A fresh take on risk and valuation

TOWARDS EMIR II? New EMIR reporting standards & the EMIR review

By Tim Van Wijmeersch, Senior Consultant,

Juan Luis Rousselot  Sanz, Middle Officer

& Joana Elisa Maldonado, Regulatory Compliance Assistant


The European Market Infrastructure Regulation (EMIR, Regulation (EU) No 648/2012) has been regulating the European OTC derivatives markets since 2012. Five years later, in May 2017, the European Commission has issued a major review of the regulation. While the EMIR review is now being debated in the Parliament and the Council, revised reporting standards will already apply as from November 2017. This article provides an overview of the changes for reporting as well as the additional fundamental changes to come with the adoption of the EMIR review.

New Reporting Standards

On 21 January 2017, the European Union published new reporting standards on Article 9 of EMIR, which apply as from 1 November 2017. The revised regulatory technical standards (RTS) on the minimum details of the data to be reported to trade repositories introduce changes to the content requirements for trade reports under EMIR. In addition, the implementing technical standards (ITS) on the format and frequency of trade reports to trade repositories alter the conditions and the format of EMIR trade reports. The focus of the revision lies on improving the quality of data, which is reported to trade repositories and the European Securities and Markets Authority (ESMA). In particular, the standards now include requirements and other information, which were previously provided through non-binding Q&A documents from ESMA. Market participants are hence already partly familiar with the new rules, but the transfer from the Q&A to standards makes them legally binding.

The Revised Regulatory Technical Standards (RTS)

The RTS (Commission Delegated Regulation (EU) 2017/104) specify rules on complex trades, cleared trades, collateral value, valuation of contracts and notional.

  1. Complex trades, i.e. contracts composed of a combination of several different derivative contracts, have to be reported as multiple derivative contracts. If reporting in a single line is not possible, counterparties should decompose the contract and agree on the number of lines to be submitted with separate Unique Transaction Identifiers (UTIs). A new field, ‘complex trade component ID’ is introduced in the transaction reports to identify all reports related to the same execution of a combination of financial instruments.
  2. Cleared trades need to be reported as new trades and existing original contracts should be reported as terminated. If contracts are concluded and cleared on the same date, only the cleared contract has to be reported.
  3. The RTS also regulate the reporting of collateral exchange. To identify the type of collateral, additional fields are introduced for the initial margin posted, the variation margin posted, the initial margin received, the variation margin received, the excess collateral posted, the excess collateral received and the respective currency.
  4. Concerning contract valuation, the CCP's settlement price has to be used for cleared trades, and the market approach for noncleared trades, in terms of fair value in line with IFRS 13.
  5. The notional amount is redefined based on the type of derivative contract. For example, for derivatives classified as swaps, futures or forwards in monetary units, it is defined as the reference amount from which the contractual payments are determined in derivatives markets.For options, it is derived from the strike price, and for financial CFDs and commodity derivatives designated in units, it is the resulting amount of the quantity at the relevant price set in the contract.

The Revised Implementing Technical Standards (ITS)

The ITS (Commission Implementing Regulation (EU) 2017/105) regulate the reporting format and introduce new rules on the use of the Legal Entity Identifier (LEI), the generation of UTIs and the determination of the buyer and seller of a contract. The amendments also impact the reporting of collateralisations, credit default swaps and interest rate derivatives. Moreover, the update brings major changes on the reporting of transactions/positions messages (through the introduction of the so-called ‘trade levels’) and the addition of more accurate action types. The number of fields for reporting increases from 85 to 129 and several existing fields are redefined compared to the ones currently used in the templates.

  1. The use of the LEIs (ISO 17442) becomes mandatory for the identification of legal persons in the fields ‘Reporting Counterparty ID’, ‘Broker ID’, ‘Reporting Submitting Entity ID’, ‘Clearing Member ID’, and CCP. Interim identifiers are no longer valid.
  2. The ITS include new rules to support the identification of buyers and sellers. The counterparty side is identified differently depending on the asset classes. For example, for options and swaptions, the buyer is the counterparty that has the right to exercise and the seller is the counterparty that sells the options and receives a premium.
  3. Classification of collateralisation for reporting depends on the type of collateralisation (uncollateralised, partially collateralised, oneway collateralised and fully collateralised).
  4. To avoid duplications and problems for counterparties to obtain UTIs, the ITS define criteria for the generation of UTIs in the absence of agreement. In the case of centrally cleared trades, UTIs are defined by the CCP. For centrally executed but not centrally cleared trades, they are set by the trading venue, and for centrally confirmed trades, by electronic means, but for not centrally cleared trades, by the trade confirmation platform. In other cases, the counterparty highest in the hierarchy (Financial Counterparty (FC), Non-Financial Counterparty (NFC)+) generates the UTI. Finally, if both counterparties have the same level, the UTI will be generated by the seller. The counterparty which is generating the UTI has to communicate the identifier to the other counterparty in a timely manner.
  5. Reports will have to include a new section of asset class specific fields for credit default swaps (CDS) with 10 fields.
  6. A new field specifies at which trade level (transaction or position) reporting takes place.
  7. Additional fields are introduced in the interest rate derivatives section. The Finalyse EMIR reporting solution has already accounted for some of these fields and will add the time period and the multiplier for the floating rate reference period for legs 1 and 2.
  8. . New ‘action type’ values are added and several are redefined:
    1. A derivative contract reported for the first time will be identified as ‘new’.
    2. . Any modification to the terms or details of a previously reported derivative contract, but not a correction of a report, will be identified as ‘modify’ (including updates to a previous report for new trades added in that position).
    3. i. A cancellation of a wrongly submitted entire report in case the contract never came into existence or was not subject to EMIR reporting requirements, but was reported to a trade repository by mistake, will be identified as ‘error’.
    4. An early termination of an existing contract will be identified as ‘early termination’.
    5. A previously submitted report that contains erroneous data fields that need to be corrected will be identified as ‘correction’.
    6. A compression of a reported contract will be identified as ‘compression’.
    7. An update of a contract valuation or collateral will be identified as ‘valuation update’.
    8. .A derivative contract that is to be reported as a new trade and also included in a separate position report on the same day will be identified as a ‘position component’ (equivalent to reporting a new trade followed by an update to that report showing it as compressed).

Furthermore, the reporting period for historic trades – the so-called backloading – is extended to five years, i.e. to 12 February 2019. However, as explained below, the recent EMIR review (EMIR II) proposal suggests to remove the backloading obligation completely.

Updated Official Q&A

Following these new level 2 reporting standards, ESMA has released a revised version of the Q&A document to clarify the transition to the new rules. For example, entities will not be obliged to update all the outstanding trades in November 2017, but are required to submit the reports related to the old outstanding trades only when a trade is modified. Furthermore, the validation rules will be amended to account for the changes introduced in the revised standards.

EMIR II – the EMIR Review

On 4 May 2017, the Commission proposed a revision of EMIR. Following an assessment in the Regulatory Fitness and Performance programme (REFIT), the Commission concluded that EMIR performs well in regulating the OTC derivatives market by promoting transparency and standardisation. The proposed amendments are targeted adjustments to increase proportionality and efficiency of the law for a more growth-friendly regulatory environment. They concern the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty and the requirements for trade repositories:

  1. Clearing Exemptions: NFCs will need to clear only the asset classes for which they have breached the clearing threshold and a new clearing threshold is introduced for small FCs, such as small banks or funds with a limited volume of OTC derivatives transactions. The Commission proposes to extend the exemption from the clearing obligation for pension funds by three years. 
  2. Streamlined Reporting: According to the proposal, NFCs will face simplified rules with exemptions for intragroup transactions and delegation of reporting of transactions between FCs and NFCs from small NFCs to their respective FC. Exchange-traded derivatives will only be reported by the CCP on behalf of both counterparties. Reporting historic transactions (backloading) will no longer be required. The proposal further clarifies that in the case of mutual fund UCITS or an alternative investment fund (AIF) the reporting obligation lies with the management company.
  3. New Risk Mitigation Standards: The European Supervisory Authorities will develop implementation and validation standards for risk-management procedures, including internal models for collateral and segregation solutions.
  4. Stricter Rules for Trade Repositories: To align EMIR with the Securities Financing Transactions Regulation (SFTR), trade repositories will be explicitly required to check the completeness and the accuracy of reported data. In addition, trade repositories will need to establish procedures for reconciling and orderly transferring data with other trade repositories.

If the proposal is adopted without amendments, the regulatory burden for corporates will thus decrease significantly. The EMIR review proposal will now be tabled in the European Parliament and the Council. Modifications of the proposal are hence still possible before the final adoption by the legislators in the coming months.

More new Regulations to come in 2017

Together with the EMIR proposal, the Commission has published a communication to the Parliament and the Council on its intentions to present additional legislative proposals in the coming months concerning important challenges emerging in derivatives clearing. In particular, the Commission seeks to address issues related to the CMU and EMIR concerning Brexit, such as for example supervision of CCPs.

Do You Have a Compliant Reporting Solution?

Finalyse offers an EMIR reporting solution that is at all times compliant with the latest regulations and standards. The automated reporting tool assists you in reporting your derivative transactions to a major trade repository system with a minimum investment.