New Trade Reporting Requirements for Derivatives Transactions

EMIR has required counterparties to derivatives transactions to report their transactions to authorised trade repositories since 2014. In 2019, EMIR Refit included a mandate for new trade reporting rules to be made. Both EMIR and EMIR Refit form part of retained EU law in the UK following Brexit ("UK EMIR"), so the mandate applies both in the EU and the UK.

EU entities entering derivatives transactions within scope of EMIR must report such transactions to an EEA trade repository registered with ESMA, or a third-country trade repository recognised by ESMA. UK entities must make reports under UK EMIR to a trade repository registered with or recognised by the FCA.

EMIR Refit required ESMA to conduct a review of the data standards, formats, methods and arrangements for reporting, the frequency of the reports and the date by which derivatives transactions must be reported. On 7 October 2022, the EU Commission published Implementing Technical Standards fulfilling this mandate (the "Framework ITS").

Due to the intervening publication of internationally agreed trade reporting standards¹, the EU Commission has updated the rules covering the minimum data to be reported and the types of reports to be used. On 7 October 2022, the EU Commission published Regulatory Technical Standards covering the format of the reports and the data to be provided (the "Data RTS").

In the UK, on 24 February the FCA and the Bank of England jointly published policy statement PS23/2 setting out similar changes to apply in the UK, stating that the new rules are intended to harmonise UK trade reporting requirements with those made in the EU. The FCA is implementing this by introducing a new sourcebook in the FCA Handbook: the European Market Infrastructure Regulation Rules.

[1] Technical Guidance published by the Bank for International Settlements and the International Organisation of Securities Commissions in 2018

The new rules are wide-ranging so are not covered here in detail. A high-level summary is as follows:

The EU Framework ITS:

• Reports must be made electronically in machine-readable form using a common template provided by the supervisory authority
• Reports of margin updates must be made daily
• There are new requirements for legal entity identifiers (LEIs) for entities responsible for reporting and third-party post-trade reduction service providers, and for changes to LEIs in the case of corporate events
• There are new provisions as to which entity is responsible for generating Unique Transaction Identifiers (UTIs)
• There are new requirements on the use of ISIN numbers where derivatives transactions (or the underlying instrument) are admitted to trading or traded on a trading venue
• There are new requirements for non-financial counterparties to give certain information to financial counterparties who are responsible for reporting on their behalf
• There are new requirements for notifying errors and omissions in trade reporting to competent authorities

The EU Data RTS

New data fields have been introduced, including:

• A new table of data on collateral reporting (although exceptions to collateral reporting still apply for small non-financial counterparties)
• New requirements for reporting of linked derivatives transactions which consist of several contracts, and new data fields for lifecycle events
• New provisions allowing reporting at position level (e.g. following portfolio compression), provided that counterparties agree and that certain additional criteria are met (e.g. the risk is managed at position level). Existing derivatives transactions included in the position are to be reported as terminated
• More specific requirements for determining the notional amount of different types of derivatives transactions for the purpose of the report – this may mean that counterparties need to consider whether the notional amount specified in the contract is the appropriate notional amount for reporting purposes
• Specific requirements for reporting the price of the derivative
• All reports following the application date must be made in accordance with the new rules – including modifications, terminations and other lifecycle events of existing derivatives transactions reported under the existing rules

The UK Policy Statement

Largely, the FCA and Bank of England have kept the new requirements in line with those published by the EU. However, there are a few areas of difference:

• Market Identifier Codes are to be reported for transactions executed through MTFs, OTFs and Systematic Internalisers, even where such transactions are considered OTC for EMIR purposes
• There are new fields relating to post-trade risk reduction (PTRR) – to identify the type of PTRR applying to derivatives transactions (e.g. portfolio compression with or without a third party service provider)
• There are new fields for execution timestamps. These refer to the time that the derivatives transaction was entered for the first time, plus the first time that the derivatives transaction was added to a position-level report. The FCA has indicated it will provide further guidance on timestamps in due course.

Following publication of the Framework ITS and the Data RTS, on 14 December 2022, ESMA produced Guidelines for trade reporting under EMIR, which give further detail on compliance with completing the data fields for particular classes of derivatives transactions. The Guidelines are substantial and can be used as a starting point for operations teams who are in the process of adapting to the new EU rules. By way of a high-level guide, the Guidelines provide additional clarity on (among other things) the following:

• Clarification on the perimeter of "derivatives" (i.e. which contracts are derivatives transactions and which are not)
• Guidance on intragroup reporting, including who is a "parent undertaking" for the purpose of using the intragroup exemption (as to which see further below)
• Guidance on specific scenarios such as block trades, novations, reporting collateral pools where some transactions are not reportable, and reporting transactions that terminate intraday
• Responsibility for reporting
• Reporting at position level
• Reporting of lifecycle events

The Guidelines also provide detailed flowcharts on responsibility for generating UTIs, details on identifying the "price" for different kinds of derivatives transactions and details on the required valuation inputs.

There is also precise guidance on correctly completing required reporting fields for specific types of derivative transactions.

As yet the FCA has not provided guidance in the same level of detail as ESMA, but it has suggested that further guidance on certain aspects of the new rules may be forthcoming.

Note that under both regimes the rules also apply to existing reported derivatives transactions – which must be re-reported under the new rules unless the counterparties have already submitted a modification to the contract in accordance with the new rules. The EU allows the counterparties 18 months from the reporting start date (of 29 April 2024) to do this, while the UK allows counterparties 6 months from the reporting start date (of 30 September 2024) to do so. The FCA has stated that it will provide further guidance on reconciling reports during this transitional period, but will exercise its supervisory powers in respect of reporting proportionately during this time.

Currently, Article 9 of EMIR (and UK EMIR) provides an exemption from reporting requirements for transactions between counterparties within a group, where at least one of the counterparties is a non-financial counterparty. This exemption was introduced by EMIR Refit. However, as part of the EU Commission's further review of EMIR (EMIR 3.0), there is a proposal to remove this exemption on the grounds that it reduces transparency on the risks to which non-financial counterparties are exposed. Despite this, ESMA's Guidelines are drafted as though the exemption is still available. EMIR 3.0 is currently a proposal and will require approval from the EU Parliament and the Council before becoming law.

In the UK the exemption remains available and there is no current proposal to change it. Reforms to retained EU law are expected to be made in the wider context of the Financial Services and Markets Bill currently progressing through Parliament.

Due to the extent of change brought in by the new rules, it is recommended that counterparties begin to address the operational changes that will need to be made as soon as possible in order to comply with the new reporting requirements from 29 April 2024 in the EU, and from 30 September 2024 in the UK.

Should you wish to discuss these forthcoming changes, please contact a member of the Derivatives and Structured Products team, or your usual Travers Smith contact.