On Wednesday 20 March, ESMA published the first draft of its much anticipated Questions and Answers (Q&A) document designed to “promote common supervisory approaches and practices in the application of EMIR” during the regulation’s implementation phase which commenced on 15 March 2013 when the regulation came into force.
Although the Q&A does not address all questions raised by various ESMA EMIR Working Groups nor the variety of different scenarios in which EMIR impacts industry participants, ESMA has stated that the Q&A will be “continually edited and updated as and when new questions are received”.
Furthermore, ESMA has provided an email address to address any questions on the practical application of the requirements.
Who will this impact?
ESMA has answered questions relating to all counterparties (both Financial Counterparties (FC) and Non-Financial Counterparties (NFC)), of which the following summary highlights the questions primarily focused on FCs. Further context of the impact on counterparties and the definitions of FCs and NFCs have been included in our EMIR update, dated 13 February, 2013.
What is the content of the Q&A?
The Q&A has been structured in three parts containing questions relating to OTC Derivatives, Central Counterparties (CCPs) and Trade Repositories (TRs).
Part I: OTC Derivatives
Within this section of the Q&A, clarity on the definition of OTC Derivatives as “a derivative contract the execution of which does not take place on a regulated market” is provided. The responsibility of the FC to assess whether its counterparty is an NFC above or below the clearing threshold is also discussed, stating that the FC should obtain “representations” from the NFC counterparty detailing this status upon which the FC can rely. Details of what “representations” consists of are not discussed within the Q&A.
Importantly, clarity on the definition of “confirmation” and “where available by electronic means” in the context of the timely confirmation risk mitigation strategy (Article 11, paragraph 1(a) of the regulation) is discussed. ESMA highlights a confirmation as a “legally binding agreement to all terms of an OTC derivative contract”. Prearranged processes under which documentation is deemed to be finalised and accepted by both parties after a set period is also considered as a confirmation. Electronic confirmation must be used where available to the market but ESMA stresses in the Q&A that in instances where counterparties can justify that this is not possible, alternative confirmation methods are mentioned.
Further questions relating to applications for intragroup exemptions from the clearing obligation and the availability of and information contained within the public register (under Article 6 of the regulation) are also discussed in Part I.
Part II: CCPs
Part II of the Q&A concentrates on registration and authorisation of CCPs. Although these answers may not be directly applicable to market counterparties, some elements will indirectly apply. For example, it is confirmed that a CCP must record client assets posted as margin, default fund contributions or contributions to other financial resources as pre-haircut valuations, thereby ensuring transparency regarding the recording of client assets.
Part III: Trade Repositories
Further clarification of the reporting obligations to Trade repositories are discussed in Part III of the Q&A. The classification of Exchange Traded Derivatives (ETD) on government bonds and cross currency swaps as interest rate products is stated, whilst the reporting of collateral and outstanding positions within the wider reporting obligation is discussed. The Q&A document states that ETDs which were still outstanding on 16 August 2012 will have to be reported within 90 days of the date of the reporting obligation coming into force if they are still outstanding on that date, and within three years of the date of the reporting obligation coming into force, if they are not outstanding.
The final question stipulates the agreements required between counterparties and CCPs in order to avoid reporting duplications. Under EMIR, both CCPs and counterparties are required to report, but must agree on an efficient reporting method to avoid duplication, for example, where the reporting obligation is delegated. It is also stressed that neither the CCP nor the counterparty has the right to impose a particular reporting mechanism on the other in situations where a different TR may be used by each entity. However, the CCP can select a TR to be used and leave the choice to the counterparty as to whether or not to accept the service for its trade to be reported by the CCP on its behalf.
In conclusion, the Q&A demonstrates the complexities surrounding EMIR implementation. With a variety of different obligations being placed on counterparties and with different entities possessing the necessary information to populate reporting fields, there is a need for co-operation between firms to ensure accurate reporting. In addition, given the variety and number of different trading scenarios and permutations, it is clear that the Q&A should remain a critical working document to provide clarification to the market and to help facilitate working protocols.
The full ESMA Q&A document and future updates can be found here.
Disclaimer: The opinions expressed herein are those of the authors and other contributors and do not necessarily reflect the views of the Firm. This is not intended as specific legal advice for any purpose.
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