EMIR: Buy side, don't get caught out

With the next European Market Infrastructure Regulation (“EMIR”) deadline of 12 February 2014 which focuses on Trade reporting fast approaching, investment managers need to take action now to ensure they are not caught out.

Key Actions

  • Ensure any funds that trade derivative contracts have pre-LEIs
  • Determine if you need to report and when this will be required
  • Determine if you are going to delegate your trade reporting to a third party
  • Adopt controls around delegated reporting
  • Consider privacy issues

What is an LEI and why do I need one?
A Legal Entity Identifier (LEI) is a set of characters between 42-52 characters long, depending on which type of LEI is obtained (US CICI numbers are 52 characters long and European pre-LEIs are 42 characters long). LEIs can be obtained from a number of sources including the London Stock Exchange, -INSEE, WMDatenservice, CICI utility, and Takasbank. This is then used to identify the counterparty to a transaction and is required as part of the trade reporting under EMIR.

Who needs to report
EMIR requires Financial Counterparties (“FC”) and Non-Financial Counterparties (“NFC”) to report all derivative contracts entered into, modified or terminated to a trade repository. In the fund context, the party to the transaction will be the fund itself and not the investment manager. The reason that this is important is that the reporting obligations under EMIR do not apply to non-EEA funds as they will be classified as a Third Country Entity (“TCE”). EEA funds (may) and UCITS will be required to report from 12 February 2014.

That said, this will change with the implementation of the Alternative Investment Fund Managers Directive (“AIFMD”). Under the definition of a FC, an Alternative Investment Fund (“AIF”) will become a FC if it is managed by an investment manager which is authorized or registered in accordance with the AIFMD (this is unlikely to include a non-EEA investment manager until October 2015 and possibly later).

Many funds will therefore not become FCs until 22 July 2014 and, for those funds, that is the date that the EMIR reporting obligations will officially become effective. However, some investment managers are opting to start their reporting from 12 February 2014 due to the numerous trade reports that will be required in July if they wait.

Reporting timetable

  • Trades entered into and closed before 16 August 2012, do not need to be reported.
  • Trades that were open on 16 August 2012 and closed before 12 February 2014 must be reported by 12 February 2017.
  • Trades that were open on 16 August 2012 and remain open on 12 February 2014 must be reported by 13 May 2014 or, in the instance of a fund, immediately upon becoming classified as a FC if that occurs is after 13 May 2014.
  • Trades entered into on or after 12 February 2014 must be reported by T+1 or, in the instance of a fund, immediately upon becoming classified as a FC, regardless of whether the trade is open or closed on this date.

This amount of “backloading” trades could cause operational challenges if the trade reports all become due on the same date. In addition, EMIR requires that counterparties to a trade should agree the common data. Given that an investment manager’s counterparty, for example an Investment Bank, will be subject to the trade reporting requirements from the first reporting date of 12 February 2014 and will therefore need to meet the T+1 deadline, a delay on behalf of the investment manager may result in reconciliation differences in common data and mismatching (i.e. one sided reporting) for the sell side.

Delegated reporting
Under EMIR, both counterparties to a transaction are required to report the transaction to a Trade Repository. Either party can delegate their trade reporting obligation either to their counterparty or a third party; however, the parties to the trade ultimately retain regulatory responsibility for their own trade reports. Many of the dealers initially were slow to offer delegated reporting services, but as we approach 12 February there appear to be only a few outliers.

Investment managers that choose to delegate their reporting obligations to another party will need to ensure that they can verify that the transactions have been appropriately reported. This may mean that they need some oversight over the data either by setting up an account with the trade repository that the reporting party uses so that they can view the data, or requesting the party to whom they have delegated the reporting to provide a report.  If the former, this could mean setting up multiple accounts with multiple trade repositories for viewing trade reporting data and incurring the associated costs.

Ultimately, should the investment manager delegate the trade reporting to a third party and there is a failure to report, the FCA would expect the investment manager to have a back-up plan in place to ensure that the transactions are reported.

In addition, investment managers will need to enter into agreements with the party reporting the transaction on their behalf.  The International Swaps and Derivatives Association (“ISDA”) and the Futures and Options Association (“FOA”) recently have published an EMIR Reporting Delegation Agreement covering Over the Counter (“OTC”) and Exchange Traded Derivatives (“ETD”) to assist in formalizing these arrangements. General buy-side industry reaction has been that there are a number of favorable sell side terms that the buy side should be cautious to agree.

A word of caution
There “could” be potential privacy issues, especially for institutional investment managers, if they voluntarily report. By voluntarily reporting earlier than technically required, the investment manager may accidentally breach a privacy agreement with a client if such an agreement contains a clause effectively only allowing the sharing of client data if “required” by a regulator. Investment managers should check any privacy documents and where necessary consider obtaining waivers.



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