With 12 February being the EMIR reporting start date, it is timely to recap on the various EMIR deadlines as they apply to Irish regulated funds.
The European Market Infrastructure Regulation (Regulation No. 648/2012) (the "Regulation") affects all funds which transact derivatives (including foreign exchange forwards). It is implemented on a phased basis through a series of technical standards (these technical standards, together with the Regulation, being "EMIR"). EMIR imposes different requirements based on whether an entity is a Financial Counterparty ("FC"), a Non-Financial Counterparty whose non-hedging derivatives activity exceeds certain thresholds ("NFC+") or a Non-Financial Counterparty which is below the applicable thresholds ("NFC-"). All alternative investment funds managed by an AIFM and all UCITS are FCs for the purposes of EMIR. In this briefing we first focus on the reporting obligation, which takes effect on 12 February 2014. We then recap on those EMIR obligations which are already in effect. Finally, we look ahead to EMIR obligations which have yet to take effect.
The EMIR obligation: funds will be required to ensure that details of any derivative contract concluded (and any modification or termination of those contracts) are reported to a trade repository. The obligation to report trades will apply in respect of: (i) any legacy trades that were in existence on 16 August 2012 (even if now terminated); (ii) any new trades since that date; and (iii) future trades.
Timing: the reporting obligation comes into force on 12 February 2014. As of this date, funds must ensure that details of any derivative contracts and any modifications or terminations of those contracts are reported to a trade repository. The responsibility to report applies to both counterparties, but parties can delegate this obligation to a third party or arrange for one of the counterparties to report on behalf of both counterparties. However, the legal responsibility to report may not be delegated and, accordingly, a fund will remain responsible for any failure to report or any error in reporting by its delegate.
|TIMING OF REPORTING TO TRADE REPOSITORY|
|DERIVATIVE CONTRACT||DEADLINE FOR REPORTING|
|Derivative contract entered into from 12 February 2014||Details of each derivative contract must be reported no later than the working day following the conclusion, modification or termination of the contract|
|Derivative contract entered into before 16 August 2012 and still outstanding on 12 February 2014||On or before 12 May 2014|
|Derivative contract entered into on or after 16 August 2012 and still outstanding on 12 February 2014||12 February 20141|
|Derivative contract entered into before, and outstanding on, 16 August 2012 but no longer outstanding on 12 February 2014||On or before 12 February 2017|
|Derivative contract entered into on or after 16 August 2012 but no longer outstanding on 12 February 2014||On or before 12 February 2017|
Required action: the responsibility to report applies to both counterparties, but parties can delegate this obligation to a third party or arrange for one of the counterparties to report on behalf of both counterparties. Funds (or investment managers on their behalf) should discuss with their counterparties how to satisfy the reporting obligation and to determine if the counterparty will report on behalf of the fund. Where a counterparty agrees to report on behalf of a fund, the ISDA/FOA EMIR Reporting Delegation Agreement (which was published by ISDA and the FOA earlier this month) may be of assistance. If a fund does not delegate its reporting obligation to its counterparty, it will likely still need to liaise with its counterparty to ensure consistency of the contents of each report (as required by EMIR).
In order to facilitate reporting, each fund will require a Legal Entity Identifier ("LEI"). An LEI is a global reference code that uniquely identifies a legal entity. The Global LEI Foundation operating the Central Operating Unit ("COU") will take over operational governance of the LEI system, but is not yet operational. Pending the COU becoming operational, a pre-LEI code process has been established to assist relevant entities who are already required to have a pre- LEI code (for, example, entities subject to EMIR reporting). In Ireland, a fund can apply for pre-LEI codes through the Irish Stock Exchange at this link www. ISEdirect.ie. See also the relevant FAQs at this link https://www.isedirect.ie/FAQ/ Pre-LEI-FAQs.html. The ISE charge, on application, €150 per code (exc. VAT), with an annual renewal fee of €100 (exc. VAT) per code. There is no prohibition on a fund obtaining an LEI (or pre-LEI Code) from an authorised provider outside Ireland.
The EMIR obligation: EMIR requires counterparties to agree in writing means by which portfolios of uncleared OTC derivative contracts are to be reconciled. The frequency with which reconciliation must be carried out will depend on the number of trades that are in place with a particular counterparty.
For a fund which has 500 or more OTC derivative contracts outstanding with a particular FC or NFC+ counterparty, the reconciliation must be performed on each business day. For a fund which has between 51 and 499 OTC derivative contracts outstanding with a particular FC or NFC+ counterparty, the reconciliation must be performed once per week. For a fund which has 50 or fewer OTC derivative contracts outstanding with a particular FC or NFC+ counterparty, the reconciliation must be performed once per quarter. Different requirements apply in the less usual situation of derivatives between a fund and an NFC- counterparty.
Timing: the portfolio reconciliation requirement came into effect on 15 September 2013.
Required action: ISDA has published the ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol (the "Relevant ISDA Protocol"). The Relevant ISDA Protocol may offer a fund the most efficient way of facilitating compliance with its EMIR portfolio reconciliation obligations provided that its counterparty has acceded to the Relevant ISDA Protocol as a Portfolio Data Sending Entity. This would allow the fund to be a Portfolio Data Receiving Entity and to reconcile portfolios on the basis of information provided by its counterparty. The Relevant ISDA Protocol specifically allows for an investment manager to adhere to the Relevant ISDA Protocol on behalf of a fund for which it transacts derivatives as agent. Alternatively, a fund may wish to incorporate the provisions of the Relevant ISDA Protocol by means of a bilateral amendment to its ISDA or other OTC derivatives documentation which it has in place with its counterparty. Funds should confirm with their investment manager how this EMIR obligation has been addressed.
The EMIR obligation: EMIR requires that parties to OTC derivatives contracts have agreed detailed processes and procedures in place in relation to the identification, recording, monitoring and resolution of disputes regarding their derivative contracts and to the exchange of collateral.
Timing: the dispute resolution requirements came into force on 15 September 2013.
Required action: adherence to the Relevant ISDA Protocol may offer a fund the most efficient way of facilitating compliance with its EMIR dispute resolution obligations (provided that its counterparty has also acceded to the Relevant ISDA Protocol). Alternatively, a fund may wish to incorporate the provisions of the Relevant ISDA Protocol by means of a bilateral amendment to its ISDA or other OTC derivatives documentation. Funds should confirm with their investment manager how this EMIR obligation has been addressed.
The EMIR obligation: all non-cleared derivatives entered into after 15 March 2013 must be confirmed as soon as possible following execution and in any event within the deadline specified for transactions of that type.
Timing: the timely confirmation requirement came into effect on 15 March 2013.
The timing requirements are as follows:
|DERIVATIVE TYPE||DATE TRADE IS EXECUTED||CONFIRMATION DEADLINE|
|Credit default swaps & interest rate swaps||15 March 2013 to 31 August 2013||5 business days following date of execution|
|Credit default swaps & interest rate||1 September 2013 to 31 August 2014||3 business days following date of execution|
|Credit default swaps & interest rate swaps||1 September 2014 onwards||2 business days following date of execution|
|All others||15 March 2013 to 31 August 2013||7 business days following date of execution|
|All others||1 September 2013 to 31 August 2014||4 business days following date of execution|
|All others||1 September 2014 onwards||2 business days following date of execution|
Required action: funds must ensure that their counterparties comply with delivery of confirmations of trades within the above timelines. You might expect that some fund counterparties may (in order to assist in the satisfaction of their "timely confirmation obligations" under EMIR) request amendments to a fund's ISDA (or other OTC derivatives) documentation to provide that confirmations sent by them to the fund will be deemed accepted by the fund within a certain short period. Funds should confirm with their investment manager that the investment manager is monitoring non-cleared derivative transactions for compliance with the EMIR timely confirmation obligation.
The EMIR requirement: funds are required to mark-to-market outstanding non-centrally cleared OTC contracts on a daily basis. In circumstances where mark-to-market is not appropriate, mark-to-model must be performed.
Timing: the MTM requirement has applied from 15 March 2013. The requirement applies to contracts outstanding on or after 15 March 2013, irrespective of the date when they were entered into.
Required action: funds must ensure that transactions are marked-to-market on a daily basis in accordance with EMIR.
The EMIR requirement: the obligation to engage in portfolio compression (essentially an exercise in seeking to eliminate overall notional size and number of outstanding contracts in derivative portfolios without changing the overall risk profile or value of the portfolio) will only apply if there are 500 or more OTC derivative trades in place with a particular counterparty.
Timing: the portfolio compression requirements came into effect on 15 September 2013.
Required action: None, unless the fund has 500 or more derivative trades with a particular counterparty (in which case portfolio compression must be conducted at least twice per year).
EMIR requires mandatory central counterparty clearing of certain standardised OTC derivatives contracts. The clearing obligation is not yet in effect. However, once in effect, all derivative products which are declared "subject to the clearing obligation" and which are entered into between a fund and either another FC or an NFC+ must be centrally cleared.
The rules around collateralisation of non-cleared OTC derivatives will not be finalised until after the BCBS-IOSCO report on margin requirements has been issued. The potential impact on funds' derivatives contracts will need to be assessed by reference to those rules, once formulated, but may, in due course, require transactions (which, but for EMIR, would not have been collateralised) to be collateralised.
1. Although previous expectations had been that this date would be 12 May 2014, recent informal ESMA guidance has confirmed that the deadline is 12 February 2014.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.