There remains a lack of clarity as to whether cryptocurrency derivatives (including crypto CFDs) should be treated as financial instruments and therefore subject to EMIR and MiFIR reporting requirements and hence, submitted to a Trade Repository (TR)/Approved Reporting Mechanism (ARM). Though, as the popularity of cryptocurrency sweeps the market internationally, both ESMA and the FCA are working to amend EMIR and MiFIR regulation to support the adequate reporting of cryptos. In this article, ‘EMIR’ and ‘MiFIR’ refer to the regimes operating in both the EU and UK unless specified.
On 4 January 2022, ESMA requested feedback regarding how pre- and post-trade transparency and data reporting requirements should be amended including how regulators can access the data required. This request forms part of ESMA’s Distributed Ledger Technology (DLT) Pilot Regime.
While in September 2021, FCA’s CEO, Nikhil Rathi, confirmed that the regulator is cooperating with the Bank of England on a digital reporting initiative aimed at reducing the cost of compliance checks.
Despite efforts to improve the regulation of crypto derivatives, ESMA’s statement on crypto-assets, issued in January 2019, still stands as the foremost reporting guidance available:
“Our survey of NCAs highlighted that some crypto-assets may qualify as MiFID financial instruments, in which case the full set of EU financial rules would apply. However, because the existing rules were not designed with these instruments in mind, NCAs face challenges in interpreting the existing requirements and certain requirements are not adapted to the specific characteristics of crypto-assets.”
|Products||EU MiFIR reportability||UK MiFIR reportability||EU EMIR reportability||UK EMIR reportability|
|Non-EEA or non-UK Listed Crypto Derivatives||No||No||Yes||Yes|
|UK listed Crypto Derivatives (do not exist yet)||No||Yes||No||Yes|
|EEA Listed Crypto Derivatives (do not exist yet)||Yes||Yes||Yes||Yes|
|Non-listed Crypto Derivatives (eg. CFD Crypto)||No||No||Yes||Yes|
To be reportable under EU MiFIR, the instrument has to be traded on a trading venue, or the underlying has to be traded on a trading venue, within the EEA. To be reportable under UK MiFIR, the instrument has to be traded on a trading venue, or the underlying has to be traded on a UK, Gibraltar or EU trading venue.
Currently, the only venue listed cryptocurrencies we are aware of are Bitcoin and Ether Futures listed outside the EEA (on CBOE and CME) so we currently don’t see cryptos as reportable under MiFIR.
Are cryptocurrencies themselves reportable or just the CFD?
Under EMIR, only derivatives are reportable. Therefore, a CFD on a cryptocurrency is deemed reportable.
Are all crypto CFDs reportable or just Bitcoin CFDs?
TRAction would expect that if a CFD on Bitcoin is reportable, then all cryptocurrency derivatives are also reportable.
What asset class do they fall under?
Due to the fact the EMIR Reporting Rules were not designed with these instruments in mind, there isn’t a category that perfectly fits a cryptocurrency and therefore some interpretation is required in order to report these instruments. At this stage, the wider derivative industry and Trade Repositories suggest reporting under the commodity asset class as a cryptocurrency does not have an ISO standard currency code, which is required for it to be reported as a currency.
When did the reporting obligation for Crypto CFDs commence?
12 February 2014, when the reporting obligation under EMIR commenced. We are of the view that Crypto CFDs will fall under the definition of derivatives. Hence the reporting of Crypto CFDs would have the same commencement date as all other derivatives contracts.
Is there a backloading requirement for reporting Crypto CFDs?
Yes, if you agree with TRAction’s assessment about the reportability of Crypto CFDs, the backloading requirement applies to Crypto CFDs. The reporting obligation applies to derivative contracts which:
(a) were entered into before 12 February 2014 and remain outstanding on that date;
(b) were entered into on or after 12 February 2014.
What should I do next?
We suggest that you review your current product offering and determine whether your Investment Firm has offered or transacted in any cryptocurrency derivatives or CFDs. Where you have done so, this is what you need to do:
- Check if they have been reported
Where any crypto CFDs have not been reported:
- Consider whether all previous transactions should be backloaded under EMIR and MiFIR
- Consider whether you need to lodge a breach report to your NCA
- Make sure you update your systems and processes to ensure daily reporting of all cryptocurrency derivatives along with your other reportable transactions.
What’s the best way to get compliant?
Regardless of whether you are a current client of TRAction or not, we are happy review your specific situation and provide our perspective free of charge. Please contact us.