Along with the current regulatory requirements to report information about over-the-counter (OTC) derivatives pursuant to the European Market Infrastructure Regulation (EMIR) and the Markets in Financial Instruments Directive (MiFID I), new regulatory changes will mean that firms conducting business in the European Economic Area will be subject to multiple new sets of reporting obligations. New EMIR standards as well as the Markets in Financial Instruments Directive II (MiFID II) and Markets in Financial Instruments Regulation (MiFIR) will significantly expand the regulatory requirements in respect of OTC derivative trade and transaction reporting. Below we examine the imminent changes and their implications.
The Implications for OTC Derivative Brokers/Investment Firms
EMIR is concerned with monitoring systemic risk whereas MiFIR is focused on market integrity and tackling market abuse. Since there is a fundamental difference in what these regimes are looking to achieve, there is different data that needs to be reported under each regime and neither covers the obligations of the other. Where investment firms execute a transaction in applicable instruments under both regimes, there will be a requirement to submit transaction reports for both.
EMIR Reporting Obligations
EMIR is the European Union legislation for the regulation of OTC derivatives. The regulation included the implementation of risk management standards, requirements for reporting derivative contracts and established common rules for trade repositories. The requirement to report derivatives transactions to trade repositories under EMIR came into force in February 2014.
In November 2017, the new Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) will come into force, creating significant change for EMIR trade reporting. The standards change the information that is required to be reported, reporting requirements for combinations of derivative contracts, valuation information and record-keeping requirements.
MiFID II/MiFIR Transaction Reporting
There are two separate pieces of legislation:
- MiFIR regulation (2014/600/EU) – directly applicable in each member state; and
- MiFID II directive (2014/65/EU) – required transposition into the national law of each member state.
MiFIR/MiFID II commences on and will replace MiFID I. Its aim is to enhance the efficiency and integrity of the financial markets across the European Union.
The transaction reporting obligations under MiFID I were focused on financial instruments traded on a regulated market and derivatives linked to such financial instruments. MiFIR features a significant increase in the scope of firms’ reporting obligations by expanding the reporting requirement to cover nearly all instruments traded on trading venues – regulated markets (RMs), Multilateral Trading Facilities (MTFs) and Organised Trading Facilities (OTF) – and financial instruments whose immediate underlying is admitted to trading on such venues even when these instruments are traded off-venue e.g. OTC.
Background to trade and transaction reporting for OTC derivatives
An overwhelming proportion of the USD global derivatives industry is attributable to OTC derivatives – those traded directly between parties rather than through an exchange. The systemic risks in this large market became apparent during the global financial crisis, when risks often could not be managed due to a lack of transparency in the financial markets.
Governments met at the Pittsburgh G20 summit in 2009 and decided to introduce a new regulatory regime that would make OTC derivative brokers obliged to report OTC derivative information to regulators. This necessitated improved internal processes and procedures to enable the additional data management and dissemination requirements. Almost a decade on from the impetus behind the introduction of derivative trade reporting regimes, major changes are set to take place in Europe, which will again require significant change to business processes to ensure compliance.
TRAction Fintech can help you to understand the changes to your reporting obligations under and can simplify compliance by reporting on your behalf. Please contact us for further information.