By: Sam Tyfield
On December 20, 2014, ESMA release an updated Q&A on EMIR. Specifically on ETD reporting, see towards the bottom of the page at the link here (I have cut and pasted the relevant paragraphs below, too, with some additional highlighting which will be of interest to firms which are NCMs of derivatives venues but are not (yet) MiFID authorised) :
“According to the legal definitions included in EMIR, any EU counterparty which has concluded a derivative contract is covered by EMIR’s reporting obligation. At the same time, conclusion of derivative contracts should be understood as execution of a transaction under MiFID. Accordingly, the following counterparties will have to report their ETD trades to TRs:
- Central Clearinghouses (CCPs) clearing the trades;
- Clearing members of the CCP clearing the trades;
- MiFID investment firms executing derivative trades on a trading venue of which it is a member; and
- Counterparties to derivative contracts that do not fall into any of the categories above, except when they are exempt because of their status.
Any of these participants are obliged to report all derivative contracts that they have concluded with any of the other participants. Clearing members and their clients need to report separately, whereas firms who are not a counterparty to a derivative contract do not have to report their trades.”
In other words, there appears to be an argument that firms which are not authorised or regulated in the EU but are nonetheless NCMs have no obligation to report ETD transactions. This would seem to fly in the face of the EMIR level 1 text (and the views of the EU Commission), however.
There is always the possibility that an unregulated firm trading ETD could fall into the catch-all category of “Counterparties to derivative contracts that do not fall into any of the categories above, except when they are exempt because of their status”
However, look at the two illustrated examples given in the FAQs:
An NCM trading on its own account will unlikely be anything but the “Investment Firm” in either example – the catch-all category can be read as if it is designed to capture the “Client”, not NCMs which are not MiFID investment firms.
If a firm does not transaction report under MiFID or the FCA rulebook, then it is reasonable to read the FAQs as not giving it a reporting obligation under EMIR. The FAQs state:
“In the particular case of derivatives admitted to trading on a regulated market, it should be recalled that they are already subject to reporting obligations under Article 25 of MiFID. Thus, in order to ensure consistency and avoid reporting conflicts between the two regimes, they should be aligned to the maximum”
Even if ESMA does intend unregulated firms to be captured, at the very least the FAQs are ambiguous. I am making enquiries and will revert if and when I receive a response.
On December 18, the EU Commission released its own updated FAQs on EMIR (last updated in February 2013).
The main updates relate to what is (and is not) an “undertaking” for the purposes of EMIR (with my bolds):
“the term “undertaking” would be addressed to activities instead of entities. Against this background, the term “undertaking” would include entities, regardless of their legal status, performing economic activities in the market”
and an “undertaking” would be “established in the EU” if:
“’the actual pursuit of an economic activity through a fixed establishment in (another) Member State for an indefinite period of time’. In this context, it is worth noting that the concept of undertaking is broader than that of ‘companies or firms’ and thus, not restricted to entities with legal personality or with for-profit-making”.
In other words, an “establishment” could be a formal branch or taxable permanent establishment. Firms which trade algorithmically are likely (if not certain) to have servers located in close geographical proximity to a venue’s (or its broker’s etc) main servers. The OECD model for what is and is not a taxable permanent establishment would exclude such servers. However, a very small number of jurisdictions around the world regard servers as taxable permanent establishments. Note that the FAQs define an undertaking in terms of its activity and an undertaking in the EU in terms of the place of its fixed establishment. There is no requirement for the undertaking to have personnel, a real estate presence etc on the ground or to be incorporated or registered in the EU.