On 21 January 2017, the European Commission (EC) published a delegated regulation and an implementing regulation in the Official Journal amending the RTS and ITS on the minimum details of the data to be reported to trade repositories under EMIR.
One of the key changes made by the EC includes defining how to identify and classify Exchange Traded Derivatives (ETDs) and OTC derivatives. This additional detail is likely to impact the current trade and transaction reporting landscape.
Under EMIR, a transaction report is made to a trade repository on a T+1 basis and the requirements include coverage for OTC and ETDs. EMIR requires entities to report detailed information on each derivative contract to trade repositories, implement new rules to mitigate counterparty risk and clear those derivatives to enhance transparency.
As both OTC and ETD products fall under the scope of MiFID II/R, the amendments may also affect transaction reporting requirements under the MiFID II/R regime. The delegated regulation includes the following amendments to the EMIR RTS:
- The reporting of a derivative contract should be composed of a combination of several other derivative contracts. Counterparties to the derivative contract should agree on the number of separate reports to be sent to the trade repository before the reporting deadline. The reporting counterparty shall link all the reports related to the same derivative contract with a complex trade component ID that must be unique.
- Cleared trades by a CCP: Existing derivative contracts shall be reported as terminated and new contracts resulting from clearing shall be reported. If a contract is concluded and cleared on the same day, only the cleared contract should be reported.
- Reporting of exposures: Collateral exchanged by the counterparties should specify what exactly should be reported, by whom and how it should be valued. Contracts not cleared by a CCP shall report the valuation of the contract performed according to the methodology defined in IFRS 13. Non-financial counterparties are not required to report collateral, mark-to-market or mark-to-model valuations of derivative contracts.
- Notional amount for different classes of derivatives: For swaps, it is the reference amount from which contractual payments are determined in derivative markets; for futures and forwards, it is the amount traded in monetary units; for options, it is the strike price and for financial contracts for difference and commodity contracts, it is the resulting amount of the quantity at the relevant price set in the contract.
- Reporting log: a log shall be kept for any modifications to the data registered in trade repositories detailing the person who requested the modification, reasoning, a date and timestamp and a clear description of the changes.
The implementing regulation includes the following amendments to the EMIR ITS:
- Counterparty side: Identifying which counterparty is either a buyer or seller depends on different asset classes, e.g., for options and swaptions, the buyer is the counterparty that has the right to exercise and the seller is the counterparty that sells the options and receives a premium.
- Collateralisation: Classification of collateralisation (i.e., uncollateralised, partially collateralised, one-way collateralised and fully collateralised) depends on the type of collateral agreement between the counterparties.
- Specification, identification and classification of derivatives: ETDs shall be identified using an ISO 6166 ISIN code or an AII code. OTC derivatives will be identified by their contract type.
- Unique Trade Identifier (UTI): For centrally-executed and cleared trades, the UTI should be generated by the CCP and another should be generated by the clearing member. For centrally-executed but not centrally-cleared trades, the UTI should be generated by the trading venue. For centrally-confirmed and cleared trades, the UTI should be generated by the CCP and another should be generated by the clearing member. For centrally-confirmed but not centrally-cleared trades, the UTI should be generated by the trade confirmation platform. For all other trades, either the financial counterparties, non-financial counterparties or the sellers should generate the UTI depending on the situation.
- Venue of execution: rules outlining how venue of execution shall be identified.
Both standards will apply from 1 November 2017, however, Article 1(5) of the ITS, which is delaying the backloading requirement, will apply from 10 February 2017.
ESMA recently published a letter to the EC advising them to consider strengthening ESMA’s sanctioning powers under EMIR to ensure that suggestions made by ESMA can be taken into account. This means that it is crucial for firms to comply with the revised amendments despite the short turnaround period as ESMA may have more sanctioning powers in the future. We will closely be following any updates regarding EMIR especially if it affects the trade and transaction reporting landscape. We will also be launching our Reporting and Reference Data SIG (RRDS) in March, which will look at the details of reporting formats, standards and collection mechanisms as well as data models and gap analysis across comparable regimes. If you would like to find out more about this Special Interest Group, please contact firstname.lastname@example.org.
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