Deadline for EMIR Refit on June 18th
Following the financial crisis that started over a decade ago, the European Union adopted the European Markets Infrastructure Regulation (EMIR) in 2012 to address shortcomings in the functioning of derivatives markets. The main objective of EMIR is to reduce systemic risk by increasing the transparency of the derivatives markets and to mitigate counterparty risk by requiring Over-the-counter (OTC) derivatives contracts to be cleared through Central Counterparties.
EMIR reporting requirements are a considerable administrative and technological burden. The associated costs and inefficiencies of more than one party reporting cannot be neglected. The purpose of the EMIR REFIT is to amend and simplify the regulation in order “to address disproportionate compliance costs, transparency issues and insufficient access to clearing for certain counterparties.”
NFC intra-group transactions
Recital 16 of EMIR Refit notes that intragroup transactions involving Non-Financial Counterparties (NFCs) represent a relatively small fraction of all OTC derivative contracts and are used primarily for internal hedging within groups. Considering this, intra group transactions where at least one counterparty is an NFC will be exempt from the reporting obligation. Counterparties will need to notify their Member State national competent authority (NCA) that they intend to rely on this exemption. This was taken into effect on 17 June 2019.
Reporting by FC
From 18 June 2020, Financial Counterparties (FCs) will be solely responsible and legally liable for reporting on behalf of itself and NFCs that are not subject to the clearing obligation. The FC will also be responsible for ensuring the correctness of the details reported. To ensure that the FC has the data it needs, the NFC should provide the details relating to the OTC derivatives contracts that the FC “cannot be reasonably expected to possess”. Corporations should ensure that all FCs in scope have informed them and that the FCs take responsibility following the implementation and portability guidelines of the European Securities and Markets Authority (ESMA). An NFC will also be exempted from its 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 (Mechanism to avoid duplicative or conflicting rules).
Reporting by NFCs
NFCs may still choose to report their OTC derivatives contracts and in such cases, they should inform the FC. In such instances, the NFC becomes responsible and legally liable for reporting the data and ensuring its correctness.
The new reporting requirements will apply from June 18, 2020 onwards. A period of forbearance has not been granted. Market participants therefore need to continue with their implementation efforts and work towards the June 2020 deadline. Participants are working around the clock to meet this deadline, requesting NFCs to provide data they “cannot be reasonably expected to possess”, requesting NFCs to agree to new requirements and transfer of data between Trade Repositories. Zanders can assist you in the transition of the reporting to the FCs. Among others by reviewing FCs documentation, coordinating the communication with FCs and TRs, following-up on their (data) requests as well as decommissioning current (reporting) interfaces in the treasury management systems, thus ensuring a smooth transition.
Would you like to know more? Contact Wilco Noteboom.