By Sam Tyfield and JWG.
We asked a prominent city lawyer what current EMIR reporting issues could mean if the regulators chose to get nasty. The bottom line: big fines could appear on the cards years down the line. Given where we are with current data quality efforts, this might have an impact on the bottom line sometime this decade.
As previous RegTech articles on have noted, there have been significant teething problems with the OTC trade repository (TR) systems. Last week, Thomson Reuters reported in ‘Compliance Complete’ that TRs “underperform in report processing, reconciliation”, noting significant difficulties in matching or pairing reported trades:
“it is estimated that at some repositories as little as 2 percent of all trades reported were being matched or paired”;
These views contradict a spokesman for ESMA who has said that
“[t]rade reporting has worked reasonably well so far, although some trade repositories are still finalising issues with some clients, especially those that came on board very late in the process”.
These fines will get personal as specific individuals within TRs are penalised for no/under performance or breach of their obligations under EMIR (or as ESMA expressed it: where “a TR has, intentionally or negligently, committed one of the infringements listed in Annex I of EMIR”; or where, in the case of continuing infringement, ESMA feels it must “put an end to an infringement or respectively to comply with [the TR’s] obligations in accordance with EMIR”).
The EU Commission published a delegated regulation with regard to rules and procedures for penalties imposed on TRs by ESMA on 13 March, 2014. This delegated regulation comes on the back of ESMA’s own technical advice to the Commission on rules to impose fines on trade repositories. There are different types of penalties and fines available – one-off fines and periodic penalty payments (fines which are payable daily until the infringing situation is rectified). The fines are subject to adjustment in the event of mitigating or aggravating factors, although “the amount of the fine shall not exceed 20% of the annual turnover of the trade repository concerned in the preceding business year but, where the trade repository has directly or indirectly benefited financially from the infringement, the amount of the fine shall be at least equal to that benefit”.
Let’s look at what this means. For an imaginary TR that is collecting 30,000 OTC trade reports and five million ETD trade reports per week, charging a flat fee of 0.3 Euro cents for ETD and one Euro cent for OTC, and collecting annual membership fees totalling €600,000, annual turnover would be approximately €1.4 million. Should they fall foul of ESMA, they could be fined €280,000 before considering the benefits they received from the infringement. Of course, this will likely dwarf the cost of the staff’s late nights and weekends as they work with their lawyers to defend themselves from investigation.
Will this make their shareholders very happy? Most definitely not. Will they look to push these costs on to the customers that caused them pain? Perhaps. Will this mean that the TRs have a strong incentive to help the regulators put in place workable standards for reporting? We can only hope …
If you think this is a future problem, think again. ESMA has five years from either (a) the date of the infringement or (b) in the case of continuing or repeated infringements, the day on which the infringement ceases, to impose fines and periodic penalty payments. The limitation period shall be suspended for the period investigations or proceedings are ongoing (subject to a 10 year maximum). In other words, merely because ESMA is biding its time to allow for ‘teething problems’, all current performance issues may be subject to investigation and fines.
The ‘worst case scenario’ for a TR would be a withdrawal of its registration under Art 73 of EMIR.
Overall, whilst it seems that both the Commission and ESMA have sought to set out rules which would require ESMA and its officers to comply with the laws of ‘natural justice’, any investigation will require management and personnel to devote significant time and attention to it and the amount of information that may be required to be delivered up will be enormous. The interpretation and enforcement of Annex I of EMIR will evolve, too. The principles contained in it seem reasonable, but no TR (or senior personnel within a TR) would like to be the test case.
 It is not only negligence or intent: Art 73 of EMIR states that ESMA may take into account “whether the infringement has revealed serious or systemic weaknesses in the undertaking’s procedures or in its management systems or internal controls and whether financial crime has been occasioned, facilitated or otherwise attributable to the infringement”
 EMIR (Art 65) states that the “basic amounts of the fines referred to in paragraph 1 shall be included within the following limits:(a) for the infringements referred to in point (c) of Section I of Annex I and in points (c) to (g) of Section II of Annex I, and in points (a) and (b) of Section III of Annex I the amounts of the fines shall be at least EUR 10 000 and shall not exceed EUR 20 000; (b) for the infringements referred to in points (a), (b) and (d) to (h) of Section I of Annex I, and in points (a), (b) and (h) of Section II of Annex I, the amounts of the fines shall be at least EUR 5 000 and shall not exceed EUR 10 000.”
 The amount of the periodic penalty payments shall be 3% of the average daily turnover in the preceding business year, or, in the case of natural persons, 2% of the average daily income in the preceding calendar year. It shall be calculated from the date stipulated in the decision imposing the periodic penalty payment
 The investigation may be quite intrusive and time-consuming. EMIR (Arts 62 and 63) gives ESMA rights to have wide access to a TR’s personnel, records and premises
 In particular, the right to a fair hearing