An overview of transaction reporting under EMIR

The European Market Infrastructure Regulation (EMIR) requires firms that trade in financial derivative contracts to file detailed reports via a Trade Repository. This important regulatory framework was introduced in the wake of the 2007-2008 financial crisis to improve market transparency and control risk, but its complex provisions and technical language often make it hard for firms to fully understand their legal obligations.

This guide provides a simple overview of EMIR and explains how firms can comply with its reporting requirements.

What is EMIR reporting?

EMIR requires anyone involved in the trading of derivative contracts to report on the details of each trade. Reports are filed with Trade Repositories that collate the data and provide it to financial regulators who use it to monitor for systemic risks within the market.

What counts as a derivative for EMIR?

A derivative is a financial contract that is linked to the changing price of an underlying asset or a collection (basket) of several assets. This includes both exchanged-traded and over the counter (OTC) derivative transactions. Examples include futures contracts, credit default swaps, options contracts, and many contracts concerning commodities and foreign currency exchange (Forex or FX).

For the purposes of EMIR, derivative contracts include:

· Financial derivatives that are settled either physically or in cash;

· Commodities derivatives that are traded on a regulated market and settled physically;

· Commodities derivatives that are settled in cash; and

· Commodities derivatives that are settled physically and share characteristics with other derivative financial instruments.

What is a trade repository?

A Trade Repository is an entity that collects and maintains central records of OTC derivatives. EMIR-compliant reports can only be made to repositories that are registered and approved by a national competent authority such as the UK’s Financial Conduct Authority (FCA). A list of the registered trade repositories that are permitted to operate under UK EMIR can be found on the FCA’s trade repository page.

Who has to submit EMIR reports?

EMIR applies to all entities established in the EU or UK that enter into, modify, or terminate a derivative transaction. Counterparties from outside the EU may also be indirectly affected when trading with an EU entity. The Regulation identifies two key types of counterparties to a derivatives contract:

· Financial counterparties – including banks, investment firms, insurers, and fund managers.

· Non-financial counterparties – all entities that do not provide financial services.

Any firm involved in the trading of derivative contracts may be required to submit reports in line with EMIR. In most cases, both counterparties (both the ‘buyer’ and the ‘seller’) must file a report for each trade. Notable exceptions to this rule include when:

· the parties have agreed for one to report on behalf of them both;

· either counterparty has delegated their reporting duties to a third party; or

· a trade is between a financial counterparty and a non-financial counterparty. In these cases, the financial counterparty is legally responsible to report on behalf of itself and the non-financial counterparty.

What is included in an EMIR report?

EMIR reports typically contain 26 fields of counterparty data and 59 fields of additional data. The following data should be supplied at minimum for an EMIR transaction report to be compliant:

· Counterparty data – including their name, country of incorporation or domicile, and unique identifiers.

· Common data – including the type of contract entered, its notional value, quantity traded, settlement date and time.

At a more advanced level, EMIR reporting also requires counterparties to report on the clearing of eligible OTC derivatives. It’s also necessary for entities to confirm any measures they have taken to reduce counterparty operational risks and credit risks.

What are my EMIR reporting obligations?

Any entity involved in a derivative transaction must file a report by the deadline. Since 12 February 2014, this has been T+1 – which in plain terms means the day after the transaction was executed. It is also possible to report back-dated transactions (in a process known as back-loading) and these must be filed within 90 days after the reporting obligation first arises.

There are three main ways to comply with EMIR reporting obligations:

· Reporting directly to a Trade Repository - counterparties can monitor and report their own derivative transactions. Firms that choose this approach will generally need to develop robust internal controls and procedures to ensure they remain compliant with all relevant provisions of EMIR.

· Delegating reporting to a counterparty – agreements can be reached between counterparties for one to report on behalf of another.

· Delegating reporting to a third-party – EMIR allows firms to delegate reporting obligations to a third-party reporting solution such as eflow’s TZTR software. Taking this approach can save on costs and internal resources while guaranteeing a consistently compliant approach to transaction reporting.

Am I exempt from EMIR reporting?

It is difficult to advise whether any one entity is exempt from EMIR reporting. In most cases, detailed legal guidance should be sought to determine whether you are required to file derivative transaction reports.

While a number of exemptions do exist, firms that deal in exempt transactions should continue to monitor trades and inform regulators if they become subject to reporting requirements.

Intragroup exemptions

EMIR Refit introduced an exemption from the reporting obligation for derivative contracts made between members of the same corporate group where at least one of the counterparties is a non-financial counterparty.

For this exemption to be valid, both counterparties must be part of the same consolidated group and be subject to appropriate risk evaluation and control measures.

Small financial counterparties

The REFIT regulation also introduced a new class of entity – Small Financial Counterparties (SFCs). SFCs are potentially exempt from certain reporting requirements and not subject to clearing obligations. To qualify as a Small Financial Counterparty, firms must show that their annual aggregate month-end position across each asset class does not exceed the relevant clearing threshold.

For more information about clearing thresholds, visit the European Securities and Markets Authority’s dedicated page.

Individual exemptions

Individuals are not required to report their derivative transactions or trades. In most cases, however, a financial counterparty will be involved in a transaction with an individual and so the legal responsibility for filing an EMIR report will fall to them.

What are the penalties for EMIR reporting?

Article 12 of EMIR provides for member states to apply penalties for infringements of reporting rules. These penalties are overseen by the national competent authority (NCA) of each country. The NCA in the UK is the Financial Conduct Authority (FCA) which has far-reaching powers to impose penalties without a maximum limit on fines.

In 2017, the FCA fined investment management firm Merrill Lynch more than £34 million for reporting failures, showing just how high the stakes can be.

What is EMIR Refit?

EMIR REFIT refers to the European Commission’s Regulatory Fitness and Performance Programme (REFIT). This system is regularly used to review European legislation and to identify areas for improvement. The review process for EMIR began in 2015 and resulted in the passing of Regulation (EU) 2019/834 – also known as EMIR II or the REFIT Regulation.

Most of the new regulation’s provisions came into force on 17 June 2019, imposing reporting requirements on a wider class of counterparties including Alternative Investment Funds (AIFs) and Central Securities Depositories. The REFIT Regulation also clarified the status of smaller financial counterparties and introduced new Fair, Reasonable, Non-Discriminatory, and Transparent (FRANDT) requirements.

Read our overview of the EMIR Refit Regulation to learn more.

Does EMIR apply after Brexit?

Although the UK has now left the European Union, it did not officially do so until 31 January 2020. The EMIR Refit Regulation came into force on 17 June 2019, and so most of its provisions were transferred into UK domestic law by the European Union (Withdrawal) Act 2018.

This means that reporting requirements continue to apply even after Brexit. UK EMIR closely mirrors its European counterpart, but there are some changes that UK firms should know about. For one thing, firms established in the UK must now report all qualifying derivative transactions from after 1 January 2021 to a UK EMIR registered trade repository. Firms can no longer rely on their relationship with a sister company or group entity in the EEA to satisfy their reporting requirements, meaning they must develop their own transaction reporting capabilities.

Simplified transaction reporting and EMIR compliance

EMIR reporting is complex and it can be difficult to remain compliant. Fortunately, the regulation allows for the appointment of third-party suppliers that can simplify the process and allow firms to stay on the right side of the regulators.

eflow’s TZTR software reduces the compliance burden of EMIR transaction reporting and could help you to avoid sizeable financial penalties. For more information, book a demo or contact eflow today.

*Want more information on EMIR refit? Read our latest blog post on the regulation here.