The changes regarding internal reporting obligations and the calculation of the clearing threshold thus already fall within the scope of EMIR assessments pursuant to Section 32 (1) of the German Securities Trading Act [WpHG] for financial years ending after 17 June 2019. In addition, extensive relief for non-financial counterparties (NFCs) with regard to reporting will come into effect in June 2020. This article provides a brief outline of the most significant changes and highlights which areas require particular attention in the implementation of the new legislation.
- One-sided external reporting1
After the end of the transition period, the relief provided by the EMIR Refit with regard to external reporting comes into force on 18 June 2020. On this date, the reporting obligation for OTC derivatives is generally transferred one-sided to the financial counterparty (FC). The relief applies to all FCs domiciled in the EU or a recognised third country. This includes all third countries whose reporting system has been declared equivalent to the EU's in accordance with Article 13 EMIR, while the financial counterparty must be required to report the information pursuant to the third-country reporting regime and the data must be accessible by the competent EU supervisory bodies pursuant to Article 81 (3) EMIR2. The European Commission's equivalence decisions determine which countries are recognised as equivalent3. Compared to the previous system of delegated reporting, the non-financial counterparty thus essentially transfers responsibility for the compliance and timeliness of reporting to the FC. This also applies to recognised third-country institutions. However, a duty of cooperation still remains: for example, the FC still has a right to information so that reporting can be carried out correctly. The NFC still has the option to continue reporting itself. The FC must be notified of this, as the legally specified standard case states that the FC carries out the reporting. If this option is exercised, full responsibility for complete and prompt reporting remains with the NFC4. If transactions are concluded between two NFCs, the previous regulations apply (two-sided reporting with the option to delegate).
- Termination of intercompany reporting5
With effect from 17 June 2019, the EMIR Refit has completely abolished the reporting obligation for intragroup transactions. Due to the changes with regard to external reporting obligations, many companies will exercise the relief for intercompany reporting simultaneously as at 18 June 2020. With this in mind, the most important points are briefly presented here. To make use of the reporting relief, the parent company and at least one counterparty must be an NFC. Furthermore, the counterparties in the same group must be fully consolidated and be subject to suitable centralised risk assessment, measurement and control procedures. The requirements for the risk assessment, measurement and control procedures are specified in the ESMA Q&A6. If this relief is exercised, the national supervisory body must be notified and has a three-month period to object.
During this three-month period, internal derivatives should still be reported7. BaFin has published a specific email address for reporting (A9EMIR@bafin.de). The notification must include the following information:
- Information on the parent company (is it a counterparty itself?, registered office, name, address, LEI),
- Declaration of fulfilment of the exemption requirements,
- If applicable, any other competent bodies that have been/will be notified,
- Attachment with all counterparties wishing to make use of the exemption.
Every company domiciled in the EU must notify the respective national supervisory body to this effect. Unfortunately, there is no provision for an exempting notification, for example sent to the ESMA8. Companies domiciled outside of the EU do not have send any such notification. However, if they are a counterparty in an intercompany deal with an EU company, they must be included in that company's notification. The world principle applies here, meaning that intercompany deals are no longer subject to reporting obligations if the requirements are met worldwide9. In general, the parent company or another group company can report on behalf of a company10. In such as case, a central notification is prepared in English and sent to all relevant national supervisory bodies.
- Calculating the clearing threshold11
The EMIR Refit has simplified the previous process for calculating the clearing threshold as a moving average by introducing a single yearly calculation. For this purpose, the simple average of the month-end positions for the previous twelve months is used. The requirement for first-time calculation came into effect as at 17 June 2019. Accordingly, the clearing threshold is initially calculated for the period from June 2018 to May 2019. Subsequent harmonisation of this period with the financial year is not possible12. If OTC derivatives are being traded for the first time, or a new legal entity trading in OTC derivatives is established, the clearing threshold is first calculated twelve months after the start of trading activities13. If no clearing threshold is calculated, this must be reported to BaFin and the NFC is automatically subject to a clearing obligation in all classes of derivative. Similarly, if a clearing threshold is exceeded, this must be reported to BaFin immediately. In this case, however, the NFC is subject to a clearing obligation only in the derivative classes concerned14. Provided the calculation does not result in a clearing obligation, BaFin does not need to be notified. It should be highlighted at this point that, unlike before the EMIR Refit, the obligation to calculate the clearing threshold arises directly from the EU regulation. Similarly, the consequence of the general clearing obligation for all derivative classes in the event of the threshold not being calculated is stipulated directly. As a result, calculation using the simplified method – even for companies that use derivatives solely for hedging purposes – is unavoidable for financial years ending after 17 June 2019.
- Subsidiaries in the UK after Brexit
After Brexit, companies in the UK are to be treated as companies domiciled in a third country. Accordingly, these companies are essentially no longer subject to EMIR and must instead observe the regulatory requirements of the Financial Conduct Authority (FCA). Therefore, derivatives concluded externally by companies in the UK are to be reported under UKmir. If internal derivatives are traded with a subsidiary in the UK, it may be possible to exercise the aforementioned exemption regarding the reporting of internal derivatives. The subsidiary in the UK should then be included in the notification to the relevant national supervisory authorities in the country in which the counterparty in the intercompany deal within the EU is domiciled. A transition period has been agreed by means of a Memorandum of Understanding to allow companies domiciled in the EU to continue to use trading repositories or central clearing houses in the UK in 202015.
1 Article 9 (1a) Regulation (EU) No 648/2012 amended by Regulation (EU) 2019/834.
2 See BaFin OTC derivatives EMIR "Reporting to trade repositories" (https://www.bafin.de/DE/Aufsicht/BoersenMaerkte/Derivate/EMIR/emir_node.html)
3 See https://ec.europa.eu/info/files/emir-equivalence-decisions_en
4 See BaFin OTC derivatives EMIR "Reporting to trade repositories" (https://www.bafin.de/DE/Aufsicht/BoersenMaerkte/Derivate/EMIR/emir_node.html)
5 Article 9 (1) Regulation (EU) No 648/2012 amended by Regulation (EU) 2019/834.
6 See OTC Answer 6 (d) ESMA Q&A.
7 See OTC Answer 51 (d) ESMA Q&A.
8 See OTC Answer 51 (f) ESMA Q&A.
9 See OTC Answer 51 (i) ESMA Q&A.
10 See OTC Answer 51 (f) ESMA Q&A.
11 Article 10 (1) and (2) Regulation (EU) No 648/2012 amended by Regulation (EU) 2019/834.
12 See OTC Answer 2 (a) ESMA Q&A.
13 See OTC Answer 2 (h) ESMA Q&A.
14 See OTC Answer 25 (b) ESMA Q&A.
15 See https://www.esma.europa.eu/press-news/esma-news/esma-and-eu-securities-regulators-agree-no-deal-brexit-mous-fca
Source: KPMG Corporate Treasury News, Edition 99, March 2020