February 11, 2014

One day before reporting ESMA decides to publish updated Q&As

Yet another update to the ESMA EMIR Q&A the night before Trade Reporting starts.

So, the rumors (LinkedIn group discussion) that spread in the last days by national regulators like the FCA and BaFin were true – ESMA was not only working on an update on the Q&A but actually published [PDF] (and also attached below) them today. Conincidentally, today is the last day before trade repository reporting in EMIR countries becomes reality – tomorrow is GLERT, RSD, 'the beginning of the end' – whatever you prefer to call it.

One can only question what drives a regulator to confuse market participants with an 11th hour publication of such massive update on the implementation Q&As for reporting purposes. But they surely cannot expect to see this being put into action by market participants who have been working frantically towards the 12th of February.

But what you really want to know is what has been added to the Q&A – well, here goes (changes/updates in italics):

General questions

(1) Funds, counterparties
Non-profits have to report if derivatives dealing falls under the definition of economic activity.

OTC questions

(3) Calculation of clearing threshold
Having wrongly assumed that the threshold is exceeded will – if being rectified – not incure any obligations under EMIR.

(12) Risk Mitigation techniques for OTC derivative contracts not cleared by a CCP
Risk mitigation techniques do not have to be implemented between counterparties subject to EMIR and counterparties not subject to EMIR.

(18) Indirect clearing (new question)
Provisions of Article 4 of EMIR and Article 2 of Commission Delegated Regulation (EU) No 149/2013 on indirect clearing apply only to OTC derivatives.

OTC questions

(3) Default management
(a) Porting shall be done in a sufficiently quick way that enables a client to request porting and for the CCP to perform porting. Only then should a liquidation mechanism come into play.
(b) A CCP may not require a client to designate a backup clearing broker although not having a clearing broker in place at a time of default of the primary clearing broker will make porting near impossible.

(6) Authorisation of a CCP
(a) Under EMIR CCPs will not be able to provide services or perform activities that are not linked to "clearing"
(b) Where a CCP provides services or performs activities, which are considered as being linked to clearing and which present a distinct risk profile from its functions and potentially pose significant risks to the CCP, then the CCP is required to comply with all of the requirements laid down in EMIR (Article 17(4) of EMIR) and to ensure that it manages those additional risks adequately.

(8) Segregation and portability
Such excess collateral that is provided to the clearing broker under individual segregation but not eligible under CCP rules, in this case the clearing broker does not need to transform the collateral into eligible one (same for bank guarantees).

(11) Investment policy
Please read for yourself… :)

(12) Default fund
Please read for yourself… :)

(16) Transparency
Fees and figures by CCPs need to be easily accessible (D'uh…)

(17) Limited exposures of Clearing Members (new question)
CCPs may ask for additional funds from non-defaulting clearing members but only up to a pre-defined exposure and only if such clearing members are not exposed to losses they cannot anticipate or control.

(18) Use of margins posted by non-defaulted Clearing Members (new question)
This question covers the question which margins of non-defaulting clearing members can be used in the event of a default.

(19) Application of the exemptions to Title VI of EMIR (new question)
Please read for yourself… :)


TR Questions

(10) Codes
The identity of parties to a trade must be reported to a trade repository. No way around this! Even if the counterparty that cannot be identified because of legal, regulatory or contractual impediments.

(18) Reporting to TRs: UTI construction (new question)
This offers methods to construct a UTI.

(19) Reporting to TRs: UTI generation (new question)
This gives guidance on who should be the UTI generating party to a trade.

(20) Reporting to TRs: Empty fields (new question)
This describes what needs to be entered if fields will not be filled in, i.e. "n/a" or left blank.

(21) Reporting to TRs: UPI taxonomy (new question)
As there is no UPI taxonomy in Europe available the two-tier description in field 2 and 3 of the Common Data shall be used – but no other taxonomy.

(22) Reporting to TRs: Venues with AII codes (new question)
Describes how to determine if  a particular contract is identified by ISIN or by AII codes.

(23) Reporting to TRs: AII code (new question)
Describes how to fill field 2 Common Data for AII derivative contracts.

(24) Reporting to TRs: Buy/Sell indicator for swaps (new question)
Describes what to fill in as buy/sell side indicator for equity, debt and dividend swaps.

(25) Reporting to TRs: Decimal values in fields 15 and 16 (new question)
Decimal values in fields 15 (price multiplier) and 16 (quantity) Common data are allowed.

(26) Reporting to TRs: Complex Contracts (new question)
Looks at reporting cases for complex contracts.

(27) Reporting to TRs: 'Leg1' and 'Leg2' fields (new question)
Who thought we would get clear guidance which leg would hold what data from the various swap types will be disappointed. "counterparties are expected to agree a consistent approach to assigning each leg of the respective field in the report" – come on, seriously???


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