EMIR and REFIT
What is EMIR?
The European Markets Infrastructure Regulation (EMIR) regulates the European derivative markets, central counterparties (CCPs) and trade repositories (TRs). It sets requirements for the authorization, registration, organization and supervision of European TRs. EMIR legislation (level 1 text) was implemented in 2014.
EMIR is the European Union’s response to the G20 Pittsburgh agreement from 2009 on the need to clear and report all over-the-counter (OTC) derivative contracts by end of 2012. It entered into force on 16 August 2012.
It is aimed at improving the transparency of OTC derivatives markets and reducing the risks associated with those markets by requiring that:
- OTC derivatives which meet certain requirements are subject to a clearing obligation;
- Risk mitigation techniques must be applied in respect of all OTC derivatives that are not centrally-cleared; and
- All derivatives transactions must be reported to TRs.
Reporting obligation under EMIR
EMIR gives the European Securities and Markets Authority (ESMA) the responsibility for the registration and supervision of TRs and the ability to charge fees for this function. Where necessary, however, ESMA may delegate specific supervisory tasks to the competent authority of a Member State. To carry out its supervisory duties, EMIR establishes that ESMA should be able to require all necessary information from TRs and that it should be able to conduct investigations and on-site inspections. It also empowers ESMA to take certain measures in case of an infringement of this Regulation by a TR like periodic penalty payments, fines or, as a last resort, withdrawal of registration.
EMIR mandates counterparties and CCPs to report to TRs all details of any derivative contracts they have entered into, no later than the working day following the conclusion of the contract. It also offers the possibility for counterparties to delegate the reporting, while no counterparty is considered in breach of any restriction on disclosure of information.
EMIR also requires the exchange of collateral from counterparties for non-centrally cleared trades, with a phased-in implementation for different volumes of bilateral trades (Variation and Initial Margin).
ESMA has responsibility for defining technical standards for, and regulatory oversight of, the EMIR legislation. The Regulatory Technical Standards (RTS) written by ESMA came into effect in February 2014, marking the beginning of European requirements for the reporting of derivative contracts. Over time, ESMA has sought to improve the quality of data reported and to increase the level of reconciliation achieved when both counterparties have a reporting obligation through changes to the validation rules. The latest iteration of the revised standards came about with the revised RTS in November 2017 introducing significant changes to existing reporting requirements.
- The total number of reportable fields has increased from 85 to 129, with some of the original 85 fields being retired. Numerous existing validations and permitted values have also been modified;
- More detailed collateral information is now required including collateral posted and received, as well as excess collateral;
- Reporting parties must identify themselves with a Legal Entity Identifier (LEI);
- Product identifiers have more prominence with increased usage of the CFI code and ISINs;
- ESMA have clarified that firms must report the outstanding notional;
- A new 'Level' field has been introduced to derogate positions from trades;
- Complex derivatives must be decomposed into their component parts; and
- Many clarifications provided in the existing Q&A document have been put into legislation.
EMIR 2.1 (REFIT)
The European Commission launched a review of the EMIR publishing a first set of draft amendments on 4 May 2017. These amendments were mainly aimed at lightening reporting and clearing obligations for firms with smaller derivatives exposures while heightening the responsibilities for market infrastructure, most notably trade repositories.
Currently, the EU lawmakers (European Parliament and Council of Member States representatives) are in negotiations with the Commission on a final text, after they released their own comments on this proposal.
Reporting changes proposed by EMIR REFIT:
Responding to the industry’s requests to further harmonise post-trade in general, and concretely reporting, the European Parliament, in its draft proposal, calls on ESMA to introduce a common Union standard of reporting to trade repositories to reduce the administrative burden and to increase the matching of trades. Further harmonization is also envisaged by requiring ESMA to draft Implementing Technical Standards (ITS) on formats and standards to be used to comply with reporting requirements.
The main changes EMIR’s Regulatory Fitness and Performance (REFIT) program proposes to introduce to reporting include the possibility of removing the reporting of:
- Historic transactions; and
- Intragroup OTC trades where at least one non-financial counterparty (NFC) is involved.
It will also shift the responsibility and legal liability to report OTC trades that have taken place between a financial counterparty (FC) and a non-financial counterparty (NFC) to the FC, unless the NFC chooses to report on its own.
REFIT also envisages a potential review of exchange traded derivatives (ETDs) reporting in the near future, calling the Commission to take into consideration the outcome of the ‘fitness check’ on supervisory reporting, where the industry had the possibility to provide input through a public consultation.
EMIR 2.2 (CCP Supervision)
On 13 June 2017, the Commission published further amendments to EMIR in a separate proposal focusing on EU and third-country CCP supervision, strengthening ESMA’s supervisory powers and granting an important role to the central banks, especially the European Central Bank (ECB).
The third-country supervision part of this second proposal has been heavily politicized as it contains a Brexit component. The European Parliament has published its position on the text, while the Council of Member States still needs to agree on the supervision of EU CCPs, especially the role of ESMA and central banks in it.
Provisional key elements relevant to the DTCC:
Relevant for the DTCC’s Systemically Important Financial Market Utilities (SIFMUs) is the area focusing on third-country CCPs, which according to this draft proposal will in future be supervised by ESMA, provided they have been recognized.
Regarding recognition, EMIR CCP Supervision proposal introduces a new "two tier" system for ESMA to classify third-country CCPs that apply. Non-systemically important CCPs (Tier 1) will continue to be able to operate under the existing EMIR equivalence framework. However, CCPs that are considered systemically important for the EU’s financial stability (Tier 2) will have to comply with additional requirements. These include, among others, to provide ESMA, if so requested, any documents, records, information and data held at any time, and to grant ESMA access to any of the CCPs business premises.
A limited number of third-country CCPs may be of such systemic importance that even those requirements are deemed insufficient to mitigate the potential risks and will only be able to provide its services if it establishes itself in the EU, although this is considered to be a measure of last resort.
How can DTCC help?
DTCC provides services that will help clients comply with EMIR requirements:
DTCC’s Global Trade Repository (GTR) is the largest in the world, supporting over 6000 customers globally. GTR processes over 14 billion messages annually, covering 100,000 entities and connecting to 150 partners worldwide. For ESMA reporting alone, GTR captures around 60% of market volume and has the largest community enabling clients to meet their reporting obligations under EMIR.
Being industry-owned, GTR provides one of the most cost-efficient methods for our customers to meet their regulatory requirements for EMIR.
To find out more about GTR, visit dtcc.com/GTR.
The GMEI utility, owned and operated by Business Entity Data (BED) B.V., a wholly owned subsidiary of DTCC, is the largest Global LEI Foundation (GLEIF)-accredited Local Operating Unit (LOU) that provides LEI registrations, renewals and other services to firms in financial transactions globally.
To find out more about the GMEI Utility, visit gmeiutility.org.
ALERT® contains a field to allow investment firms to add the LEI of their clients and share this with their broker counterparts.
To find out more about ALERT, please visit dtcc.com/ALERT.
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