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ESMA Publishes Updated EMIR Q&A


On 11 February 2014, just a day before the commencement of reporting under EMIR, the European Securities and Markets Authority (ESMA) published an updated EMIR Q&A document.

Given its proximity to 12 February, it is unfortunate that many of the updates in the Q&A address the mechanics of EMIR trade reporting.  There is nothing like giving the market a bit of notice, and this is nothing like giving the market a bit of notice.  The only saving grace is that, according to the FOA, ESMA says it “appreciates that it will require a certain amount of time for both reporting firms and TRs to properly incorporate this further guidance”.

The questions that have been updated since the last Q&A was published on 20 December 2013 are:

General Questions

  • Question 1: Funds, counterparties – confirming that if a charity or not-for-profit organisation performs an “economic activity” then it will be required to report any OTC derivatives transactions entered into under EMIR.

OTC Questions

  • Question 3: Calculation of the clearing threshold – providing guidance to NFCs which have mistakenly categorised themselves as NFC+ on the basis of false assumptions.
  • Question 12: Risk Mitigation techniques for OTC derivative contracts not cleared by a CCP – confirming that the risk mitigation procedures detailed in Article 11 of EMIR do not have to be implemented with counterparties which are exempt under Article 1 of EMIR.
  • Question 18: Indirect clearing – confirming that the provisions on indirect clearing contained within Article 4 of EMIR apply to OTC derivatives products only.

CCP Questions

  • Question 3: Default management – confirming that:
    • following a clearing member default, a CCP may only liquidate underlying client positions at the end of a pre-defined transfer period, but that this period can be short if the CCP judges that this would be “necessary…in order to contain losses or liquidity pressures”;
    • A CCP cannot require a client to designate a back-up clearing member as a precondition to triggering the porting requirements of EMIR.
  • Question 6: Authorisation of a CCP – confirming that:
    • A CCP can only be authorised to perform activities which “present an objective link with the definition of ‘clearing’ under Article 2(3) of EMIR”;
    • CCPs are required to comply with all of the requirements laid down in EMIR for all of the services that it provides and activities that it performs.
  • Question 8: Segregation and portability – confirming that, where a client opts for individual client segregation, clearing members are not obliged to post excess margin directly with the CCP if the CCP does not have the operational and technical means to receive it.  In other words, there is no obligation on the clearing member to transform the non-eligible collateral into eligible collateral and then lodge the same with the CCP.  Similarly, if the clearing member benefits from a bank guarantee provided by the client in favour of the clearing member, the clearing member is not required to post an equivalent amount of eligible collateral at the CCP in order to cover the bank guarantee.
  • Question 11: Investment Policy – providing guidance on the collateralisation of cash deposits made by a CCP and confirming that CCPs are entitled to restrict their liability for losses suffered by clearing members and/or their clients as a result of the reinvestment of their assets by the CCP, provided that the CCP clearly discloses these risks.
  • Question 12: Default Fund – slightly unclear, but seeming to confirm that the use of statistics derived from historical events, of itself, would not be sufficient to satisfy the requirement to use a range of historical scenarios in calculating the size of a CCP default fund – the implication being that the replication of actual historical events may also be necessary.
  • Question 16: Transparency – confirmation that:
    • ‘Public disclosure’ of CCP and clearing member fees can be achieved by way of publication on a website in an easily identifiable location without any access limitations;
    • An actual numerical figure must be published rather than just a narrative describing how fees are calculated.  Numerical figures should at least include those for new clients and be accompanied by a list of the various discounts or rebates available and the factors that would qualify a client to receive such discounts or rebates.
  • Question 17: Limited exposures of Clearing Members – confirming that a CCP can include provisions within its rules whereby a non-defaulting clearing member can be called for additional funds in the event of the default of another clearing member.  Calls for additional funds can be limited in nature or unlimited, provided that the non-defaulting clearing member can calculate its exposure towards the CCP in advance.
  • Question 18: Use of margins posted by non-defaulted Clearing Members – confirming that:
    • Variation margin haircutting applied to the margin due to a non-defaulting clearing member with a positive change in its position is permissible in order to cover losses resulting from the default of another clearing member, provided that the scale of haircutting is pre-defined or capable of being calculated in advance;
    • The reuse of margin posted by a non-defaulting clearing member to cover a liquidity shortfall resulting from the default of another clearing member is compatible with EMIR.
  • Question 19: Application of the exemptions to Title IV of EMIR – confirming that the obligations on CCPs and their clearing members under Title IV of EMIR apply equally to clearing members which are exempt from the requirement to clear, report or employ risk mitigation procedures pursuant to Article 1(4) and (5) of EMIR.

TR Questions

  • Question 10: Codes – confirming that an EU counterparty which is unable to identify its non-EU counterparty due to a legal restriction regarding disclosure under the law of the non-EU counterparty would not be acting in compliance with the requirements of EMIR.
  • Question 18: Reporting to TRs: UTI construction – providing information on how to construct a Unique Trade ID.
  • Question 19: Reporting to TRs: UTI generation – suggesting a non-binding approach detailing an order of preference for the generation by counterparties of Unique Trade IDs.
  • Question 20: Reporting to TRs: Empty fields – confirming that in general all EMIR reporting fields are mandatory unless:
    • The field is not relevant for the specific type of transaction (in which case the field should be left blank);
    • There is a legitimate reason why the actual value of a field is not being provided (in which case the field should be marked s “NA”); or
    • None of the possible values provided in the relevant Regulatory Technical Standard for a given field apply to the specific trade (in which case the field should be marked as “NA”).
  • Question 21: Reporting to TRs: UPI taxonomy – providing an interim taxonomy for the identification of derivative contracts where there is no ISIN or AII available and in the absence of a European-wide Unique Product Identifier taxonomy.
  • Question 22: Reporting to TRs: Venues with all codes – providing guidance on how to determine whether a particular contract has to be identified by the ISIN or the AII code.
  • Question 23: Reporting to TRs: All code – confirming that, for AII derivative contracts, field No 2 (Product ID 1) in the Table 2 Common Data report should be populated with the Exchange Product Code assigned by the Regulated Market.
  • Question 24: Reporting to TRs: Buy/Sell indicator for swaps – confirming which party should be reported as being the ‘Buyer’ or the ‘Receiver’ with respect to field No 13 (Counterparty side) in the Table 1 Counterparty data report for equity, debt and dividend swaps.
  • Question 25: Reporting to TRs: Decimal values in fields 15 and 16 – confirming that decimal values are allowing in fields 15 (Price multiplier) and 16 (Quantity).
  • Question 26: Reporting to TRs: Complex Contracts – providing guidance on how the following should be reported:
    • A contract stemming from another contract (e.g. an option on future) – to be reported separately if the first contract ceases before giving rise to the second;
    • Trading strategies (e.g. straddles or butterfly trades) – each underlying contract within the strategy to be reported separately;
    • A transaction with 2 legs – both legs to be reported in one report.
  • Question 27: Reporting to TRs: ‘Leg 1’ and ‘Leg 2’ fields – confirming that counterparties should agree a consistent approach to assigning legs of a transaction as either “Leg 1” or “Leg 2”.


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