February start for derivative reporting as EC rejects ESMA request for delay

EC to ESMA: “Non.”

The European Commission has rejected a request from the European Securities and Markets Authority to delay the reporting of exchange traded derivatives, with the effect that all derivatives trades will have to be reported to registered trade repositories from 12 February next year.

ESMA announced the first four trade repositories to be registered under the requirements of the European Market Infrastructure Regulation this week – The London Stock Exchange’s UnaVista and the DTCC Derivatives Repository, both based in the United Kingdom, the Polish KDPW – Krajowy Depozyt Papierów Wartościowych – and Regis-TR, based in Luxembourg.

The TRs are commercial firms that centrally collect and maintain the records of derivatives contracts reported to them. The registration of these TRs means that they can be used by the counterparties to a derivative transaction to fulfil their trade reporting obligations under EMIR. The registrations will take effect on 14 November 2013, with the reporting obligation beginning on 12 February 2014, 90 working days after the official registration date.

The registered TRs cover all derivative asset classes –commodities, credit, foreign exchange, equity, interest rates and others – irrespective of whether the contracts are traded on or off exchange.

“Registering the first European trade repositories is an important component in making derivative markets more transparent and resilient. Trade repositories play a fundamental role in the surveillance of derivatives markets and in risk monitoring. The data gathered by TRs will enable regulators to identify and reduce the risks associated with derivative markets,” said Steven Maijoor, ESMA chairman. “ESMA’s TR supervision will ensure more robust market infrastructures and benefit investors, financial markets and the economy as a whole.”

ESMA had previously proposed a delay for the reporting of exchange-traded derivatives trades because of concerns about the lack of “models, logic and formats used to identify all of the details to be reported” under the regulations.

One of the major differences between the European EMIR and the US Dodd Frank regulations is that the latter does not require the reporting of exchange traded derivative contracts while the former does. Speaking at the FIMA conference in London this week, Tom Springbett, head of OTC Derivative and Post-Trade Policy at the Financial Conduct Authority said that in framing EMIR Europe had “taken the view that regulators wouldn’t be able to get a clear view of a firm’s exposure” if it were only reporting OTC trades.

Springbett told the FIMA delegates that that there was some “blurring” of requirements, particularly in the FX markets where there could potentially be multiple counterparties to a deal, and where the requirement to report events throughout the transaction lifecycle – such as give-ups and terminations – make it unclear who is supposed to report what.

The EC has taken the view that ESMA’s concerns, though widely shared in the industry, are not an impediment to the proper function of the regulations, saying that they “do not justify the proposed delay in the implementation of the reporting of exchange traded derivatives to trade repositories under EMIR”.

In a statement, the EC outlined its reasoning: “In particular, the involvement of a chain of contracts in exchange traded derivatives does not prevent the identification of the counterparties or an adequate implementation of the reporting obligation. The existing differences between the reporting obligations under EMIR and MIFID are justified by the different addresses and the purposes of the reports under those two legislative acts and they do not appear to be an obstacle to the correct application of both reporting obligations. Moreover, those differences have already been taken into account by ESMA when preparing its original draft regulatory technical standards regarding reporting under EMIR.”

Putting a final nail in any hopes of a delay, it added: “Furthermore, postponing the starting date of the reporting obligation for exchange traded derivatives would hinder the achievement of a key objective of EMIR, that is, the identification, monitoring, assessment and mitigation of systemic risk arising from derivative contracts by almost one year. Therefore, the proposed postponement runs counter to the principle of ensuring the stability of the financial system and the functioning of the internal market for financial services.”

The decision leaves the industry with a lot of work to do to fill in the gaps required, Springbett told the FIMA audience. While the proposed Legal Entity Identifier will provide some parts of the information needed, product and trade identifiers will also be necessary, problems that ESMA is working on with industry bodies, he said.