Following the European Securities and Markets Authority’s (ESMA’s) approval and registration of the first four trade repositories (TRs) in November 2013, counterparties to all types of over-the-counter (OTC) and exchange-traded derivatives contracts will be required, from 12 February 2014, to report certain details of their trades to a registered or recognised TR.
All counterparties, even those exempt from the clearing obligation, should take note that they will not be exempt from the reporting obligation. To facilitate the process, counterparties will, however, be permitted to delegate trade reporting requirements to third parties or their respective counterparties.
The reporting obligation forms part of the requirements imposed by the EU Regulation on OTC derivative transactions, central counterparties (CCPs) and TRs (Regulation 648/2012), also known as the European Market Infrastructure Regulation or EMIR. EMIR aims to establish within the European Union the G-20 leaders’ commitment to improve transparency in derivatives markets, mitigate systemic risk and prevent market abuse.
The primary obligations imposed by EMIR relate to clearing, reporting and risk mitigation of derivatives trades. Such obligations are imposed on both financial counterparties (FCs) and non-financial counterparties (NFCs), to varying degrees.
Whilst the scope of these obligations is aimed at EU entities, non-EU entities should not ignore EMIR’s territorial application, as they may still be caught by its requirements. In particular, a non-EU entity may be required to comply with obligations under EMIR where either its trading counterparty is established in the European Union, or the derivatives transaction has a direct, substantial and foreseeable effect within the European Union.
The Reporting Obligation
Despite a request from ESMA that the reporting obligation in respect of exchange traded derivatives be delayed by one year, in order to give market participants sufficient time to put in place the necessary systems and procedures, the reporting obligation will come into full effect on 12 February 2014.
Under Article 9 of EMIR, all counterparties to all derivatives contracts and CCPs are required to report particular details of any derivatives contract they have concluded, modified or terminated (including lifecycle events such as give-ups and partial terminations), to a TR. ESMA guidance suggests that, in respect of terminations, a report is only required to be made where termination takes place on a date different to that originally provided for in the relevant contract.
Whilst the clearing and risk mitigation obligations are restricted to OTC derivatives contracts, the reporting obligation applies to all derivatives contracts, irrespective of whether they are traded on-exchange or OTC. In addition, although the clearing obligation only applies to FCs and non-financial counterparties that exceed the relevant clearing threshold (NFC+s), the reporting obligation also applies to non-financial counterparties below the clearing threshold (NFC-s). The clearing threshold, as prescribed in the technical standards to EMIR, differs depending on type of derivative contract. The clearing thresholds are as follows:
- Credit derivatives: €1bn in gross notional value
- Equity derivatives: €1bn in gross notional value
- Interest-rate, currency and commodity derivatives: €3bn in gross notional [...]