European Commission on the records of transactions in which ACER proposed the approach of using one format for each “class” of data (eg. pre-trade, execution, confirmation and nomination scheduling). The Technical Standards Consultation now seek views on the information that is already collated in relation to wholesale energy contracts in order to assist ACER with developing a unique product identification system for standardised wholesale energy contracts. This information will feed into the European Commission’s work on the implementing acts under Article 8 of REMIT.

The questions in the Technical Standards Consultation relate to the standards and formats for reporting and taxonomy, including:

  • whether the same standards applicable to the values taken by each field of information under other European legislation (including the Markets in Financial Instruments Directive and the European Market Integrity Regulation) should be applied to the reporting of energy derivatives; and
  • views on the common standard codes that ACER proposes should be used (as set out in Annex I of the Technical Standards Consultation).

Draft Guidelines for the registration of Registered Reporting Mechanisms and for the registration of Regulated Information Services (the Guidelines)

The draft Guidelines set out guidance on applying for registration as an RRM or an RIS and seek views on ACER’s proposed approach and on the draft guidelines themselves.

RRMs:

  • In summary, an RRM is a person registered with ACER to provide the service of reporting records of transactions (including orders to trade) on behalf of market participants, in accordance with Article 8(1) of REMIT.
  • To become registered as an RRM, applicants will need to first fulfil ACER’s technical requirements which include (amongst others) having certain security mechanisms in place to guarantee the security of transferred data, adequate resources and back-up facilities, reconciliation systems that can check the completeness and accuracy of transaction reports and having in place a contingency plan to ensure the availability of the transaction reporting services. Applicants will also need to provide details of the fees that it intends to charge for its services and provide evidence that it is established in an EU/EEA state (as only these entities may apply for registration as an RRM).
  • ACER proposes that the registration process will consist of 2 stages, namely (1) submission to ACER of a written application on the basis of which provisional registration (referred to as “pre-registration”) will be granted; and (2) final registration will be granted once an applicant has successfully demonstrated integration of its systems with ACER’s. ACER has produced special guidance on its systems architecture (referred to as “Technical Specifications for Registered Reporting Mechanisms and Regulated Information Services”) which shall be available to applicants under the terms of an NDA.
  • The draft guidance also sets out information about the ongoing obligations to which RRMs would become subject once registered. The obligations relate to the submission of annual reports, making certain notifications to system users and ACER as required, and maintaining certain records.
  • RRMs will be required to renew their registration every 2 years.

RISs:

  • An RIS is a person who is registered by ACER to provide the service of reporting “regulated information” in accordance with Article8(5) of REMIT to ACER on behalf of market participants.
  • Regulated information is inside information that must be publicly disclosed under the requirements of Article 4(1) and includes information that a market participant possesses in relation to business or facilities which they, their parent undertaking or a related undertaking, own or control or for which the market participant (or its parent or a related undertaking) have operational responsibility (in whole or in part). Disclosures under Article 4(1) should include, as applicable, information relevant to the capacity and use of facilities for production, storage, consumption or transmission of electricity or natural gas or related to the capacity and use of LNG facilities, including planned or unplanned unavailability of these facilities.
  • The Guidelines distinguish between 3 types of RIS, namely (1) platforms for the disclosure of inside information in accordance with Article 4(1) (“inside information platforms”); (2) a European transparency platform from ENTSO-E or ENTSO-G (“European transparency platforms”); and (3) platforms for the publication of transparency information according to the Regulation on Conditions for Access to the Network for Cross-Border Exchanges in Electricity (Regulation (EC) 714/2009) and the Regulation on Conditions for Access to the Natural Gas Transmission Networks (Regulation (EC) 715/2009 (“transparency platforms”).
  • ACER proposes that the registration process will consist of 2 stages in much the same way as the RRM process described above. RIS will also be required to fulfil similar pre-registration conditions as set out above in relation to RRMs. RISs will also be subject to similar post-registration obligations as RRMs, although the Guidance does not suggest that they will be required to renew their registration bi-annually as is proposed in relation to RRMs.
  • Market participants will need to identify their “inside information platform” when making a disclosure via an RIS.

Consultation periods

ACER invites comments on the two consultations by 12pm (CET) on 7 May 2013.

Public workshop

ACER has scheduled a public workshop in Ljubljana on 25 April 2013 to allow stakeholders to fully engage in the consultation process and put their views on the public consultation documents to ACER. Details of the workshop will be available on ACER’s REMIT website in due course.

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Ofgem publishes letter and seeks views on REMIT, 15 March 2013

On 15 March 2013, the Office of Gas and Electricity Markets (Ofgem) published an open letter on Regulation 1227/2011 on wholesale energy market integrity and transparency (REMIT), which aims to counter insider trading and market manipulation and to increase transparency in the wholesale markets for electricity and natural gas.

REMIT came into force on 28 December 2011. As a European regulation, REMIT is directly applicable in the UK. However, certain obligations are required to be detailed by the European Commission (the Commission) through implementing acts to complete implementation (the Implementing Acts). The letter seeks views from wholesale energy market participants and other wholesale energy market stakeholders on issues relating to the Implementing Acts.

Implementation timeline

According to ACER’s REMIT microsite, the Implementing Acts are not expected to be adopted before “mid-2013” at the earliest. ACER’s timeline sets the overall timeframe out in more detail.

The scope of the letter published by Ofgem and the aspects of REMIT implementation on which Ofgem is seeking views are as follows:

Implementation of prohibitions against market abuse (Article 13)

Member States must ensure, by June 2013, that their National Regulatory Authority (NRA) has the necessary investigatory and enforcement powers to fulfil their functions under REMIT. The UK Government is in the process of granting such powers to Ofgem, the UK NRA. These powers are expected to be finalised in Q2 2013.

Ofgem will consult on its REMIT penalty policy and enforcement procedures whilst the draft investigatory and enforcement powers are being considered by Parliament. Stakeholders should keep up to date with any draft secondary legislation relating to these powers and consider submitting responses to the proposals.

Data collection (Article 8)

The European Commission (EC) is expected to adopt Implementing Acts later this year which will set out details of the transaction data that market participants will be required to report to the Agency for the Cooperation of Energy Regulators (ACER).

The draft Implementing Acts are expected to be released for public consultation shortly and data collection is expected to begin 6 months after the EC Implementing Acts come into force.

Registration of market participants (Article 9)

Market participants who enter into transactions in wholesale energy products (as defined in REMIT) must register with the NRA of the Member State that they are established or resident in. In relation to UK resident or established entities, the NRA is Ofgem as mentioned above. If a market participant is not established or resident but are active in an EU Member State, they must register in an EU Member State.

In order to submit transaction data, market participants (see further below) will be required to be registered first and the registration process is expected to begin within 3 months after the implementing acts are adopted by the EC. ACER is expected to publish a draft of the relevant Implementing Acts which will set out the detail of the registration process for both reporting mechanisms and market participants.

In the second edition of its REMIT Q&A at paragraph 3.4, ACER sets out a list of the persons it considers to fall within the REMIT definition of a “market participant” (Article 2(7)). This list includes, amongst others, energy trading companies.

Transaction reporting under Article 9 will commence 6 months after the implementing acts setting out the details to be reported are adopted. To register, market participants must submit a registration form to their NRA before entering into a transaction that is reportable to ACER. This means that UK market participants will need to submit their registration form to Ofgem in advance of the relevant Implementing Act being adopted.

In its letter, Ofgem notes that it is working with ACER to develop a "registration user manual" which will include guidance on how to use the registration system as well as an explanation of the fields that market participants will need to fill in. Ofgem asks for views on any specific issues that stakeholders think the user manual should address and also seeks views on what registration data should be made public by ACER.

Transparency (Article 4)

Article 4 of REMIT requires market participants to publically disclose, in an effective and timely manner, “inside information” (as defined in Article 2(1)) that they possess in respect of certain business facilities. There has been much discussion across the energy industry as to what “effective” and “timely” disclosure means in practice and in the second edition of ACER’s REMIT Q&A, a little light has been shed on this. In summary, ACER suggests that inside information should be disclosed as widely as possible and considers the use of “transparency platforms” as being likely to be the most effective means of disclosure.

In its letter, Ofgem asks certain questions relating to transparency platforms and their use. In particular it asks about the benefits of moving towards the use of transparency platforms (whether at EU level, regional or national level), whether there are any differences for gas and electricity markets, what are considered to be the characteristics of an effective transparency platform, and what is considered to be the appropriate local gas market threshold for inside information disclosure. Responses are invited by 1 May 2013.

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FSA publishes final versions of forms for non-financial counterparty (NFC) notifications under EMIR, 12 March 2013

On 12 March 2013, the FSA updated its microsite dedicated to the European Market Infrastructure Regulation (Regulation 648/2012) (EMIR).

The microsite now includes links to the final versions of the notification forms to be completed by NFCs if they:

  • exceed the clearing threshold set out in Article 11 of the regulatory technical standards on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, risk mitigation techniques for OTC derivatives contracts not cleared by a central counterparty (Regulation 149/2013) - the final form is available here.
  • no longer exceed the clearing threshold - the final form is available here.

The specimen versions of these notification forms were originally published on the EMIR microsite on 27 February 2013 (see blog article “FSA updates its EMIR microsite to include information on EMIR notifications and exemptions, 27 February 2013”).

The FSA has also included a reminder on the EMIR microsite to firms noting that notification forms should not be submitted until 15 March 2013. The EMIR microsite will be updated with details of how to notify the FSA and where to send any notifications.

The FSA has also reminded firms that notification forms must be submitted by an individual with the appropriate level of seniority, for example an executive director, the company secretary or the head of compliance.

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Publication of FCA and PRA Handbooks, 8 March 2013

On 8 March 2013, the FSA published on its website the FCA Handbook and the PRA Handbook. In addition, the FSA published further information on how the FCA and PRA Handbooks are formed in a guide to designation. The Handbooks and the Guide to Designation are available by following these links:

View the FCA Handbook

View the PRA Handbook

View the Guide to Designation

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ISDA publishes 2013 EMIR Non-Financial Counterparty (NFC) Representation Protocol and Timely Confirmation Amendment Agreement, 8 March 2013

On 8 March, the International Swaps and Derivatives Association, Inc. (ISDA) published its 2013 EMIR NFC Representation Protocol (the Protocol) and Timely Confirmation Amendment Agreement (TCAA). ISDA has referred to the Protocol and the TCAA as “the first in a series of tools that ISDA plans to make available to market participants to facilitate their compliance with EMIR”.

The Protocol

The Protocol, developed by a working group of ISDA member institutions, is designed to allow parties to ISDA Master Agreements (Master Agreements) to simultaneously amend the terms of multiple Master Agreements to reflect:

  • certain know your counterparty requirements and the consequences of transacting on the basis of an incorrect classification under the European Markets Infrastructure Regulation, (EU) No 648/2012 (EMIR); and
  • certain risk mitigation requirements imposed by EMIR (the majority of which apply to financial counterparties (FCs) and NFCs that have exceeded the trading threshold in Article 10 of EMIR.

The majority of the EMIR requirements that the Protocol seeks to facilitate compliance with must be implemented by market participants caught by them 15 March 2013.

The Protocol is open to ISDA members and non-members. Parties are required to pay a one-time fee of USD 500 to ISDA to adhere to the Protocol. In a group context, each legal entity will be required to pay the fee if they wish to adhere to the Protocol and are party to a Master Agreement (as opposed to trading through a group agency entity). To sign up to adhering to the Protocol, an entity must submit an adherence letter to ISDA, which can be obtained from the ISDA website. The text of the adherence letter may not be amended. There is currently no cut-off date for adherence to the Protocol, however ISDA may designate a closing date in the future.

The full text of the Protocol is available here.

FAQs

ISDA has also published a set of fairly detailed Frequently Asked Questions (FAQs) regarding the Protocol, available here. The FAQs are organised under the following 3 general headings:

  • What does the Protocol do?
  • How can an entity sign up to the Protocol?
  • Specific questions on the amendment language

The FAQs note that, given the early stages of implementation of EMIR, the FAQs are based on the interpretive assumption that an NFC becomes subject to the higher standard of risk mitigation techniques and additional risk mitigation techniques set out in Article 11 of EMIR and in Delegated Regulation 149/2013 when its positions in OTC derivative contracts exceed the clearing threshold over 30 working days on a rolling average basis. References in the FAQs to an NFC being above or below the clearing threshold should be interpreted in this context.

The TCAA

The TCAA (originally released as a pre-publication draft on 21 February 2013) is a form of agreement that is designed to assist market participants to comply with the obligation imposed by Article 11(1)(a) of EMIR to provide timely confirmation of the terms of uncleared OTC derivatives.

The TCAA sets out suggested wording to facilitate parties to specify responsibilities for producing and agreeing confirmations. The explanatory memorandum accompanying the TCAA notes that the suggested wording in the TCAA is “not a full, or the only, means of complying with the EMIR obligations” and parties to a Master Agreement can “elect to use none, all or some only of the draft provisions or to amend them” to reflect that commercial agreement between the parties. The arrangements contemplated by the TCAA include positive and negative affirmation of confirmations and suggests alternative wording depending on whether a breach should constitute an Event of Default or Termination Event (as defined under the relevant Master Agreement) or have other consequences.

ISDA’s timely confirmations standard wording is available here and an explanatory memorandum to the timely confirmations standard wording is available here.

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FSA updates its EMIR microsite to include information on EMIR notifications and exemptions, 27 February 2013

On 27 February 2013 the FSA updated its microsite dedicated to the European Market Infrastructure Regulation (Regulation 648/2012) (EMIR). The FSA EMIR microsite now includes information on the “active” EMIR notifications detailed below:

  • Clearing threshold notifications: Non-financial counterparties that exceed the clearing threshold(s) set out in Article 11 of the regulatory technical standards on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, risk mitigation techniques for OTC derivatives contracts not cleared by a central counterparty (Regulation 149/2013 ) (RTS) must notify their competent authority (ie. the FSA / FCA in the UK) and the European Securities and Markets Authority (ESMA) of the threshold breach in accordance with Article 10(1) of EMIR.

    The FSA has published on its EMIR microsite specimen notification forms that non-financial counterparties can use to notify of a breach of the clearing threshold and to notify that they no longer exceed the clearing threshold. The FSA website says that the specimen forms will “become active” from 15 March 2013, along with details of how to notify the FSA / FCA.
  • Timely confirmation: Financial counterparties are required, in accordance with Article 12(4) of the RTS, to have procedures in place to enable them to report on a monthly basis the number of unconfirmed OTC derivative transactions that have been outstanding for more than five business days. The FSA EMIR microsite states that “financial counterparties” will be contacted individually to request that a report is “submitted” and that such firms “do not need to submit a report unless it has been requested, but must have procedures in place to do so when requested”.
  • Future notifications: The FSA EMIR microsite also includes information on future notifications including:
    • A counterparty wishing to use the intragroup clearing exemptions under EMIR Article 4(2)(a) or Article 4(2)(b);
    • A counterparty wishing to use the exemptions from intragroup margin requirements and providing evidence that it meets the relevant criteria under EMIR Article 11 to rely on the exemptions; and
    • Financial counterparties reporting outstanding disputes in accordance with Article 15(2) of the RTS.
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European Commission updates frequently asked questions on EMIR, 8 February 2013

The European Commission has updated its Frequently Asked Questions (FAQs) in relation to Regulation 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR).

Section II of the FAQs contains information relating to the scope of EMIR, with question 13 under this section outlining the requirements for financial counterparties and non-financial counterparties in respect of timely confirmations for trading. Question 13 of the FAQs refers to the following:

  • the requirement in Article 11(1) EMIR, i.e. “financial counterparties and non-financial counterparties that enter into an OTC derivative contract not cleared by a CCP, shall ensure, exercising due diligence, that appropriate procedures and arrangements are in place to measure, monitor and mitigate operational risk and counterparty credit risk”, including the “timely confirmation, where available, by electronic means, of the terms of the relevant OTC derivative contract”;
  • the timelines for confirmation outlined in the Regulatory Technical Standards supplementing EMIR on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, risk mitigation techniques for OTC derivatives contracts not cleared by a CCP (the RTS); and
  • the requirement in Article 12 of Chapter VIII of the RTS which provides that firms should have procedures in place that will allow them to confirm trades within specific timelines that range from 1 to 7 days, depending on the derivative class and the date when the trade was concluded.

The following addition has now been made to the requirements listed in question 13 of the FAQ’s:

“The requirements set out in Article 12 of Chapter VIII of the Delegated Regulation should be read in conjunction with Article 11(1) of EMIR. They do not introduce hard deadlines to be complied with case-by-case. If a firm has appropriate procedures and arrangements in place, but nevertheless does not achieve the deadline for legitimate reasons, this should be reported to its competent authority. The competent authority should examine the procedures and arrangements of the firm in respect of its obligations under Article 11(1) of EMIR and determine whether the firm has made sufficient efforts to achieve the deadlines.”

View European Commission updates frequently asked questions on EMIR, 8 February 2013

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Draft RTS for EMIR approved, 8 February 2013

The European Parliament has stopped its proposed objection to 2 of the draft regulatory technical standards (RTS) for EMIR and has now approved all of the 6 drafts. As the European Council has previously approved all of the draft RTS, they will now all be published in the Official Journal of the EU and will enter into force 20 days after their publication in the Official Journal. The European Commission has confirmed that the likely date for their entry into force will be mid-March 2013.

The RTS covering the exchange of collateral in relation to non-cleared trades in OTC derivatives remain outstanding. It is expected that the ESAs will consult on these in the first half of 2013. The RTS concerning the third country provisions under EMIR are also outstanding.

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ECON vote on motion for resolution to reject draft RTS for EMIR, 6 February 2013

The Economic and Monetary Affairs committee of the European Parliament (ECON) has voted in favour of a motion for a resolution (the Resolution) to reject 2 of the 6 draft regulatory technical standards (RTS) in relation to Regulation 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR).

The 2 rejected RTS are:

  • RTS on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, risk mitigation techniques for OTC derivatives contracts not cleared by a central counterparty; and
  • RTS on requirements for central counterparties.

The Resolution includes the following reasons for rejecting the first of these RTS:

  • The result of a non-financial counterparty exceeding one of the clearing thresholds being that other members of its group are obliged to clear all OTC derivatives contracts subject to a clearing obligation and margin other OTC derivatives was not intended by EMIR.
  • The calculation of the clearing threshold on a gross notional basis also deviates from the primary legislation and would result in imposing the clearing obligation on non-financial counterparties whose positions are not systemically relevant.
  • The RTS should clarify that non-financial counterparties that are not subject to the clearing obligation are not required to mark to market.
  • A higher threshold for reconciliations for non-financial counterparties that are not subject to the clearing obligation would be more appropriate.
  • The RTS does not take account of situations where it is not appropriate to require electronic confirmation by smaller non-financial counterparties that transact on an infrequent basis.

The Resolution will now be put before the European Parliament on 6 February 2013. The 2 RTS rejected by ECON will be formally rejected by the European Parliament if a majority of legislators supports the Resolution.

If the 2 RTS are formally rejected by the European Parliament, the next steps that can be expected in the process are:

  • It is likely the rejected RTS will require redrafting by ESMA. Following this, ESMA will be under an obligation to conduct public consultation on the newly drafted RTS. There are no formal time limits for this.
  • The European Commission will then require that the newly drafted RTS are submitted to them for formal review and endorsement. The European Commission is prescribed up to three months to complete this process.
  • The European Commission will submit the new drafts to the European Parliament and to the Council of the European Union for scrutiny. The legislators will have between one and three months, which is extendable, to approve the newly drafted RTS.

The implementation of key EMIR provisions will therefore be delayed by approximately 6 months. If the RTS are formally rejected by the European Parliament on 6 February 2013, implementation of the clearing obligation and authorisation of central counterparties will only be set in motion once the newly drafted RTS are approved.

Please click here to view the Resolution.

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EMIR technical standards published in the Official Journal of the European Union, 21 December 2012

On 19 December 2012, the texts of 9 regulatory and implementing technical standards, which complement the obligations under the EU regulation on OTC derivatives, central counterparties and trade repositories (more widely known as the European Markets Infrastructure Regulation or EMIR), were adopted by the European Commission without modification. This follows the publication in September 2012 by the European Securities and Markets Authority (ESMA) of the final report on the draft technical standards.

The provisions in the technical standards are directly applicable on Member States from the day of their entry into force. Entry into force is the twentieth day following publication of the technical standards in the Official Journal of the European Union, unless otherwise stated.

The 6 regulatory technical standards will be published in the Official Journal once the European Parliament and Council have confirmed their “non-objection”. The period that the European Parliament and Council have to exercise their initiative will last until 19 February 2013 (having been extended recently by a period of one month). This means that the regulatory technical standards could enter into force as early as 11 March 2013. The regulatory technical standards contain the following technical details and requirements:

  • indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, risk mitigation techniques for OTC derivatives contracts not cleared by a central counterparty (CCP);
  • minimum details of the data to be reported to trade repositories;
  • requirements for CCPs (including record-keeping and disaster recovery requirements and provisions on financial instruments provided as collateral and valuation of collateral);
  • capital requirements for CCPs;
  • details of the application for registration as a trade repository; and
  • specification of the data to be published and made available by trade repositories and operational standards for aggregating, comparing and accessing data.

The 3 implementing technical standards were published in the Official Journal on 21 December 2012 and came into force on 10 January 2013 (although the provisions under these technical standards will only take effect once the associated regulatory technical standards enter into force - see below for further detail on this). The implementing technical standards relate to:

  • the format and frequency of trade reports to trade repositories (Commission Implementing Regulation (1247/2012));
  • the format of applications for registration of trade repositories (Commission Implementing Regulation (1248/2012)); and
  • the format of the records to be maintained by central counterparties (Commission Implementing Regulation (1249/2012)).

For further information on EMIR and the G20 obligations, please visit our microsite, OTC Oracle.

European Commission publishes FAQs on EMIR, 14 November 2012

On 14 November 2012 the European Commission published a set of frequently asked questions relating to the Regulation on OTC derivatives, central counterparties and trade repositories (EMIR).

The objective behind the FAQs is to provide clarity in 3 areas in particular, including:

  • the scope of EMIR;
  • timing of implementation (i.e. when the various EMIR obligations will take effect); and
  • the position of third country central counterparties (CCPs) and trade repositories under EMIR.

The FAQs are accessible from the European Commission’s website. The accompanying note to the FAQs states that they will be updated as necessary and provides an e-mail address to which interested parties can submit further questions.

For further information on EMIR and the G20 obligations, please visit our microsite, OTC Oracle.

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Final report published on standards for EMIR, 27 September 2012

On 27 September 2012 the European Securities and Markets Authority (ESMA) published a final report which sets out the draft regulatory technical standards (RTS) and implementing technical standards (ITS) on the European Markets Infrastructure Regulation (EMIR).

The final report comes after two separate consultations by ESMA on the draft RTS and ITS. The report was made available to the Commission on 30 September 2012, from which date the Commission has a period of three months to decide whether it wishes to endorse the draft technical standards set out in the report.

The report is set out in three parts (with references made in each part to the relevant article in EMIR and to the relevant technical standards included in the relevant annex to the report) and follows the same structure as EMIR, covering the following areas:

  • over-the-counter (OTC) derivatives, in particular indirect clearing arrangements, the clearing obligation, access to trading venues, non-financial counterparties, risk mitigation techniques for contracts that are not cleared by a central counterparty (CCP) and intra-group exemptions;
  • CCP requirements (although a number of these will need to be specified by further technical standards); and
  • trade repositories, primarily in terms of the content and form of the information to be reported to trade repositories, the requirements for registration as a trade repository and ongoing reporting obligations for trade repositories.

For further information on EMIR and the G20 obligations, please visit our microsite, OTC Oracle.

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European Commission consultation on data and transaction reporting under REMIT, 14 September 2012

The Commission has published a consultation under the regulation on wholesale energy market integrity and transparency (REMIT) relating to the implementing acts for a framework around the reporting of data and transactions.

Under REMIT, the Agency for the Co-operation of Energy Regulators (ACER) is given the role of monitoring the EU wholesale energy market. In order to do so more effectively, REMIT provides for the implementation of a framework for the reporting of certain data and transactions.

Under this framework, the Commission shall draft a list of the contracts and derivatives (including orders to trade) that must be reported, and must draw up corresponding rules on the reporting of information, the timing requirements, applicable de minimis thresholds that will trigger reporting requirements and the form in which information must be reported.

The consultation emphasises that reporting obligations under REMIT should be kept to a minimum so as to prevent market participants from being subjected to unnecessary administrative costs and burdens.
The consultation covers a range of topics, inviting views on the following key issues (amongst others):

  • Commodity types: which commodity types should be subject to the reporting requirements;
  • De minimis threshold: whether respondents agree with the Commission’s proposal not to include a de minimis threshold for reporting transactions;
  • Reporting standards: what the reporting standards for particular transactions should be;
  • Reporting obligation: which party should be subject to the obligation to report;

Timing considerations:

  • at which point in the lifecycle of a transaction a reporting requirement should be triggered; and
  • the frequency with which reports should be made (eg. daily);
  • Vertification of reporting parties: how the market participants and third parties that report transactions to ACER should be verified;
  • Taxonomy: what the taxonomy for standard products should look like;
  • Fundamental data requirements: what are the necessary requirements for reporting fundamental data; and
  • Interaction between REMIT requirements and other EU legislation: how best to implement the REMIT reporting framework to ensure that it operates effectively alongside reporting requirements set out in other European legislation.

    The consultation is available from here and the consultation period will close on 7 December 2012.
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ESAs postpone deadline for risk mitigation technical standards under EMIR, 7 August 2012

The three European Supervisory Authorities have requested a postponement for the deadline on the submission of the draft technical standards on risk mitigation techniques for non-cleared OTC derivatives under EMIR. The current deadline is for these draft standards to be submitted to the European Commission on 30 September 2012.

These standards relate to areas such as the exchange of collateral between counterparties to a non-CCP cleared OTC derivative trade. These standards will apply to all entities (both financial and non-financial counterparties) which are subject to the clearing obligation under EMIR.

The explanation given for the request is that the regulatory technical standards should be consistent with global standards in this area, which are currently being worked on by the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions. It is expected that the international standards will be finalised by the end of 2012.

This development is seen as another sign that European regulators are keen to ensure that their new rules in relation to OTC derivatives are consistent with the international developments in this area.

If the request is granted, a new deadline will be decided upon once the current deadline has expired.

OTC Oracle is Norton Rose Group’s online resource dedicated to keeping our clients and contacts up to date with the regulatory developments in relation to OTC derivatives in several key jurisdictions.

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ESMA open hearing on EMIR technical standards, 1 August 2012

At a recent open hearing on the technical standards under EMIR, the European Securities and Markets Authority (ESMA) discussed the draft technical standards which relate to Article 10 of EMIR (this Article covers when non-financial counterparties will be subject to the clearing obligation in relation to clearing eligible OTC derivatives). The points below will be of particular interest to those non-financial entities which trade classes of OTC derivative products which are likely to be caught by the clearing obligation under EMIR:

  • It is irrelevant for the purposes of EMIR whether an entity is regulated by the financial regulator of its home state.
  • No clearing obligation is likely to be in force until summer 2013.
  • Whilst it has become common to hear of the “hedging exemption” under EMIR, in reality this is not a true exemption. The technical standards will set a threshold levels for each of the different classes of OTC derivatives. Providing a non-financial entity’s rolling average position over a 30 working day period remains below the threshold in all of the classes then that entity will not be subject to the clearing obligation. Any trades which are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing of the non-financial entity or its group will be excluded when calculating whether the threshold has been reached. However, if the non-financial entity exceeds any of the thresholds during that period then it will be subject to the clearing obligation for all its clearing eligible OTC derivative trades regardless of which asset class they may be in and regardless of whether they are for the purpose of reducing risks directly relating to the commercial activity or treasury financing of the entity or its group.
  • The phrase “commercial activity” means the main business activity of a non-financial company and should be given a narrow interpretation when looking at which OTC derivatives trades should be counted towards the clearing thresholds.
  • It will be the responsibility of the non-financial entity to know whether it has reached the threshold and so become subject to the clearing obligation. Where a non-financial entity is trading with a financial entity it may become market practice for the non-financial entity to give contractual representations to the financial entity as to whether it is subject to the clearing obligation.
  • In relation to the contractual structure for clearing, only financially regulated entities will be able to provide indirect client clearing services. Indirect clients are the clients of the clients of clearing members. In practice this means that if a group currently relies on one non-financially regulated entity’s relationship with a clearing member to clear all the group’s OTC derivative trades, then this structure may need to be reviewed for compliance with the indirect clearing requirements.

The open hearing was held as part of the consultation period on the draft technical standards for EMIR. The consultation period is open until 5 August 2012.

OTC Oracle is Norton Rose Group’s online resource dedicated to keeping our clients and contacts up to date with the regulatory developments in relation to OTC derivatives in several key jurisdictions.

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FSA Policy Statement on bidding for emissions allowances under ETS Phase 3, July 2012

The FSA has published its latest paper (PS12/12) concerning rules relating to the authorisation and supervision of firms that intend to bid for emission auction products across the EU on auction platforms operating under the Commission Auctioning Regulation. The paper incorporates the feedback from the market on the previous consultation paper (CP12/6) which set out the proposals for implementing the new regulatory regime for bidding in emissions auctions, including the new regulated activity of bidding in emissions auctions.

Those active in the market should be aware that the new regime is being put in place ahead of the start of auctions on both a common EU platform and a number of national platforms, including those in the UK, Germany and Poland. These platforms will be used to auction a large part of the emissions allowance allocations of Member States.

The new FSA Rules and guidance came into force on 27 July 2012. From that date the FSA has been accepting applications from firms wishing to apply for permission (or a variation of permission) to carry out the new regulated activity of “bidding in emissions auctions”.

This paper (and also CP12/6 and the associated HM Treasury paper from earlier in the year) is of interest to any firms taking part in the emissions market. Of particular note from this latest paper:

  • The FSA has confirmed that the trading arms and other firms within energy groups may be able to rely on an exclusion from the new regulated activity. This confirmation is timely given that a number of energy generation and supply business were concerned that they would require authorisation for their trading activity under the new regime based on the previous FSA and HM Treasury papers.
  • FSA authorised firms seeking to obtain a variation of permission (VoP) to carry out the new regulated activity should use the bespoke application form in the paper. Unregulated firms will need to apply for authorisation in the usual way.
  • The FSA recognises that it is possible that auctions may take place in the EU prior to the commencement of auctions on the UK platform. Where a firm wishes to take part in such auctions, the FSA should be notified on the firm’s application form and the FSA will attempt to process the application in sufficient time for the firm to participate.
  • The paper contains the (near) final FSA Handbook text which will be of interest to regulated firms carrying out auction bidding activity.

A copy of the paper can be found here: http://www.fsa.gov.uk/library/policy/policy/2012/12-12.shtml

We understand that the FSA now estimates that around 50 firms will seek authorisation to bid in auctions of emissions allowances. The majority of these are expect to be large firms, although the FSA also expects around 10 smaller specialist commodities trading firms, which are currently exempt from much of MiFID, to apply to be authorised to conduct this new activity.

If you would like to discuss the authorisation requirements for auction bidding then please do not hesitate to contact a member of our team.

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ACER consultation on records of transactions under REMIT, 25 June 2012

On 25 June 2012 the Agency for the Cooperation of Energy Regulators (ACER) published its second of two consultations on the Regulation on wholesale energy market integrity and transparency (REMIT). This consultation seeks market participants’ views on the recording of wholesale energy market transactions (including orders to trade) and additional information that will be required to be disclosed to ACER for monitoring purposes.

REMIT Article 8(1) states that the information that must be reported in relation to each transaction shall include “…the precise identification of the wholesale energy products bought and sold, the price and quantity agreed, the dates and time of execution, the parties to the transaction and the beneficiaries of the transaction and any other relevant information”. This consultation sets out proposals that aim to flesh out Article 8(1). The key proposals include:

Types of contracts to be reported:

  • The consultation sets out a list of transactions that will need to be reported. The list comprises nine commodities contracts (seven supply contracts and two transportation contracts). The categories of transactions have been intentionally drafted very broadly as opposed to being prescriptive and the consultation seeks views as to whether this is an appropriate approach.
  • Records of transactions should distinguish between standardised and non-standardised contracts. In relation to a non-standardised contract (ie. one that is not admitted to trading at an organised market place or auction platform or subject to an industry standard agreement), any change in price or quantities should be reported as a new transaction.
  • Reporting of transactions in both standardised and non-standardised contracts should include lifecycle information of a transaction, including for example confirmations, amendments and cancellations.

Details of transactions:

  • The consultation sets out prescriptive mandatory data to be included in reports. Separate data is specified in relation to standardised and non-standardised contracts but in relation to both, relates to the parties to the contract, the contract type and details of the transaction.

Reporting threshold:

  • The consultation sets out three options in relation to a minimum reporting threshold: (1) to refrain from defining a de minimis threshold; (2) to apply a de minimis to small producers whereby operating and trading an overall capacity of up to a maximum of 2MW will not be caught by the reporting requirements; and (3) to apply a de minimis to small energy producers acting independently whereby contracts for the sale of renewable energy sources at administratively fixed prices are excluded from the reporting requirements.

Timing and form of reports:

  • Mandatory reporting of transactions in standardised contracts shall be done through registered reporting mechanisms. Records of transactions in non-standardised contracts should be reported directly to ACER.
  • Trades undertaken on the basis of standardised contracts should be reported no later than the working day following execution, modification or termination of the transaction or of placing an order to trade.
  • Trades undertaken on the basis of non-standardised contracts should be reported within one month following execution of transaction.
  • All reports should be made electronically.

Market participants may be subject to similar reporting requirements under other EU legislation (eg. the Markets in Financial Instruments Directive (MiFID) or the Regulation on derivative transactions, central counterparties and trade repositories (EMIR)). ACER will cooperate with the European Securities and Markets Authority (ESMA) to minimise duplicative reporting requirements. However, market participants should be aware that they may have independent reporting obligations to more than one agency where, for example, a transaction is required to be reported under REMIT but not under MiFID or EMIR (eg. physically settled spot market contracts).

In addition to transaction reporting, the consultation also sets out proposals around additional information that market participants will need to report. This information relates to the capacity and use of facilities for production, storage, consumption or transmission of electricity or natural gas or to the capacity and use of LNG facilities including planned or unplanned unavailability of these facilities. It is intended that this information will enable ACER and other relevant agencies to monitor wholesale energy market trading. In particular, it is proposed that market participants will be required to report information relating to unplanned outages that lead electricity and natural gas producers (amongst others) entering into a transaction to cover the immediate physical loss resulting from such outages where to not to do so would result in the market participant being unable to meet existing contractual obligations. ACER may require this information to be reported via a regulated information service (or RIS).

ACER seeks responses to the consultation by 31 July 2012 and intends to provide the Commission with its recommendations on how transactions should be reported by 30 September 2012.

A copy of the consultation can be found here

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ESMA consultation paper on draft technical standards for EMIR published, 25 June 2012

The European Securities and Markets Authority (ESMA) has published a Consultation Paper concerning the regulatory technical standards and implementing technical standards that it is required to produce under the Regulation on over-the-counter (OTC) derivatives, central counterparties and trade repositories (otherwise known as EMIR). The Consultation Paper follows the Discussion Paper published on 16 February 2012 and is based on the EMIR texts as adopted by the European Parliament on 29 March 2012 and by the Council of the European Union on 11 April 2012.

The deadline for responding to the Consultation Paper is 5 August 2012 and the final draft standards are intended to be submitted to the European Commission for endorsement by 30 September 2012. ESMA will hold a public hearing on the draft technical standards on 12 July 2012 in Paris.

Of particular interest to non-financial counterparties and financial counterparties that enter into derivatives with non-financial counterparties is Chapter VII of the draft Commission Delegated Regulation with regard to regulatory technical standards on OTC derivatives (Delegated Regulation) and paragraphs 54 to 68 of the Consultation Paper which provide commentary. These relate to: (i) the thresholds above which non-financial counterparties will be subject to the clearing and certain risk management obligations; and (ii) the tests for determining whether derivatives are objectively measurable as reducing risks directly related to the commercial or treasury financing activity of the non-financial counterparty or its group which such derivatives can be discounted from the calculation whether the non-financial counterparty exceeds the thresholds.

The proposed thresholds as set out in the Delegated Regulation are:

  • EUR 1 billion in notional value for credit derivatives;
  • EUR 1 billion in notional value for equity derivatives;
  • EUR 3 billion in notional value for interest rate derivatives;
  • EUR 3 billion in notional value for foreign exchange derivatives; and
  • EUR 3 billion in notional value for commodity (and other) derivatives.


It should be noted that when any of the thresholds for an asset class is reached, the counterparty is considered to exceed the clearing threshold and is subject to the relevant EMIR requirement for all asset classes and not just the asset class in relation to which the threshold is exceeded. ESMA proposes a phase-in approach where it will start by setting the thresholds at a level that can be further tailor made when more data is available, which it would welcome from the industry but will be able to gather from trade repositories in due course. ESMA explains that the thresholds are high because they are set by reference to the notional amount of OTC derivatives where the nominal value of all outstanding OTC derivatives should be added, irrespective of whether they are in or out of the money.

The test for determining whether OTC derivatives are objectively measurable as reducing risks directly related to the commercial or treasury financing activity of the non-financial counterparty or its group has changed little from that set out in the Discussion Paper. An OTC derivative is so measurable where it satisfies any of the following criteria:

  • it covers risks arising from the potential change in the value of the assets, services, inputs, products, commodities or liabilities that the non-financial entity or its group owns, produces, manufactures, processes, provides, purchases, merchandises, leases, sells or incurs, or reasonably anticipates owning, producing, manufacturing, processing, providing, purchasing, merchandising, leasing, selling or incurring in the ordinary course of its business;
  • it covers risks arising from the potential indirect impact on the value of such assets, services, inputs, products, commodities or liabilities resulting from fluctuations in interest, exchange or foreign exchange rates; and
  • it qualifies as a hedging contract for the purposes of the International Financial Reporting Standards.

However, an OTC derivative cannot be considered as objectively measurable as reducing risks directly related to the commercial or treasury financing activity of the non-financial counterparty or its group if it has been entered into for a purpose in the nature of speculation, investment or trading. The test must be applied to an OTC derivative taken alone or in combination with other derivatives and whether it is entered into directly or through closely correlated financial instruments.  

For further details on the developments and impact of EMIR and the draft technical standards generally, please visit our designated web portal OTC Oracle

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G20 Leaders declaration, 20 June 2012

The G20 published a leaders' declaration on 20 June 2012, following the G20 leaders' summit held in Los Cabos, Mexico on 18 and 19 June 2012. The declaration included comments emphasising the importance of well-functioning and transparent physical and financial commodities’ markets in mitigating excessive commodity price volatility. The G20 again reconfirmed its commitment to enhancing transparency and avoiding abuse in financial commodity markets, including OTC markets, with effective intervention powers for market regulators and authorities and an appropriate regulatory and supervisory framework. The G20 is looking forward to IOSCO’s report on the implementation of its recommendations on commodity derivatives markets which is expected by November 2012.

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ACER consultation on REMIT Registration Format, 19 April 2012

19 April 2012

ACER (the Agency for the Cooperation of Energy Regulators) has published a consultation paper regarding the format through which National Regulatory Authorities (NRAs) are required to transmit information on market participants to ACER (the REMIT Registration Format).

Under REMIT, NRAs are required to establish and maintain national registers containing information on wholesale market participants. ACER is required to determine the format under which such information can be transmitted to ACER for the purposes of ACER establishing its own European-wide register of wholesale market participants.

The consultation seeks views on the following:

  • The content of the REMIT Registration Format - proposals include, amongst other things, basic information on market participants, country relevant information and information on corporate structure. ACER is seeking to minimise the information burden to that which is, in its view, strictly necessary to ensure the effectiveness of registration.
  • The REMIT registration and update process - proposals for registration include: criteria for application, confirmation of application by the NRA and transmission of information to the IT system operated by ACER. The consultation also includes requirements for updating market participants’ registration profile. As market participants will not be able to trade until they are registered, ACER recognises the need for the registration process to be completed in a timely manner and seeks to simplify the registration process by relying on existing information already available to NRAs where possible.
  • Whether information in the European register should be made public - ACER believes publication is crucial in allowing for verification of whether market participants are appropriately registered.
  • ACER’s thoughts on issues related to, and options for, “unique identifier” codes to be assigned to each market participant that will be used for identifying parties in the transactions reported to ACER.

ACER will publish the REMIT Registration Format by 29 June 2012 and seeks responses to the consultation by 21 May 2012.

A copy of the consultation can be found here.

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Timetable of ACER tasks under REMIT, 11 April 2012

11 April 2012

ACER (the Agency for the Cooperation of Energy Regulators) has published a timetable setting out its tasks under the Regulation on Energy Market Integrity and Transparency (REMIT).

The timetable can be viewed on the ACER website.

The timetable indicates:

  • The second edition of the ACER guidance on REMIT definitions will be published mid 2012
  • There will be a public consultation between mid-April and mid-May 2012 regarding the registration of market participants, with the final format of this determined by ACER on 29 June 2012.
  • There will be a public consultation between June and July 2012 on the record of transactions.

Market participants will be hoping that this will provide some much-needed clarity following the rather muted reception of the first edition that was published in December 2011.

Both public consultations will also include a public workshop which may be a useful means for affected market participants to make their voices heard.

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Post-trade developments: EMIR consultations on technical standards published, 13 March 2012

13 March 2012

After a couple of years of political debate agreement has been reached on the level one text and now the European Supervisory Authorities (ESA) are working on the detailed technical standards which will govern exactly how EMIR is implemented. Recently, there has been a flurry of activity on the technical standards with ESMA holding its first open hearing and the publication of three papers.

As a quick reminder, EMIR will impose three new requirements on those who trade derivatives:

  • To clear OTC derivatives that are subject to the clearing obligation through a central counterparty (CCP).
  • To put in place certain risk management procedures for OTC derivative transactions that are not cleared.
  • To report derivatives to a trade repository.

These obligations will not only apply to financial counterparties such as firms who are regulated to carry out business in EU financial markets, non-financial counterparties also now need to start preparing for how EMIR will impact their business.

In terms of the clearing obligation, non-financial counterparties will have to comply with this once they have passed a threshold, but will not have to take into account of any OTC derivative contracts that protect against risks directly related to their commercial activities, treasury financing activities or that of their group when calculating whether or not they have exceeded the threshold. In terms of risk management procedures for non-centrally cleared OTC derivative transactions, non-financial counterparties which are past the clearing threshold can expect to be posting margin, and marking-to-market the value of outstanding contracts on a daily basis (amongst other obligations). And finally, in terms of the reporting obligation - all derivative contracts entered into by non-financial counterparties will need to be reported to trade repositories.

For non-financial counterparties the implementation of EMIR is going to bring with it new business processes, new expense and for those who are used to being outside of the world of financial regulation, a new regulatory regime.

However, just what impact EMIR will have will be governed by the content of the technical standards. The level one Regulation will put in place the overall framework of obligations, but it is the technical standards which will provide us with the detail. For example the criteria for establishing which OTC derivative contracts are objectively measurable as reducing risk directly related to the commercial activity or treasury financing of a non-financial counterparty and the level of the clearing threshold will both be set out in the technical standards. Discussions on the technical standards are happening now. As mentioned above, the three papers have been issued by the ESAs. Two of these are of direct relevance to non-financial counterparties; these can be found below:

This paper covers the risk mitigation techniques for non-centrally cleared OTC derivatives. Its response deadline is 2 April 2012.

This paper covers areas such as the clearing threshold, which OTC derivatives should be subject to clearing, the exemptions for non-financial counterparties as discussed above. Its response deadline is 19 March 2012.

The third paper covers capital requirements for CCPs - an interesting read, but perhaps not so directly relevant to non-financial counterparties.

HM Treasury publishes draft EUA auctioning legislation: UK regulation to catch bidders in Phase III auctions

Last month, HM Treasury published a consultation document proposing changes intended to implement elements of the EU regulatory framework applicable to certain bidders in Government auctions of aviation and phase III EU emissions allowances under the EU Emissions Trading System (EU ETS). EU regulation requires certain persons that wish to bid in EU ETS auctions of aviation and phase III emissions allowances across Europe to be regulated by the competent national authority - the FSA in the UK.

The HM Treasury proposals will result in the creation of a new regulated activity under the Financial Services and Markets Act (2000) (FSMA). In most cases this will lead to the FSA having to authorise relevant persons who wish to bid in auctions of emissions allowances; irrespective of extant permissions or exemptions that they may currently hold or rely on. The FSA will be consulting on the consequential changes required to their Rulebook in due course.

These changes will directly affect:

  • unregulated firms that wish to bid in the auctions on behalf of others;
  • authorised firms that wish to bid in auctions on behalf of others; and
  • persons covered by the exemption in Article 2(1)(i) of the Markets in Financial Instruments Directive that wish to bid in auctions on their own account or on behalf of others.

For firms that buy emissions allowances for compliance purposes, there should be no direct impact. However, other firms trading allowances or providing services for other persons to buy allowances may be affected, including both regulated and unregulated firms.

HM Treasury anticipates that approximately 20 firms active in the commodities markets are likely to require FSA authorisation in order to bid in the auctions. If you are active in these markets, you should ensure that you review the consultation paper to consider your position and whether authorisation or a variation of permission may be required.

The paper is accessible here.

The consultation period will end on 10th April 2012.

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