Financial Counterparties (FCs) are required to report both on behalf of themselves and on behalf of Non-Financial Counterparties that are not subject to the clearing obligation (NFC-).
FC/NFC- reporting requirements under EMIR Refit took effect on 18 June 2020.
The EMIR Refit in this article refers to both EU EMIR Refit and UK EMIR Refit unless specified.
1. New definitions and categories for Financial Counterparties
Under EMIR Refit, the scope of the term Financial Counterparties (FC) is expanded to include more entities which ESMA deem to pose a significant risk to the financial system, such as inclusion of Alternative Investment Funds (AIF) and their managers.
An AIF is 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 is also 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 of the Small Financial Counterparties (SFCs) concept. SFCs are exempt from the clearing obligation but remain subject to risk mitigation obligations, including margin requirements.
2. What are the new obligations or requirements?
A. FCs Reporting for NFC-s
For OTC derivative contracts, FCs are responsible and legally liable for reporting on behalf of itself and NFC-s, and also responsible for making sure that the details reported are correctly. NFC-s, on the other hand, are required to provide the details relating to the OTC derivatives contracts that their FC is not reasonably expected to know, and responsible for the accuracy of those details.
The table below shows you some post-Brexit reporting scenarios for EU and UK FCs.
|Under EU EMIR Refit – Do EU FCs need to report on the NFC-’s behalf?|
|Under UK EMIR Refit – Do UK FCs need to report on the NFC-’s behalf?|
B. FCs Clearing Requirement Determination
EMIR Refit has also established a new regime to determine when FCs 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 latter category (FC-s) are not subject to the clearing obligation. An entity is only a FC- if it is below the threshold for each asset class.
|Asset class for OTC derivative contracts||Clearing threshold (gross notional and value) in EUR|
|Credit derivatives||1 billion|
|Equity derivatives||1 billion|
|Interest rate derivatives||3 billion|
|FX derivatives||3 billion|
|Commodity derivatives||3 billion|
What does all this mean for investment firms and how should they respond?
FCs are responsible for reporting on behalf of any NFC-s. This means they need to first identify which of their trading counterparties are an NFC-. Once those NFC-s are identified, FCs need to request additional 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 has the responsibility and liability to submit transaction reports for both itself and also its clients that are small companies.
The below are the two key data fields which need to be populated in the trade report when reporting on behalf of an NFC-:
- ‘Corporate sector of reporting counterparty’ referring to the nature of your NFC-’s company activities; and
- ‘Directly linked to commercial activity or treasury financing’ referring to the information on whether a derivatives contract is objectively measurable as directly linked to the NFC-‘s commercial or treasury financing activity.
This means that investment firms need to create an extra trade report for their NFC-.
With the additional obligation under EMIR Refit, we suggest you consider utilising a delegated reporting service. Reduce the burden on your compliance and operations team by outsourcing your reporting to TRAction, so you can focus your business operations on what you do best – trading.