ESMA updates EMIR Level 3- mainly reporting

ESMA updated its EMIR Q&A and MiFID 2 Q&A on Post-Trading Issues yesterday 14 December 2017. The updated Q&As include clarification in relation to:

• Indirect clearing – Q&A amended for both EMIR and MiFID 2 Post-Trading Issues;
• Swap reporting to trade repositories;
• Reporting of collateral; and
• Reporting of contracts with no maturity

The guidance in respect of netting across multiple accounts following the default of a clearing member takes effect with MiFID 2 on 3 January 2018. All other Q&A amendments and additions take effect retrospectively from 1 November 2017. The new questions and answers are excerpted below for convenience. Please refer to the Q&A for full detail.

OTC Question 18b

Segregation level for indirect clearing accounts

In the event of a clearing member default, is it permissible for a CCP to liquidate all of the collateral recorded in all the gross omnibus indirect client accounts (referred to in paragraph 2(b)) together and apply the resulting sum collectively in order to cover losses or to enable the netting of positions across different accounts?

OTC Answer 18b

No, Article 4(4)(b) of the Indirect Clearing RTS requires that a clearing member shall open and maintain in the CCP a segregated account for the exclusive purpose of holding the assets and positions of indirect clients of each client held by the clearing member in an account as referred to in paragraph 2(b). Therefore, a clearing member would have to open a separate account at the CCP for each client’s pool of Indirect Clients who have elected the account referred to in paragraph (2)(b).

In the event of a clearing member default, Recital 6 of the Indirect Clearing RTS provides that indirect clients’ assets and positions which are held in an indirect clearing account, including gross omnibus accounts referred to in Article 4(2)(b), may still be exposed to the losses of another indirect client within the same account. However, to the extent a clearing member has opened at the CCP several gross omnibus indirect client accounts referred to in Article 4(2)(b) for each of its clients, positions recorded in those different gross omnibus indirect client accounts at the CCP may not be netted against each other and assets covering the positions in one of these gross omnibus indirect client accounts may not be exposed to losses connected to positions held in a different account.

Article 9 of EMIR – Contracts with no maturity date

Some derivative contracts, like Contracts For Difference (CFDs), may not have any specified maturity date and at the moment of their conclusion the termination date is also not specified. Counterparties may at any moment decide to close the contract, with immediate effect. They can also close it partially as counterparties may terminate only a part of the volume on one day and the other part or parts of the contract on any other day. How should these contracts be reported under EMIR?

TR Answer 34

Each opening of a new contract should be reported by the counterparties to the TR as a new entry. This means that each transaction has to be reported with a Unique Trade Identifier and action type “New”, even if they are executed and then netted or terminated for other reasons during the same day. Furthermore, transactions have to be reported even if they are concluded with a counterparty that is not subject to the reporting obligation, such as an individual not carrying out an economic activity and who is consequently not considered as undertakings.

Subsequent transactions do not have to be compressed in a position, however, it is strongly recommended to do so. As these transactions have no maturity, it would imply that without compression each individual transaction by a financial counterparty would need to receive daily valuation updates until either 1) the transaction is cancelled or 2) infinity. Outstanding transactions need valuation updates, but when compressed the valuation can be provided at position level in accordance with the TR Q&A 17.

ESMA considers offsetting transactions to be reportable transactions requiring a Unique Trade Identifier for each transaction. In case transactions are not compressed, offsetting transactions need to be terminated. Once the contract is closed, the counterparty should send a termination report to the initial entry, completing the field “Termination date”. If the contract is closed partially, counterparties send a modification report to the initial entry, reducing only its “Notional amount” (remaining volume is equal to the not yet terminated volume). If there is another partial close, yet another modification report is sent – until the contract is finally closed in whole. Then, the counterparties send a termination report marked as ’C= Early termination’, completing the field “Termination date”. In these cases, the opening price of the contract is reported only in the first report (new) and it is not updated in the following modification reports. Please note that the possibility to modify the notional of a given trade, as just described, should only be used in the event that both parties in fact agree to partially terminate that trade. If however they agree to conclude an offsetting trade with a smaller notional, then a new report is required.

TR Question 1 –

Article 9 of EMIR –Classification of financial instruments

How should the following financial instruments be classified for reporting and other purposes under EMIR?

(a) ETD on government bonds (e.g. Bund, Bobl)

(b) Cross-currency swaps, swaptions, Caps and Floors?

TR Answer 1

(a) These financial instruments should be classified as interest rates and Field 4 of Table 2 should be populated accordingly. The dedicated fields for this asset class should not be filled, since they are not relevant.

(b) These financial instruments should be classified as interest rates, in line with current market practice.

On the sections to be reported, ESMA finds that where both sections are relevant having in mind the terms of the contract being reported, both sections of reporting fields are to be reported i.e. “option” and “interest rate” for swaption, Caps and Floors, and “FX” and “interest rate” for cross-currency swaps. The contract type (Field 1 of Table 2) should be populated with the value “ST” for swaption.

There are two fields for the notional amount currency and one for the notional amount. To avoid that one counterparty reports the notional amount in CCY1 (Field 9 of Table 2) while the other would report in CCY2 (Field 10 of Table 2), which would create a reconciliation problem, the Field “Notional Amount” (Field 20 of Table 2) should be denominated in the currency reported in “Notional currency 1” (Field 9 of Table 2).

TR Question 3a –

Article 9 of EMIR – Reporting of collateral

 (c) In the case where the Counterparty 2 returns part of the variation margin initially posted by the Counterparty 1, shall this margin be reported by Counterparty 1 as a reduction of the margin initially posted or shall be reported as margin received?

(d) How counterparty should report the VM amount that is not transferred, because it is below the agreed Minimum Transfer Amount (MTA)? Should it be reported as excess collateral?

TR Answer 3a –

(c) Counterparty 1 should report in this case decreased variation margin posted, rather than separate variation margin received.

(d) Excess collateral should capture only additional collateral that is posted or received separately and independently from the initial and variation margin. Therefore, any collateral posted or received under the concept of variation margin, should be reported as such, rather than as excess collateral. If the variation margin amount does not exceed the MTA and therefore it is not posted, it should not be reported as VM posted.

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