On November 10, the European Securities and Markets Authority (ESMA) published a consultation paper relating to the Regulatory Technical Standards and Implementing Technical Standards (collectively, the Technical Standards), which address the reporting obligations under the European Market Infrastructure Regulation (EMIR).1 This consultation paper follows ESMA’s Final Report on Technical Standards published on September 27, 2012.
The obligation to report derivative transactions is one of the EMIR requirements discussed in the Q&As2 on EMIR implementation that ESMA has published and regularly updated since EMIR’s inception. Despite the information provided in the Q&As by ESMA, market participants have continued to note a lack of clarity over the interpretation of some of the data fields included in the transaction reports and the appropriate way of populating the fields. The consultation paper proposes to revise the Technical Standards to address these issues. ESMA is receiving the public’s comments on the proposed revised standards until February 13, 2015.
Changes to the Current Technical Standards
The consultation paper introduces three categories of changes to the current Technical Standards. The categories are listed below with a few examples.
1. Clarification of data fields for transaction reporting and/or their descriptions:
For example, the term “Reporting Counterparty” is used within the description of the fields “Counterparty ID” and “Reporting Entity ID” but there is no actual field with that name. To avoid confusion, the “Counterparty ID” and the “Reporting Entity ID” fields will be renamed and referred to in a consistent way.
ESMA will also clarify how the mark-to-market value should be calculated and reported. ESMA will take into account the market practice of valuing different types of derivative contracts.
2. Adaptations of existing fields to the reporting principles prescribed in the Q&As or to reflect specific ways of populating them. These changes will entail incorporating some of the content of the Q&As into the Technical Standards:
For example, ESMA is proposing to split the field “Notional Amount” into two renamed fields. The first field will be named “Original Notional” and will reflect the reference amount from which the contractual payments are determined. The second will be named “Actual Notional” and will reflect the current reference amount from which the contractual payments are determined if the terms of the initial contract have changed.
Many trade repositories allow only one character for the current field “Corporate Sector of the Counterparty.” This leads to a need for prioritization in cases where the counterparty meets more than one possible option (for example, when investment firms are also acting as credit institutions.) ESMA is proposing to allow more than one valid character in this field.
3. Introduction of new fields and values to reflect market practice or other necessary regulatory requirements:
ESMA is proposing to introduce a new Article 4a3 to the Implementing Technical Standards that will prescribe which reporting entity is responsible for the creation and transmission of the Unique Trade Identifier (UTI)4 in the absence of an agreement between counterparties.
ESMA is proposing to define original notional amounts by transaction in order to add clarity.
For swaps, futures and forwards traded in monetary units, original notional amount will be defined as the reference amount from which contractual payments are determined in derivatives markets.
For options, contracts for difference and commodity derivatives designated in units such as barrels or tons, the original notional amount will be defined as the resulting amount of the derivative’s underlying assets at the applicable price at the date of conclusion of the contract.
For contracts where the notional amount is calculated using the price of the underlying asset and the price will only be available at the time of settlement, the original notional amount will be defined by using the end of day settlement price of the underlying asset at the date of conclusion of the contract.
For contracts where the notional amount, due to the characteristics of the contract, varies over time, the original notional amount will be defined as the one valid on the date of conclusion of the contract.
ESMA is receiving stakeholders’ feedback to the proposed revised standards until February 13, 2015. ESMA will consider the feedback received when drafting its final report.
Once finalized, ESMA will submit its report to the European Commission (EC). The EC will have up to three months (until May 2015) to endorse the revised Technical Standards contained in the final report. If the EC takes such action, the revised standards will become effective 20 days after being published in the Official Journal. Therefore, the revised Technical Standards are not expected to become effective until the summer of 2015.
1 EMIR came into force on August 16, 2012, and introduced requirements aimed at improving the transparency of over-the-counter derivatives markets and reducing the risks associated with such markets. EMIR requires, among other regulatory obligations, that all derivatives transactions be reported to registered trade repositories. Article 9 of EMIR Regulation No. 648/2012 provided a mandate for ESMA to draft standards to guide the reporting obligations for counterparties including central clearing counterparties (CCPs).
2 The first version of ESMA’s Q&A was published on March 20, 2013. The document is updated and expanded when appropriate.
3 Article 4a can be found in Annex V of the consultation paper. The identity of the UTI generator and the timing depend on the type of transaction. For example, for centrally executed and cleared trades, the UTI shall be generated either by the execution venue for its member or at the point of clearing by the CCP for the clearing member. On the other hand, for centrally confirmed but uncleared trades, the UTI shall be generated at the point of confirmation by the confirmation platform.
4 The UTI helps reconcile the data when the counterparties are reporting to different trade repositories. The existing technical standards prescribe that the UTI must be agreed to by the other counterparty. However, due to the marginal success of the trade repository reconciliation process, ESMA is proposing an additional prescriptive rule in order to account for cases where counterparties fail to agree on the responsibility to generate a UTI.
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