The purpose of the EMIR Refit is to amend and simplify the European Markets Infrastructure Regulation (EMIR) “to address disproportionate compliance costs, transparency issues and insufficient access to clearing for certain counterparties.” EMIR Refit was published in the Official Journal on May 28, 2019 and entered into force on June 17, 2019. While the majority of the new requirements under the EMIR Refit applied upon the regulation entering into force, other requirements are phased in, such as the changes in relation to the current EMIR reporting regime.
The new reporting requirements will apply from June 18, 2020 onwards. In response to a letter from various industry associations requesting a period of forbearance following the June 18, 2020 effective date for the reporting requirements under EMIR Refit the European Securities and Markets Authority (ESMA) have outlined “that deprioritising supervisory actions in relation to the provisions in question is not an adequate way forward” and therefore a period of forbearance has not been granted. Market participants therefore need to continue with their implementation efforts and work towards the current June 2020 deadline.
In a previous note, we provided a summary of the key changes under the EMIR Refit. The purpose of this note is to give a short overview of the new regulatory reporting requirements under the EMIR Refit, and provide guidance on how market participants should prepare in connection with the new requirements.
What is changing in the reporting requirements?
Under EMIR, all financial counterparties (FCs) and non-financial counterparties (NFCs) are required to report details of derivative contracts they have concluded (and any modification or termination of the contract) to a trade repository registered with ESMA, no later than the following business day (T+1). The reporting requirement covers both over-the-counter (OTC) derivative contracts and exchange traded derivative contracts (ETDs). Reporting can be delegated to the counterparty of the derivative contract or a third party provided there is no duplication in reporting. The type of data that needs to be reported to a trade repository depends on the regulatory status of the counterparty.
The EMIR Refit introduces the following changes:
- When entering into an OTC derivative contract with an NFC which is below the relevant clearing threshold for all asset classes (NFC-) the FC will be solely responsible and legally liable for reporting on behalf of itself and the NFC-. The FC will also be responsible for ensuring the correctness of the details reported. The NFC- is required to provide the FC “with the details of the OTC derivative contracts concluded between them, which the financial counterparty cannot be reasonably expected to possess”. It is the responsibility of the NFC- to ensure that those details are correct. The new mandatory reporting requirement under Article 9 (1a) of the EMIR Refit will apply for OTC derivative transactions entered into on or after 18 June 2020 onwards. ESMA have clarified that lifecycle events of OTC derivative transactions (such as a modification or a termination) executed before that date, and which are still live, are also in scope. However, according to ESMA the FC and NFC- may contractually agree that the responsibility and the liability of the FC will be limited to the new OTC derivative contracts concluded as from 18 June 20204.
- An NFC- may opt out of the new mandatory reporting regime and continue to report on its own behalf. If it chooses to do so, it must inform the FC with whom it transacts of its decision prior to transacting with the FC.
- An NFC- will also be exempted from reporting responsibility if it transacts with a third country entity that would be an FC if established in the EU, but only if the entity reports the transaction under its home country reporting regime, and that regime has been declared equivalent under Article 13 of EMIR. This means that in the absence of an equivalence decision, the NFC- is responsible for reporting the trade itself as the EMIR Refit requirement for an FC to report on behalf of itself and its NFC- clients does not apply to third country FCs.
- The management company of an undertaking for collective investment in transferable securities (UCITS) and the manager of an AIF (AIFM) are responsible and legally liable for reporting the details of OTC derivative contracts to which that UCITS or AIFM is a counterparty, as well as for ensuring the correctness of the details reported.
- Where an institution for occupational retirement provision (IORP) does not have legal personality under national law, the authorised entity that is responsible for managing and acting on behalf of an IORP is responsible and legally liable for reporting the details of OTC derivative contracts to which that IORP is a counterparty, as well as for ensuring the correctness of the details reported.
- The EMIR Refit removes the reporting obligation for intra-group transactions, where at least one of the counterparties is (or would be, if it were established in the EU) an NFC. However, to be able to apply this exemption, both counterparties must be part of the same group and their parent undertaking cannot be an FC. Counterparties will need to notify their Member State national competent authority (NCA) that they intend to rely on this exemption.
- The backloading requirement (to report transactions that were no longer outstanding when the EMIR reporting obligation came into effect) is removed by the EMIR Refit.
When do I need to comply with the new reporting requirements?
The key deadline that firms are currently working toward is June 18, 2020.
I already have delegated reporting agreements in place with my counterparties. Do I need to put in place a new reporting agreement?
While you may already have delegated reporting arrangements with your counterparties in place, your delegated reporting agreement will not satisfy the new regulatory reporting requirements in the event you are entering into OTC derivative transactions with NFCs which are below the relevant clearing threshold for all asset classes on or after June 18, 2020.
What is the Master Regulatory Reporting Agreement?
The Master Regulatory Reporting Agreement (MRRA) was jointly published by various industry bodies (AFME, FIA, ICMA, ISLA and ISDA). The MRRA is drafted to cover the new regulatory reporting requirements in respect of derivative transactions under EMIR (as amended by the EMIR Refit) and/or securities financing transactions under the Securities Financing Transaction Regulation (SFTR)9. The MRRA can be used for delegated reporting, mandatory reporting or both.
Which approach is better for me – the MRRA or bilateral documentation?
The answer to this will depend on a number of factors, and will not be the same for everyone, but will largely be driven by the FC`s current documentation approach. For example, in the event an FC currently has bespoke arrangements in place which form part of their general terms of business it might be easier to incorporate the new regulatory requirements into the current suite of documents. An FC might also want to consider the scope of impacted contracts and counterparties and whether or not FCs want to offer delegated reporting for OTCs and ETDs going forward.
What is the structure of the MRRA?
The MRRA consists of a number of parts:
- Delegated Reporting Provisions: This part sets out the rules that will govern the delegated reporting arrangements between the parties. Parties can agree to delete the Delegated Reporting Provisions section from the MRRA and only include the Mandatory Reporting Provisions.
- Mandatory Reporting Provisions: This part sets out the rules that will govern the mandatory reporting arrangements between the parties. Parties can agree to delete the Mandatory Reporting Provisions section from the MRRA and only include the Delegated Reporting Provisions.
- General Provisions: This part sets out generic provisions applicable to both delegated and mandatory reporting, including definitions and representations.
- Derivatives Annex: This annex sets out a number of derivatives-specific provisions, which include both checkbox elections and definitions. Where paragraphs in this Annex are not relevant, the parties can remove them.
- Securities Financing Transactions Annex: This annex sets out a number of securities financing-specific provisions, which include both checkbox elections and definitions. Where paragraphs in this Annex are not relevant, the parties can remove them.
What do I need to complete in the MRRA?
The MRRA is a template document requiring the parties to bilaterally agree and finalise various provisions throughout each section of the MRRA. FCs will therefore need to discuss with their legal, compliance and operations teams internally the relevant approach and subsequently tailor the MRRA.
What do I need to do next?
In the event the new regulatory reporting requirements are applicable to you, you should consider how you wish to proceed. This includes determining:
- Whether you enter into ETDs or OTCs on non-equivalent non-EU trading venues with your counterparties.
- Whether you would like to offer delegated reporting going forward.
- How you will capture any NFC classification change.
- Whether you wish to use the MMRA or bespoke documentation.
- Whether you wish to amend your existing reporting agreements to be compliant with the regulatory reporting requirements, or whether you wish to negotiate and put in place new reporting agreements and the type of counterparties you would like to repaper in addition to NFC.
Who should I speak to if I have any questions?
The Financial Services team at Norton Rose Fulbright LLP has significant experience in all of the issues associated with the new regulatory reporting requirements, and can assist in your understanding of, response to or drafting of bespoke reporting documentation required to comply with the new regulatory reporting obligations introduced by the EMIR Refit and SFTR or tailoring the MRRA.
If you have any questions, please get in touch with your usual Norton Rose Fulbright contact or with any of the people listed below.