On 28 May 2020, ESMA published an updated version of the Questions & Answers (hereinafter the “Q&A”) on the implementation of Regulation (EU) 648/2012 of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (hereinafter referred to as “EMIR”).
The updated Q&A added the new Q&A 54 which provides clarifications on the reporting of over-the-counter (“OTC”) derivative contracts by a financial counterparty (“FC”) on behalf of a non-financial counterparty which has not exceeded the clearing thresholds (“NFC-”) pursuant to Article 9(1a) of EMIR as amended by the Regulation (EU) 2019/834 (EMIR Refit).
FCs include, inter alia, (i) investment firms authorised in accordance with Directive 2014/65/EU on markets in financial instruments, as amended, (ii) a UCITS and, where relevant, its management company, authorized in accordance with Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to UCITS, as amended, and (iii) an alternative investment fund managed by AIFMs authorised or registered in accordance with Directive 2011/61/EU on alternative investment fund managers. A non-financial counterparty (“NFC”) is an undertaking established in the European Union other than an FC or a central counterparty/CCP (meaning a legal person that interposes itself between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer).
As elaborated in ESMA’s “EMIR Review Report no. 1 - Review on the use of OTC derivatives by non-financial counterparties (2015/1251)”, EMIR establishes a two-step mechanism for NFCs to determine whether they are considered as NFCs which have crossed the clearing thresholds and, in consequence, are subject to the EMIR clearing obligations and margin requirements (“NFC+”):
- Counterparties need to assess, on a trade by trade basis, whether their transactions are concluded for hedging purposes; and
- Counterparties need to sum the gross notional amounts of their outstanding OTC derivative contracts not concluded for hedging purposes, across all the NFCs of their group.
This aggregation should be done per asset-class and the resulting figures should be compared to the clearing thresholds defined in Article 11 of the Commission Delegated Regulation (EU) No 149/2013: EUR 1 billion for the credit and equity asset classes, EUR 3 billion for the commodity, interest rate and foreign exchange asset classes.
New Q&A 54
TR Q&A 54 clarifies:
WHAT ARE THE REPORTABLE DETAILS THAT THE NFC- SHOULD PROVIDE TO THE FC?
NFC- should provide to the FC the following details: (i) Reporting counterparty ID, (ii) Corporate sector of the counterparty, (iii) Nature of the counterparty, (iv) Broker ID (if unknown by FC), (v) Clearing Member (if unknown by FC), (vi) Type of ID of the beneficiary (if beneficiary is different from the NFC-), (vii) Beneficiary ID (if beneficiary is different from the NFC-), (viii) Trading capacity, (ix) Directly linked to commercial activity or treasury financing, and (x) Clearing threshold.
The reportable details in points (i) - (iii) and (x) are static information not related to a specific derivative, meaning that they can be provided by the NFC- on a one-off basis and updated immediately each time any of such details changes. Other reportable details specified in the points (iv) - (ix) should be provided for each OTC derivative concluded between the FC and the NFC-.
If the NFC- has not provided to the FC the reportable details specified above, the FC should submit the missing reports without undue delay as soon as it receives all the relevant details.
HOW SHOULD THE FC PROCEED IF THE NFC- DOES NOT RENEW ITS LEGAL ENTITY IDENTIFIER (LEI)?
The FC should timely liaise with the NFC- so that the latter renews its LEI. As the Reporting counterparty ID is one of the details that NFC- should provide to the FC as stated above, the NFC- should ensure that its LEI is correct so that FC can perform the reporting of OTC derivatives on its behalf. If the NFC- has not timely renewed its LEI and therefore FC was not able to successfully report on behalf of NFC-, the FC should submit the missing reports without undue delay as soon as the LEI of the NFC- is renewed.
HOW SHOULD THE FC PROCEED IF AN NFC THAT HAS BEEN CLASSIFIED AS AN NFC+ CHANGES ITS STATUS TO NFC- AND FAILS TO TIMELY INFORM THE FC OF THIS FACT?
The clearing threshold is one of the details that NFC- should provide to the FC as stated above. To the extent possible, the NFC- should inform the FC of an anticipated change in its status ahead of the date of calculation of its positions to avoid any disruption in the continuity of reporting.
When FC becomes aware of such change after the calculation date, it should submit the missing reports pertaining to the OTC derivatives that were concluded, modified or terminated after that date without undue delay. Such submissions should be done, upon having received from the NFC all relevant details (as per question (1) above) pertaining to these derivatives.
HOW SHOULD THE FC AND NFC- PROCEED IF THEY REPORT TO TWO DIFFERENT TRADE REPOSITORIES (TRS)?
For any outstanding OTC derivatives where an FC and an NFC- report to two different TRs, and the NFC- decides not to report itself, the outstanding OTC derivatives of the NFC- should be transferred to the TR of the FC as of 18/06/2020, unless the FC decides to become a client of the TR of the NFC- and report the OTC derivatives concluded with the NFC- to that TR.
Each time an NFC changes its status from NFC+ to NFC- and decides not to report itself its OTC derivatives, it should transfer its outstanding OTC derivatives concluded with the FC to the TR of that FC as of the date of its changed status unless the FC decides to become a client of the TR of the NFC- and report the OTC derivatives concluded with the NFC- to that TR.
Similarly, each time an NFC changes its status from NFC- to NFC+, the outstanding OTC derivatives concluded with the FC should be transferred back to the TR of the NFC, unless the NFC decides to become a client of the TR of the FC and report the OTC derivatives concluded with the FC to that TR. Any such transfer of OTC derivatives between the TRs of any pair of FC-NFC should be performed following the principles of the Guidelines on transfer of data between Trade Repositories.