With the reporting start date for the European Market Infrastructure Regulation (EMIR) of 12 February 2014 now imminent, surveys suggest that many corporates either operating in the European Union (EU) or trading with counterparties in the region are unprepared for the new regime.
Nevertheless, the European Securities and Market Authority (ESMA), the regulatory body overseeing the regulation, has given no indication that the deadline will be extended. ESMA is likely to wish to avoid following the lead of the European Commission (EC), which last month reluctantly conceded an eleventh-hour extension of six months to the 1 February deadline for eurozone corporate to migrate their payments systems to the single euro payments area (SEPA).
- Over-the-counter (OTC) and listed derivatives contracts must be reported on a daily basis to one of the six registered trade repositories (TRs).
- OTC contracts must be cleared through central clearing counterparties (CCPs), unless an exception or exemption applies.
- Parties to derivatives contracts must implement certain risk management techniques for non-cleared OTC derivatives contracts.
EMIR distinguishes between swap counterparties that are either financial (FC) or non-financial entities (NFC). FCs can include financial institutions, investment banks, insurance companies, hedge or pension funds established in Europe. Once recognised as an NFC, end-user obligations depend on the clearing threshold and intent of the derivatives contract itself.
EMIR also requires that both parties to a derivatives contract report it, unless they agree to have one party report on behalf of both. End-users who are reporting must prepare their trades by tagging them under the unique trade identifier (UTI) for reporting with TRs and register under the global legal entity identifier (LEI) system.
Down to the Wire
In a recent poll of 200 corporates, real estate investors and other companies, advisory firm Chatham Financial found that 59% of companies were still preparing for compliance with EMIR reporting, and only 4% had completed steps toward compliance. Thirty-five percent had not yet decided which reporting option to use, and only 18% planned to report trades themselves. Fifty-two percent of respondents were not even sure they were obligated to report under EMIR.
Some estimates show that only a little more than 8% of Europe’s derivatives users have registered for the preliminary LEI that will allow them to report their trades, according to risk.net. The number of LEIs per company can range from one to hundreds.
Another recent poll conducted by Reval showed that 58% of its respondents were not ready to comply with EMIR, with many admitting that they did not expect to have completed preparations before May or June. Evidently with the recent concession on SEPA in mind, nearly two in three expected the EC to provide them with a relief mechanism for compliance.
Technology consultancy Capco believes that the deadline should be postponed by eight to 12 weeks to ensure that the information reported is accurate. “The quality of reporting generally will be around 75% of what is required – but what is the value of information that is not 100% correct?” Carsten Hahn, managing principal at Capco told the Financial News. Hahn added that if reporting begins on 12 February, regulators will not receive the well-defined data needed to determine systemic risk, “which is what EMIR is all about.”
A spokesperson for ESMA said that overall, financial institutions appear to be better prepared than some corporates. “It may be the case that a small percentage of the smaller corporates may not be ready in time,” he said. “The EMIR trade reporting obligations potentially cover hundreds of thousands of counterparties, some of which – like small and medium-sized corporate – have never been subject to this sort of financial regulation before.”
Missing the deadline is not entirely the corporates’ fault; ESMA has not exactly made it an easy process for them. TRs were not formally registered by the regulator until 90 days before the reporting deadline, which has made it difficult for corporates to prepare their systems and controls in time, noted Michael Sholem, special adviser, European financial regulatory affairs, Slaughter and May.
Additionally, the LEI requirement is also causing problems, as not all organisations have acquired the necessary codes. Tom Riesack, managing principal at Capco, noted that there are only a few select Local Operating Units issuing LEIs, and thousands of LEIs must be issued for every participant in the derivatives market to start reporting. “In some cases, banks are not able to report completely because they have not got the LEIs of some of their counterparties,” he said.
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