EMIR Reporting

The European Market Infrastructure Regulation (EMIR)

The European Market Infrastructure Regulation (EMIR) places regulatory requirements on firms entering into ‘derivative’ contracts.

This covers the high volume of credit, equity and FX derivatives in the financial markets, but crucially – the regulations also incorporate the lower volume, but higher complexity, commodity derivatives.

A ‘derivative’ is generally termed as a contract which derives its value from an underlying asset (as opposed to trading the asset itself. In the commodities space, derivative contracts would include any swaps or options or physical forwards where there is an option to settle financially (cash rather than physical delivery). Commodity firms may also have smaller volumes of Foreign Exchange (FX) or Interest Rate (IR) trading for hedging forward cash flows – and these too would fall under the scope of EMIR.

Firms are required to submit contractual, position and valuation information for each of their reportable transactions to an authorised Trade Repository (TR).

What are the Challenges for Commodity Trading Firms?

Timeline

  • The European Market Infrastructure Regulation (EMIR) entered into force in August 2012, with transaction reporting going live in February 2014.
  • In August 2014, financial companies and large non-financial companies (NFC+) were obliged to start reporting daily mark to market valuations on open positions and collateral holdings.
  • Transaction reporting was later updated in November 2015, with enhanced validation rules (termed as the level 2 validations).
  • 2017  saw more change, as new technical standards are were approved by the European Commission.  These included additional reporting fields, and more granular information around initial and variation margin postings.
  • The 2018 implementation of MiFID2/MiFIR also saw changes to the threshold rules which firms utilise to determine their classification as financial companies (FC), or non-financial companies (NFC+ and NFC-).
    A change in classification would likely result in additional reporting obligations under EMIR.
  • The UK withdrew from the EU in 2020, resulting in the UK Financial Conduct Authority taking responsibility for applying UK EMIR, which applied to firms domiciled in the UK market.  Trade repositories were also required to implement a UK only repository, separate from any EU activity.
  • Future refits of the reporting standards and processes are planned – and the level of divergence between UK and EU processes remains a concern for firms active in both markets.

EMIR posed a number of operational challenges for trading firms, a selection of which are highlighted below:

  • Performing a Trade Portfolio analysis to determine what is reportable under EMIR.
  • How to handle ‘off-system’ trades and ensure these are reported to a trade repository.
  • How to handle ‘approximately booked’ trades – these typically exist in order to hold a representation of a deal in a system, but technical constraints mean that the record is often a simplified representation of the true deal that was struck.
  • Dissemination and sharing of the Unique Transaction Identifier (UTI) with your trading counterparties.
  • How to accurately provide the data required by the regulators, where such data is at odds with the traded contract (for example the requirement to provide a mandatory geographical delivery location code for trades which cash settle and do not go to physical delivery).
  • How to fit EMIR T+1 transaction reporting processes into an existing operational control framework.
  • How to ensure that sufficient operational oversight is in place in order to fulfil the obligation to ensure that submissions to the trade repository are correct, timely and complete.

Summary

EMIR provides a number of business challenges for European domiciled firms who are actively trading derivative contracts.

The regulations are being revised by the European Securities and Markets Authority (ESMA), which will involve implementation effort by firms in order to comply with the latest rule set.

Given the links between EMIR, REMIT, MiFID2 and MAR – firms are strongly advised to consider regulatory change in its entirety – rather than piece-meal.

This will prove to provide greater efficiencies of scale, greater reuse of processes and technology and consistent repeatable controls across the business functions.