Reporting of Derivative Transactions for Non-Financial Counterparties

From 12 February 2014, entities established in the EU which enter into a derivative contract will be required to report trade details to registered trade repositories. This obligation is part of the EMIR (European Market Infrastructure Regulation) process, a central aim of which is to bring greater transparency to the OTC derivatives market. This briefing is intended as a practical overview of EMIR reporting obligations, as they apply to non-financial counterparties.

Who is subject to the reporting obligation?

In terms of scope, the reporting obligation is the widest-ranging obligation under EMIR. It catches all EU entities, including corporates, SPVs and financial institutions, which have entered into any form of derivative contract, including exchange-traded derivatives as well as OTC derivatives. There is no minimum threshold in terms of volume or value of transactions below which the obligation will not apply.

When will an obligation to report be triggered?

New derivative contracts. On or after 12 February 2014 (the Reporting Start Date), a reporting obligation is triggered when a counterparty:

• executes a derivative contract;
• restructures or modifies the terms of an existing derivative contract; or
• terminates an existing derivative contract before its scheduled maturity date.

Counterparties which are categorised under EMIR as either financial counterparties or non-financial counterparties exceeding the clearing threshold will, in addition to the above, be required to report the mark-to-market valuations of their contracts and any collateral supporting such contracts on a daily basis. This further reporting obligation will come into force 180 days after the Reporting Start Date.

Existing portfolios of derivatives. Derivative contracts entered into before the Reporting Start Date may also be reportable:

• details of contracts executed after 16 August 2012 and still outstanding on the Reporting Start Date will need to be reported by the Reporting Start Date;
• details of contracts executed on or before 16 August 2012 and still outstanding on the Reporting Start Date will need to be reported within 90 days of the Reporting Start Date; and
• details of contracts which terminated between 16 August 2012 and the Reporting Start Date will need to be reported within three years of the Reporting Start Date.

Contracts which terminated before 16 August 2012 will not trigger any reporting obligations.

What details need to be reported?

If a reporting obligation is triggered, over 80 data items will need to be reported to a trade repository, split into two broad categories:

• Counterparty Data. Includes detailed information on the counterparties and other entities involved in the trade, such as brokers, clearing members, central counterparties and trade repositories (including such entities' LEI or pre-LEI codes - please see below).
• Common Data. Includes detailed information on the contract itself, such as the underlying, notional amount, maturity, price, rates and currency, amongst other items. Counterparties should ensure that the Common Data is agreed between both parties.

In order to be able to comply with the reporting obligation, an entity must obtain a Legal Entity Identifier (LEI). If multiple entities within a group enter into derivative contracts, then a separate LEI will be required for each such entity. An LEI is a 20-digit alphanumeric code assigned to a single entity, uniquely identifying such entity for regulatory purposes across jurisdictions. The European Securities and Markets Authority (ESMA) has mandated the use of LEIs for EMIR reporting purposes. Global, standardised LEIs are currently being developed and will not be in place before the Reporting Start Date. Accordingly, the LEI Regulatory Oversight Committee (ROC) has approved certain providers to generate and allocate pre-LEIs to entities, as an interim solution to permit compliance with EMIR reporting requirements whilst the LEI project is completed. The provider of pre-LEIs in the UK is the London Stock Exchange, and details of how to register for a pre-LEI, and the associated costs, can be found here.

How do I comply with EMIR reporting requirements?

Once triggered, the reporting obligation is satisfied by reporting the required data to a trade repository by no later than one working day after the date of execution, modification or termination of the relevant derivative contract. Each counterparty will be separately responsible for delivering an accurate and timely report to an authorised trade repository. To mitigate the administrative and operational burden, particularly on non-financial counterparties, EMIR allows the operational aspects of reporting to be delegated to another entity (please see below). However, ultimately each counterparty will remain legally responsible for delivering the required data within the reporting deadline.

• Direct reporting to trade repositories. Entities with large derivative portfolios are likely to keep the reporting compliance function in-house, leveraging off existing legal and operational infrastructure to report directly to trade repositories.
• Delegated reporting. Entities trading derivatives more infrequently may decide to delegate their reporting obligation, either to their derivative counterparties or to dedicated service providers, who will deliver the necessary reports to a trade repository on their behalf.

Delegating your EMIR reporting obligations

We have increasingly seen financial counterparties offer a delegated reporting service to their clients. Typically, this arrangement will be documented by a delegated reporting agreement or, if necessary, by an extension of investment management authority allowing managers to put in place infrastructure for EMIR reporting on behalf of their clients.

On 19 July 2013, ISDA published a reporting guidance note and on 13 January 2014, ISDA and the FOA jointly published a standard form reporting delegation agreement. Both documents may serve as a useful guide when negotiating reporting agreements. In general terms, key points to consider when negotiating such agreements include:

• Indemnity. A delegate reporting on your behalf may request an indemnity covering losses it incurs in the performance of its service. Counterparties should consider whether any such indemnity is acceptable, and if so whether its scope is overly broad. The ISDA/FOA standard form delegation agreement includes an indemnity, but carves out losses caused by the delegate's negligence (or gross negligence, depending on parties' negotiations), wilful default or fraud.
• Limitation of liability. A delegate will look to limit its liability in connection with the services performed. As above, the ISDA/FOA standard form agreement contains an exclusion of liability which carves out losses caused by the delegate's negligence (or gross negligence), wilful default or fraud.
• Confidentiality. Once reported to trade repositories, counterparties' data will be made available to national and European regulators. Article 9(4) of EMIR provides general relief from confidentiality restrictions (both contractual and statutory). However, in certain non-EU jurisdictions local data protection laws may still apply. Accordingly, counterparties may need to obtain local advice and ensure that appropriate contractual waivers are included.

Practical points to note and further resources

Pre-LEIs: as well as the London Stock Exchange, the ROC has endorsed 9 other providers to produce pre-LEIs, across a number of EU and non-EU jurisdictions. There are no restrictions on an entity using a pre-LEI provider located in a different jurisdiction, where there are time or cost benefits in doing so.
Non-EU counterparties: entities established in the EU facing a non-EU derivative counterparty will still be subject to EMIR reporting obligations. In such case, only the EU counterparty will be required to deliver a report, covering the Common Data of the trade and the Counterparty Data relating to such EU counterparty. The non-EU counterparty may separately be subject to its local reporting requirements, if any.

Duplication of data: EMIR requires counterparties to report their data without duplication. ESMA has clarified that in order to fulfil this requirement, each counterparty must ensure that only one report is submitted by it, or on its behalf, for each derivative contract entered into (excluding subsequent modifications or early termination). As described in further detail above, counterparties to a derivative contract may each submit their own report in respect of that same contract, without breaching such requirement.

Record keeping: EMIR requires each counterparty to keep a record of each derivative contract it has concluded, as well as any subsequent modification, for at least five years following the termination of such contract. As an operational requirement, this obligation would not usually be documented between counterparties.

Data to be reported: the full list of data items to be reported, and the format in which they are to be reported, is set out in the annexes of Commission Delegated Regulation (EU) No. 148/2013 of 19 December 2012 (available here) and Commission Implementing Regulation (EU) No. 1247/2012 of 19 December 2012 (available here).

Trade Repositories: an up to date list of trade repositories registered by ESMA can be found here.

Pre-LEI providers: a list of pre-LEI providers approved by the ROC can be found here (up to date as at December 2013).