January 29, 2014
Updated on March 11, 2014
On February 12, 2014, derivatives reporting obligations under the European Market Infrastructure Regulation ("EMIR") came into force with immediate effects on all derivatives counterparties that fall under the scope of EMIR. As a result of these new trade reporting obligations, many derivatives counterparties that do not have reporting obligations or are exempt from such obligations under the laws of other jurisdictions, such as the United States, find themselves subject to reporting requirements under EMIR.
EMIR is the EEA’s equivalent of Title VII of the U.S.’s Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank"). Both EMIR and Dodd-Frank share the same origins in the 2009 G20 post-crisis reform agenda, and introduce requirements aimed at reducing counterparty risk and improving transparency in the OTC derivative markets. Like Dodd-Frank’s requirements to report swap transaction data to a swap data repository, EMIR has a similar requirement to report swap transaction data, including historical swap data, to a registered trade repository ("TR"). However, requirements for two-sided reporting, intragroup (i.e., inter-affiliate) transaction reporting and documentation, among other things, could prove to be challenging undertakings for many market participants (especially corporate end-users, which are subject to more onerous reporting obligations under EMIR than Dodd-Frank due to the absence of a single-counterparty reporting system).
This alert summarizes the EMIR trade reporting obligation, what affected entities should be doing to comply, cross-border concerns and potential risks of noncompliance with the EMIR reporting requirements.
PUTTING EMIR INTO CONTEXT: CONFLICTS BETWEEN THE REPORTING REQUIREMENTS UNDER EMIR AND DODD-FRANK
Conflicts exist between the reporting requirements under EMIR and the Dodd-Frank Act. Unlike the Dodd-Frank Act, which places reporting requirements on swap dealers, major swap participants and financial entities, EMIR places reporting requirements on both parties to a swap. Accordingly, all entities that are subject to EMIR, including derivatives end-users, have reporting requirements under EMIR for both external derivatives and intragroup derivatives. While an entity can delegate its reporting obligations, it would still carry the regulatory burden of ensuring the data is appropriately reported.
Additionally, derivatives end-users are eligible for no-action relief from reporting requirements under the Dodd-Frank Act for intragroup derivatives (CFTC Letter No. 13-09). EMIR does not have such relief and, accordingly, derivatives end-users subject to EMIR are required to report swap data for intragroup derivatives transactions to a TR no later than the end of the next business day following the conclusion, modification or termination of such transactions (i.e., within T+1). This means before entering into intragroup derivatives with EEA affiliates, derivatives end-users should follow the steps described below to ensure that they are connected and ready to report intragroup derivatives to a TR.
We are still awaiting final equivalency determinations from the European Commission to determine to what extent compliance with the Dodd-Frank Act will satisfy EMIR requirements in the case of cross-border transactions. While the CFTC has provided no-action relief for certain entities, namely with respect to the reporting of intragroup derivatives transactions under CFTC Letter No. 13-09, the European Commission has indicated that it will adhere to the policy that the "strictest rule applies" making the importation of CFTC no-action relief unlikely as part of an EMIR equivalency determination. Accordingly, entities, including derivatives end-users, are required to report intragroup derivatives and external swaps under EMIR to the extent that one or more affiliates entering into the derivatives contract is located in an EEA member state.
EMIR’S TRADE REPORTING OBLIGATION
Under EMIR, all counterparties and central counterparties ("CCPs") must ensure that details of any derivative contracts are reported to a TR within one working day of its execution or the occurrence of a subsequent life-cycle event.
 The purpose of the reporting requirement is to ensure that information on the risks inherent in the OTC derivatives markets will be centrally stored and easily accessible to the European Securities and Markets Association ("ESMA"), regulators and relevant central banks.
Scope of the Reporting Obligation:
Details to be Reported to a TR:
Timing of the Reporting Obligation:
HOW MARKET PARTICIPANTS SHOULD PREPARE TO COMPLY WITH THE EMIR REPORTING OBLIGATION
To prepare to report data to a TR, a counterparty should take the following steps:
DELEGATING THE REPORTING REQUIREMENT
As a result of the preparation and costs to comply with EMIR’s reporting obligation, counterparties may consider whether to delegate the reporting requirement to their counterparties or to a third party. Article 9 of EMIR permits counterparties to delegate the reporting of details of a derivative contract; however, Article 9 also explains that counterparties "shall ensure that the details of their derivative contracts are reported without duplication." Accordingly, counterparties, including those counterparties to intragroup transactions, should consider whether delegation of the reporting of details makes sense given that the counterparty remains ultimately responsible for ensuring that the correct data is reporting. Further, counterparties wishing to delegate the reporting requirement would be required to enter into a delegation agreement with their counterparty or a third party, the terms of which may not be favorable to the delegating counterparty.
The ISDA/FOA EMIR Reporting Delegation Agreement
On January 13, 2014, ISDA and the FOA published a jointly drafted document entitled the "ISDA/FOA EMIR Reporting Delegation Agreement" (the "ISDA/FOA Delegation Agreement") in an effort to help market participants meet their reporting obligations under EMIR by providing a bilateral standardized form contract which can be used to delegate reporting obligations under EMIR. The ISDA/FOA Delegation Agreement allows an entity offering reporting services (the "Reporting Delegate") to submit "Relevant Data" (either itself or through a third party) to a specified TR with respect to "Relevant Transactions" on behalf of a "Client" by the reporting deadline specified in Article 9 of EMIR.
The Schedules to the ISDA/FOA Delegation Agreement allow counterparties to tailor their delegation arrangements by specifying various things, including: (1) type of transactions to be reported; (2) identifying the identities of the Reporting Delegate, affiliates of the Reporting Delegate, relevant TR; (3) date on which to commence reporting services; (4) whether Relevant Data includes "counterparty data" and/or "common data" and whether any data should not be reported; (5) notice period for terminating the ISDA/FOA Delegation Agreement; (6) contact information; (7) waiver of relevant confidentiality provisions (if applicable); (8) restrictions around the use of certain data; and (9) details and mechanics of the delegated reporting.
While the ISDA/FOA Delegation Agreement is aimed at easing the reporting obligations under EMIR, there are some potential issues that all market participants should consider when determining whether to enter into such an agreement to delegate the reporting obligation.
Bilateral Delegation Agreements
Counterparties and third-parties may also provide their own bilateral delegation agreements to entities seeking to delegate the reporting requirement. Generally, bilateral agreements include similar provisions to those included in the ISDA/FOA Delegation Agreement. Counterparties should carefully review all delegation agreements.
RISKS OF NONCOMPLIANCE WITH THE EMIR REPORTING OBLIGATION
Article 12 of EMIR directs EEA member states to issue rules on penalties applicable to noncompliance with the rules under EMIR, including the reporting obligation. Specifically, EMIR directs that those penalties shall include "at least administrative fines" and that the penalties provided for shall "be effective, proportionate and dissuasive." As of the date of this alert, certain EEA member states have issued notifications on penalties while others have not yet filed notifications. For the countries that have filed their notifications, the penalties range in scope. For example, The Netherlands has a minimum €10,000 administrative fine with the most severe fine being €4,000,000, Germany has fines ranging from €50,000 to €500,000, Sweden has fines ranging from 5,000 kronor to 50,000,000 kronor (payable within 30 days) and the United Kingdom has a very broad range of corresponding penalties (including censures as well as fines). Other countries, such as Hungary, Denmark and France have not set specific fines, but imply that there will be consequences.
 EMIR is legally binding on and directly applicable in the courts of all European Economic Area ("EEA") member states and needs no transposition into national law. The text of EMIR is available here: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:201:0001:0059:EN:PDF.
 This is an acronym for the European Economic Area, which includes the following countries: Austria; Belgium; Bulgaria; Croatia; Cyprus; Czech Republic; Denmark; Estonia; Finland; France; Germany; Greece; Hungary; Iceland; Ireland; Italy; Latvia; Liechtenstein; Lithuania; Luxembourg; Malta; Netherlands; Norway; Poland; Portugal; Romania; Slovakia; Slovenia; Spain; Sweden; and United Kingdom.
 Public Law 111-203, 124 Stat. 1376 (2010). Pursuant to Section 701 of the Dodd-Frank Act, Title VII may be cited as the "Wall Street Transparency and Accountability Act of 2010."
 See Leaders’ Statement at The Pittsburgh Summit, p. 9 (Sept. 24-25, 2009), available at http://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf.
 The CFTC generally refers to internal transactions between affiliates of the same corporate group as "inter-affiliate" swaps while EMIR refers to such transactions as "intragroup" derivatives.
 Modifications to any of the reported items; cancellations arising from errors; terminations (but not on the expected date); compressions; valuations and collateral (not applicable to NFC-s); etc. must all be reported.
 The reporting of exchange-traded derivatives presents additional challenges. For corresponding guidance refer to http://www.esma.europa.eu/news/ESMA-clarifies-reporting-exchange-derivatives-under-EMIR?t=326&o=homeEMIR. See also ESMA, Questions and Answers, Implementation of the Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR) ("EMIR: Q&A"), p. 46 (last updated: December 20, 2013), available at http://www.esma.europa.eu/system/files/2013-1959_qa_on_emir_implementation.pdf.
 Article 2(5) EMIR. Annex I, Section C of MiFID sets out the definition of financial instruments.
 See EMIR: Frequently Asked Questions, pp. 4-5 (last updated December 18, 2013), available at http://ec.europa.eu/internal_market/financial-markets/docs/derivatives/emir-faqs_en.pdf.
 See The Markets in Financial Instruments Directive 2004/39/EC, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32004L0039:EN:HTML.
 Article 84(5) of The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.
 See Press Release 14/11, "Reminder on EMIR – Reporting Obligation Starts Today, 12 February 2014," (Feb. 12, 2014), available at http://www.cssf.lu/fileadmin/files/Publications/Communiques/Communiques_2014/CP1411__EMIR_reporting_obligation_120214.pdf.
 See Letter from ESMA to Michel Barnier Re: Classification of financial instruments as derivatives (Feb. 14, 2014), available at http://www.esma.europa.eu/system/files/2014-184_letter_to_commissioner_barnier_-_classification_of_financal_instruments.pdf.
 An FC is a counterparty to a derivative that is an investment firm, bank, insurer, registered UCITS fund, pension fund or an alternative investment fund managed by an alternative investment manager (as defined by the applicable EU legislation authorizing or regulating those entities). See Article 2(8) EMIR. An NFC is a counterparty to a derivative that is not a CCP or an FC. See Article 2(9) EMIR. For more information regarding the effect of EMIR for FCs and NFCs, please consult our respective alerts here and here.
 See EMIR: Q&A, p. 52 (last updated: December 20, 2013), available at http://www.esma.europa.eu/system/files/2013-1959_qa_on_emir_implementation.pdf.
 Some of the data fields to be maintained and reported include (as applicable): LEIs (or pre-LEIs), reporting timestamp, financial or nonfinancial nature, asset class, notional amount, underlying, price/rate, price notation, price multiplier, quantity, up-front payment, effective date, maturity date, termination date, settlement date, master agreement type, confirmation timestamp, clearing timestamp, intragroup indicator, etc. Further information including required data fields that must be reported can be found in the EMIR implementing regulations. See Commission Implementing Regulation (EU) No 1247/2012 (Dec. 19, 2012), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri= OJ:L:2012:352:0020:0029:EN:PDF.
 Please see our client alert discussing the clearing thresholds for NFCs, available here.
 For example, the ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol and the ISDA 2013 Reporting Protocol may address some of these potential issues.
 The list of ESMA TRs is available at http://www.esma.europa.eu/page/Registered-Trade-Repositories.
 See Notifications by Member States of the rules on penalties applicable to infringements of the rules under Title II of EMIR (Article 12), available at http://ec.europa.eu/internal_market/financial-markets/derivatives/notifications/index_en.htm.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work or any of the following lawyers:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, firstname.lastname@example.org)
Patrick Doris – London (+44 (0)20 7071 4276, email@example.com)
Arthur S. Long – New York (+1 212-351-2426, firstname.lastname@example.org)
Chuck Muckenfuss – Washington, D.C. (+1 202-955-8514, email@example.com)
Jeffrey L. Steiner - Washington, D.C. (+1 202-887-3632, firstname.lastname@example.org)
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.