Introduction

European Market Infrastructure Regulation (EMIR) has been in force since 16 August 2012. It is concerned with improving the transparency of, and reducing the risks associated with, the derivatives market. The requirements imposed by EMIR have wide-ranging consequences for entities engaged in OTC derivative contracts in the European Economic Area. There are three key sets of provisions taking effect on a phased basis – central clearing of certain contracts, risk mitigation techniques in respect of non-centrally cleared contracts and reporting of all derivative contracts.

EMIR introduces a concept of client classification which is relevant to virtually all aspects of EMIR as it determines the extent to which EMIR obligations apply in relation to a particular entity. EU entities subject to EMIR will have one of the following classifications:

• financial counterparties (FC), entities such as banks and investment firms;
• non-financial counterparties (NFC+), entities which are not financial counterparties but whose positions in OTC derivative exceed any of five clearing thresholds prescribed by EMIR, measured over a 30 working day average, such as large corporates; and
• non-financial counterparties (NFC-), entities which are not financial counterparties but whose positions in OTC derivative do not exceed any of five clearing thresholds prescribed by EMIR, measured over a 30 working day average, such as securitisation SPVs.

The focus of this client note is EMIR reporting requirements, which is the next obligation to come into effect on 12 February 2014. It applies to all counterparties, regardless of their classification, since its aim is to create an accurate record of the status of, and changes in, the derivatives market overall and in respect to each counterparty.

One of the key pre-requisites to transaction reporting is obtaining a Legal Entity Identifier (LEI) – a 20-character alphanumeric identifier unique to each entity that is a party to a financial transaction. The objective of the LEI system is to build stability in the global financial markets by way of, amongst other things, improving risk management and risk assessment in companies, facilitating detection of financial fraud and reducing the cost of identifying entities and errors in financial transactions. This means that the LEI system has a broad scope covering all entities under the supervision of a financial regulator, such as financial intermediaries, banks and finance companies as well as issuers of all asset classes and is not simply limited to those entities which are parties to derivative transactions. However this client note only considers LEIs in the context of EMIR reporting requirements.

Reporting Obligation

The reporting obligation under Article 9 of EMIR requires all counterparties to report details of derivative contracts to registered trade repositories.

Who is required to report?

Securitisation SPVs will be caught by the reporting obligations if they are established in the EU and have entered into relevant derivative contracts.

EMIR permits counterparties to delegate reporting of the derivative contracts to each other or to a third party. However, the reporting obligation remains on both parties to the transaction (provided both counterparties are EU entities), i.e. delegating the reporting obligation to its counterparty or a third party does not remove the liability for the failure to report from the SPVs.

SPVs should seek to delegate their reporting obligation since many of the functions which are required in order to comply with the obligations themselves, for example the establishing of reporting processes and procedures as well as the associated commitment of resources, may not be appropriate for SPVs and will most certainly not have been contemplated by the fee arrangements for supporting such SPVs.

Currently most bank counterparties are offering delegated transaction reporting services to their derivative counterparties free of charge. In order to avail themselves of this service, SPVs will be required to sign a delegated reporting agreement with each bank counterparty.

SPVs may also consider delegating the reporting obligation to a third party, as in that case all derivative contracts, regardless of the counterparty, will be reported by the same entity. This would address situations where an SPV has multiple derivative contracts with multiple counterparties who would not agree to report trades to which they are not a party. This approach may also ensure the consistency of reports across a corporate service provider’s business.

What is required to be reported?

In the case of securitisation SPVs, the vast majority of derivative contracts will be reportable. Note however that spot FX transaction and embedded derivatives are not reportable.

The information that is required to be reported is prescribed by the relevant regulatory technical standards and contains 85 data fields, grouped in two tables – Counterparty Data (information relating to each counterparty) and Common Data (information about the derivative contract that has to be agreed between the parties). Not all data fields will be applicable to all transactions but since the purpose of the reporting obligation is to provide the regulators with an accurate representation of the derivatives market, counterparties should aim to complete as many of the data fields as possible.

Reports submitted to trade repositories must identify derivative contracts using a common identifier. There is currently no agreed framework in relation to what a Unique Trade Identifier (UTI) or Unique Product Identifier (UPI) should look like. Until a globally consistent solution is found, for UPIs, the interim product taxonomy should be used, and for UTIs, a unique code should be bilaterally agreed between the counterparties to avoid double-counting of transactions. It is worth noting that EMIR allows a counterparty to delegate the generation of UTIs.

When does the information need to be reported?

EMIR requires a report to be made no later than the working day following the conclusion, modification (frequently referred to as ‘life cycle events’) or termination of a derivative contract.

The conclusion of a derivative contract is its trade date, and a modification means an amendment to, or variation of, any information that is reportable under any of the data fields.

Reporting of terminations is only required if such termination occurs other than on the stated maturity date. When termination takes place in accordance with the original terms of the contract, it can be assumed that such a termination was reported when the derivative contract was created. Only terminations that take place on a date different to the specified maturity date need to be reported, meaning terminations following the occurrence of events of default and termination events.

When does the reporting obligation come into effect?

The obligation to report new derivative contracts commences on 12 February 2014. There will be no delays or exceptions allowed in respect of this deadline. All EU counterparties must be ready to commence reporting from this date.

The reporting obligation also applies to historic trades (known as "backloading"); however the deadlines for providing information in respect of those transactions are different. The backloading obligation will apply to all existing securitisation transactions where the swaps are either currently live or were live on 16 August 2012. Any swap that terminated or matured before 16 August 2012 will not be reportable.

Below is a summary of the timings of the reporting obligation in relation to new and historic trades:

In terms of reporting historic trades, counterparties should bilaterally agree UTIs prior to providing reports to trade repositories, as these would not have been created at the time such historic trades were concluded.

Counterparties must keep a record of any concluded derivative contract, and any modification made, for at least five years following the termination of the contract.

From 12 August 2014, FCs and NFC+s will be required to provide daily reports of mark-to-market/mark-to-model valuations of all reportable derivative contracts and collateral positions to trade repositories. However, it is more than likely that securitisation SPVs will be classified as NFC-s and accordingly, will not be required to make such daily reports.

How is information being reported? All counterparties that are subject to the reporting obligation are required to obtain a LEI in order to be able to report. Once the global LEI system (GLEIS) is fully operational, Local Operating Units (LOUs) will assign and maintain LEIs. However, the GLEIS is not yet fully operational and there are no fully functional LOUs. As an interim solution, pre-LOUs have been introduced which will issue pre-LEIs. Pre-LEIs will transition into LEIs upon the GLEIS becoming fully functional. Counterparties will not be able to comply with their reporting requirements under EMIR without having obtained pre-LEIs since it is not expected that LEIs will be available by 12 February 2014.

One pre-LEI is required per one legal (transacting) entity. These can be obtained online (after payment of the appropriate fee) from any of the providers listed below:

In addition to the upfront fee, each SPV requiring a LEI will need to pay an annual fee in order to validate the information and maintain its LEI. Where bulk orders are required, trade repositories are offering discounted rates and special procedures to ease the administrative burden.

Details of derivative contracts must be reported to one of the registered trade repositories. Trade repositories are entities registered under EMIR and supervised by the European Securities and Markets Authority (ESMA). There are currently six registered trade repositories, with more entities likely to become registered in the future:

(a) registered for all asset classes:

• DTCC Derivatives Repository Ltd. (DDRL), based in the United Kingdom;
• Krajowy Depozyt Papierów Wartosciowych S.A. (KDPW), based in Poland;
• Regis-TR S.A., based in Luxembourg;
• UnaVista Ltd, based in the United Kingdom; and
• CME Trade Repository Ltd. (CME TR), based in the United Kingdom,

(b) registered for commodities, credit, equities, interest rates derivatives only:

• ICE Trade Vault Europe Ltd. (ICE TVEL), based in the United Kingdom.

It is not necessary for all transactions of one SPV to be reported to the same trade repository. It may be the case that if transaction reporting is delegated to different banks, different trade repositories will be used. Equally, counterparties to the same derivative transaction may opt to report to different trade repositories. EMIR allows reports to different depositories as long as every reportable trade is reported.

SPVs that choose to delegate transaction reporting to banks should check to which trade repository the information is being reported. Since the liability for failure to report still rests with each counterparty, it may be prudent (although not required) for SPVs from time to time to contact the relevant trade repositories for copies of the reports to ensure that the reporting is being performed correctly by the delegate(s).

Use of reported information and confidentiality

The information collected by trade repositories will be kept confidential. It is one of the requirements of trade repository registration that it is able to safeguard reported information from disclosure.

Each trade repository is required to regularly publish aggregate positions by class of derivatives on the contracts reported to it, but counterparty-sensitive information will not be made public in these reports. However, trade repositories are obliged to make available to ESMA and the national regulators all the information necessary to enable proper supervision and oversight of the derivatives market. The disclosed information is subject to the professional secrecy requirements imposed by EMIR.

EMIR specifically states that counterparties (and their directors and employees) that are subject to the reporting obligations will not be considered in breach of any restriction on disclosure of information or confidentiality provisions, contractual or otherwise. SPV directors may receive approaches from their counterparties seeking to obtain waivers of confidentiality in non-disclosure agreements and should seek advice on the terms of these waivers.

It is worth noting that where EU-based SPVs enter into derivative contracts with other EU entities, both parties will be covered by the EMIR confidentiality waiver; however if the SPV’s counterparty is not an EU entity, the SPV’s obligation to report would need to be reviewed in the context of any contractual non-disclosure provisions.

Conclusion

EMIR reporting requirement is an important component in achieving the overall objectives of EMIR and as such it is crucial that all entities required to report are aware of what steps need to be taken before the reporting date – 12 February 2014. This is despite the fact that to date the sanctions for any failure to comply or the submission of incorrect or late reports have not yet been determined. We encourage all corporate services providers to SPVs to identify transactions which will be subject to the reporting obligation as soon as possible, and if necessary, promptly take all the required steps described above noting that many market participants are still working through the operational and legal implications of offering the delegated reporting services to their counterparties as well as ensuring their own compliance. It is still uncertain how well the market as a whole will be prepared to meet these obligations when the reporting date is finally here, but we anticipate that the regulators will insist that all efforts are made to comply by that date, so it is therefore essential to act promptly to allow as much time as possible to put all the required arrangements in place.

Client Alert 14-023