FC/NFC- reporting requirements under EMIR Refit will take effect on 18 June 2020.
The updates require Financial Counterparties (FCs) to report on behalf of themselves and Non-Financial Counterparties (NFCs) that are not subject to the clearing obligation.
New definitions and categories for Financial Counterparties
The Financial Counterparty definition now includes more entities which ESMA deems to pose a significant risk to the financial system.
This is the case with Alternative Investment Funds (AIF) and their managers. An AIF will be deemed an FC where it is managed by an Alternative Investment Fund Manager (AIFM) authorised or registered under the Alternative Investment Fund Managers Directive (AIFMD). This will also be the case when the AIF is established in the European Union (EU), regardless of the location or status of its manager.
Another key change is the introduction to the concept of Small Financial Counterparties (SFCs) which are exempt from the clearing obligation but remain subject to risk mitigation obligations, including margin requirements.
What are the new obligations or requirements?
(a) FCs Reporting for NFCs
For OTC derivative contracts, FCs will be responsible and legally liable for reporting on behalf of itself and NFCs that are not subject to the clearing obligation.
FCs will also be responsible for making sure that the details reported are correctly. However, there is an obligation for the NFCs to provide the details relating to the OTC derivatives contracts that the FC is not reasonably expected to know. The NFC is responsible for the accuracy of those details.
FCs will need to set themselves up operationally to report for their NFCs starting 18 June 2020.
(b) FCs Clearing Requirement determination
EMIR Refit also establishes a new regime for determining when FCs and NFCs are subject to the clearing requirement, depending on whether or not their positions exceed the clearing threshold. FCs are divided into those that exceed the specified thresholds (FC+s); and those that do not exceed the specified thresholds (FC-s).
FCs that are in the second category (FC-s) are not subject to the clearing obligation (nor are NFCs). An entity will only be a FC-s if it is below the threshold for each asset class. The current thresholds are EUR 1 billion for credit and equity OTC credit derivatives contracts (gross notional and value), and EUR 3 billion for OTC interest rate, FX and commodity derivative contracts.
What does all this mean for investment firms and how should they respond?
FCs will be responsible for reporting on behalf of any NFCs, not subject to the clearing obligation (therefore an NFC-). This means they will need to first identify which of their trading counterparties are an NFC- (below the clearing threshold). For those that are below the threshold, they will need to request some extra details in order to fulfil trade reporting obligations.
For example, ABC Broking has a diverse client base trading FX derivatives for speculative purposes. 90% of those clients are individuals but 10% are small companies. From 18 June 2020, ABC Broking will have the responsibility and liability to submit transaction reports for both itself and also its clients that are small companies.
There are two key data fields which will need to be populated in the trade report when reporting on behalf of an NFC. These are ‘Corporate sector of the reporting counterparty’. Market participants will need to be able to collect and send to their regulatory reporting vendor which category, or categories, their Non-Financial Counterparty corresponds to.
All this means that firms will need their regulatory reporting vendor to create an extra trade report for their NFC-. Using a delegated reporting provider can significantly reduce resources allocated to trade reporting – enabling trading firms to focus on their core activities. With so many other issues for financial institutions to consider this year especially during this COVID-19 pandemic, not having to worry about how to generate a second trade report for the one underlying transaction will definitely be a good way to kick-start the second half of 2020.
Last year, the European Commission published a series of amendments to the European Markets Infrastructure Regulation (“EMIR”). Those amendments became, known as “EMIR Refit” or “EMIR 2.1”, introduced some new definitions and obligations to the market. Despite requests from industry to postpone the effective date for the FC/NFC- reporting requirements under EMIR Refit, ESMA decided not to deprioritise the overarching regulatory objective to reduce the reporting burden for NFC-.
Quinn is co-CEO and founder of TRAction and focuses on assisting clients in Europe, Asia and Australia to meet their regulatory requirements with trade and transaction reporting solutions as well as development of the best execution platform. With a background in IT, Quinn started in the financial markets as IT Manager for City Index. He then co-founded and worked as a General Manager at one of Australia’s largest margin FX and CFD providers. Quinn has provided educational sessions to Australia’s regulatory bodies in relation to operational aspects of derivatives and trading platforms.