16 January 2014

BaFin: EMIR reporting obligation for derivatives

As from mid-February 2014, counterparties and central counterparties (CCPs) must use a trade repository when engaging in derivative transactions. BaFin's analysis summarises the details.

The reporting obligation for derivative transactions is laid down in Article 9(1) of the European Market Infrastructure Regulation (EMIR). The Regulation entered into force on 16 August 2012 and is directly applicable in the EU Member States, without first having to be transposed into national law.

The reporting obligation under EMIR is defined in greater detail by a regulatory and an implementing technical standard of the European Commission, which are likewise directly applicable. The regulatory technical standards define the content of the reporting obligation; the implementing technical standards describe the types of identification to be used for trading participants and traded products as well as the specific details on filling the reporting fields with field lengths and codes.

Overall, the technical standards provide for 85 reporting fields, of which 26 reporting fields are reserved for Counterparty Data and 69 reporting fields for Common Data. The fields must be completed from the perspective of the relevant party subject to the reporting obligation. The Common Data must be coordinated with the respective other contracting party. Where the report is filed in the name of both counterparties, the Common Data has to be transmitted only once. The Counterparty Data covers, among other things, the counterparty's ID, the capacity in which the party subject to the reporting obligation completed the transaction, the contract's mark to market value and information pertaining to collateralisation. The Common Data includes, inter alia, information on the type of contract including product ID, on the transaction details including the transaction reference number and on clearing.

The parties subject to the reporting obligation are counterparties and CCPs. Counterparties may be divided into financial and non-financial counterparties. According to the legal definition under Article 2(8) EMIR, "financial counterparties" are:

• investment firms,
• credit institutions authorised in accordance with Directive 2006/48/EC
• insurance undertakings authorised in accordance with the First Non-Life Insurance Directive and assurance undertakings authorised in accordance with the Life Assurance Directive
• reinsurance undertakings
• undertakings for collective investment in transferable securities (UCITS) and, where relevant, their authorised management companies
• institutions for occupational retirement provision
• alternative investment funds

Counterparties and CCPs must report any derivative contracts that have been concluded, amended or terminated; this reporting obligation shall cover both OTC as well as exchange-traded derivative contracts. The report shall be made to a trade repository which has been registered or recognised by the European Securities and Markets Authority (ESMA). The details shall be reported no later than the working day following the conclusion, modification or termination of a contract.

The party subject to the reporting obligation may submit the report itself or delegate the reporting to its counterparty or any third party. However, the obligation of submitting a correct report will remain incumbent on the party subject to it and will not pass to the third party. In the case where a counterparty reports the details of a contract on behalf of the other counterparty, or where a third party reports a contract on behalf of one or both counterparties, the report shall contain the full set of details the counterparties would have reported had the contract been reported separately.

The report should also include details on the collateral that the party subject to the reporting obligation furnishes for the contract, and on the mark-to-market or mark-to-model valuation of the contract. If the contract value, which is to be determined on a daily basis, changes, this information must be reported to a trade repository. Therefore, it is possible that a daily reporting update will be required for each contract concluded in order to communicate any fluctuations in the contract value.

However, these obligations apply only to financial counterparties and to those non-financial counterparties which have exceeded the clearing threshold. This means that non-financial counterparties who have not reached this threshold will not be required to report collateral and the valuation of the contracts. An exception also exists with respect to exchange-traded contracts: For contracts cleared by a CCP, mark-to-market valuations shall only be provided by such CCP.

It is expected that as from 2014 the entities, be they counterparties, CCPs, brokers or beneficiaries, are to be identified using an identification code (Legal Entity Identifier – LEI). Until entry into force of the relevant standard, which is currently being drawn up by the responsible international body, the Legal Entity Identifier Regulatory Oversight Committee (LEIROC), applications for so-called pre-LEIs may be submitted to the national registrars, the Local Operating Units (LOUs). As soon as the definitive LEI system has entered into force, the pre-LEI codes will be converted to permanent LEI codes; the code will remain unchanged.

According to EMIR, identification of derivative contracts shall be performed using a uniform product identifier which is unique, neutral, reliable, open source, scalable, accessible, available at a reasonable cost basis and subject to an appropriate governance framework. Where a uniform product identifier does not exist, a report shall identify a derivative contract by using the combination of the assigned ISO 6166 International Security Identification Number (ISIN) code or Alternative Instrument Identifier (AII) code with the corresponding ISO 10962 Classification of Financial Instruments (CFI) code. Where such combination is not available either, the derivative contract must be identified on the basis of the criteria referred to in the implementing standard, e.g. derivative class and derivative type.

If ESMA had registered a trade repository for interest and credit derivatives by no later than on 1 April 2013, the reporting obligation for this derivative class would have commenced on 1 July 2013. The reporting obligation for all other derivative classes would have commenced as of 1 January 2014 if a corresponding trade repository had been registered by no later than on 1 October 2013. However, the first trade repositories were only registered on 7 November 2013 based on a decision by ESMA, which took effect five working days later. For all derivative classes the reporting obligation will commence 90 days after the trade repository's registration takes effect, i.e. on 12 February 2014.

The implementing technical standard provides that derivative contracts which were outstanding already upon EMIR's entry into force on 16 August 2012 and are still outstanding upon the reporting start date, shall be reported to a trade repository within 90 days of the reporting start date for a particular derivative class. Derivative contracts which were concluded prior to 16 August 2012 and were still outstanding on that date, or those which were concluded on or after 16 August 2012 and are not outstanding on or after the reporting start date, shall be reported within a period of three years. The reporting start date will be deferred for 180 days as of 12 February 2014 for information on collateral and mark-to-market or mark-to-model valuation data of the contracts.

Full analysis

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