Businesses operating in Europe are subject to new swap reporting requirements starting February 12 that, until recently, were confined to financial institutions. Many EU-based treasurers are unaware of the European Market Infrastructure Regulation, or EMIR, a fact acknowledged by the European Securities and Market Authority (ESMA), the regulatory body overseeing the new rule. Even so, ESMA has shown no sign of postponing the start date.
Under EMIR, over-the-counter and listed derivatives transactions are subject to reporting with trade repositories and OTC contracts must be cleared under central clearing counterparties except for those that were not outstanding before August 16, 2012, the initial effective start date of the law.
EMIR functions similar to that of its U.S. regulatory counterpart, the Dodd-Frank Act, but with certain differences obligated to end-users:
- EMIR distinguishes between swap counterparties that are either financial (FC) or nonfinancial entities (NFC). FCs can include financial institutions, investment banks, insurance companies, hedge or pension funds established in Europe. Once recognized as an NFC, end-user obligations depend on the clearing threshold and intent of the derivatives contract itself.
- EMIR requires that both parties to a transaction report, unless they agree to have one party report on behalf of both. If end-users choose not to arrange for their counterparty or third-party service to report on their behalf, they must prepare their trades by tagging them under the unique-trade-identifier (UTI) for reporting with trade repositories and register under the global legal-entity-identifier (LEI) system. In contrast, Dodd-Frank requires only one party within a given transaction to report the contract—typically, the broker-dealer.
In a poll of more than 200 corporates by financial risk advisory firm Chatham Financial, 52 percent admitted they were unsure if their organizations were obligated to report under EMIR. Fully 59 percent said they are still preparing for EMIR reporting compliance, while just 4 percent said they completed all necessary compliance steps. In addition, more than a third (35 percent) have yet to decide which reporting option they will use, and only 18 percent plan to report trades themselves.
In an interview with FX Week¸ Rodrigo Buenaventura, head of the markets division at ESMA, said it should come as no surprise that industry participants are unprepared. However, with 13 months to get ready, “it's anyone's guess what will happen when the date comes around,” he said.