EMIR – Obligations of non-financial counterparties to derivative contracts – CSSF measures and priorities
The CSSF considers appropriate to remind non-financial counterparties (NFCs) that they have to comply with the obligations provided under the Regulation (EU) No 648/2012 (‘EMIR’) on OTC1 derivatives, central counterparties (CCPs) and trade repositories (TRs). In particular the CSSF intends to remind to those NFCs not prudentially supervised by the CSSF that they fall in scope of the obligations introduced by EMIR as soon as they conclude derivative transactions.
General provisions of EMIR
EMIR introduced for counterparties to a derivative contract a set of obligations in order to reduce the risk of the derivatives markets and to improve transparency. These obligations, modulated in different ways depending on the nature of counterparties to a derivative contract (e.g. financial counterparties (FCs), NFCs above the clearing threshold, NFCs below the clearing threshold), are set out below:
1. Clearing obligation2: obligation to centrally clear certain classes of OTC derivative contracts through CCPs that have been authorised (for European CCPs) or recognised (for non-EU CCPs) under the EMIR framework. Classes of OTC derivative contracts in scope of the clearing obligation are those that have certain characteristics in terms of standardisation, liquidity and availability of reliable price, and have been identified by ESMA to be in scope of such obligation;
2. Obligation to apply risk mitigation techniques3: obligation to apply to all non-centrally cleared OTC derivative contracts alternative measures of risk mitigation, such as:
i) Timely confirmation: the timely confirmation of the terms of the contracts;
ii) Portfolio reconciliation: the (periodic) reconciliation of portfolios;
iii) Dispute resolution: the detection and early resolution of disputes;
iv) Portfolio compression: the evaluation to carry out a compression of the portfolio;
v) Daily valuation (mark-to-market): monitoring of the current value of the existing contracts;
vi) Exchange of collateral: the exchange of collateral in a timely and accurate manner;
3. Reporting obligation4: obligation to report all concluded derivative contracts (i.e. OTC or ETD5), to the TRs, registered or recognised by ESMA;
4. Additional requirements for NFCs:
i) To monitor their derivative transactions,
ii) To verify if their positions exceed the clearing threshold, and
iii) To notify ESMA and the competent authority when they exceed the clearing threshold and when they no longer exceed it5.
EMIR entered into force on 16 August 2012 and was followed by a series of technical standards that specify the obligations mentioned above (all together hereafter called ‘EMIR legislation’) and that have provided effective dates deferred for each of them.
In addition to the NFCs prudentially supervised by the CSSF, pursuant to Article 1(2) of the Law of 15 March 2016 the CSSF is also responsible for ensuring the compliance with EMIR obligations by those NFCs which are not supervised.
Compliance by NFCs with the regulatory framework of EMIR
With this Communication, which does not introduce any further obligations with respect to the existing regulatory framework, the CSSF intends to remind the NFCs to a timely and comprehensive application of all EMIR obligations applicable to them.
With the aim to accelerate the process of full compliance of the NFCs with the applicable regulatory measures, the CSSF believes that the following measures have to be implemented by NFCs in order to fully comply with the EMIR legislation:
a) Identification of an organisational unit and/or responsible person (according to the size of the entity) who is responsible for ensuring the on-going compliance with the EMIR legislation (i.e. points 1.-4. above);
b) Adoption of procedures formalising functional activities in compliance with the EMIR requirements applicable to the entity;
c) Adoption of control tools on the quality of data reported to the TRs, either directly or through delegation to a third party.
The CSSF also recommends the active involvement of the administrative body in the management process, including the monitoring and control of risks arising from derivatives contract entered by the company, and an increased focus of the control body (where applicable) on the adequacy of the company’s organisational structure to comply with the EMIR rules.
Supervisory activities to be taken by the CSSF in 2017
The CSSF intends to strengthen the supervision of the NFCs operating in the derivatives market. In particular, for the year 2017 EMIR supervisory activities will include the following three areas:
Priority 1 – The quality of the data reported to the TRs
Notifications received from TRs related to rejected reports by counterparties will be monitored and counterparties with a higher number of rejected reports reported by the TRs as well as counterparties with a higher number of unreconciled trades will be subject to reviews and controls. In this context, the adequacy of the measures adopted to control and ensure the quality of the reported data will be verified.
Priority 2 – The monitoring of derivative transactions entered into for hedging purposes
Policies adopted by NFCs to monitor (i) the clearing threshold and (ii) the factors taken into account to measure the ability of the OTC derivative contracts to reduce risks directly relating to the commercial activity or treasury financing activity of the NFC or of that group will, in selected cases, be collected by the CSSF. Policy compliance with the regulatory framework of reference and information provided by ESMA in the Q&A on EMIR (Questions and Answers regarding the Implementation of the Regulation (EU) No. 648/2012 on OTC derivatives, central counterparties and trade repositories) might be verified on a sample basis.
Priority 3 – The monitoring of risk mitigation techniques
Policies and procedures adopted by NFCs to ensure the compliance with risk mitigation techniques applicable to them will, in certain selected cases, be collected. Policy compliance with the regulatory framework of reference and information provided by ESMA in the Q&A on EMIR (Questions and Answers regarding the Implementation of the Regulation (EU) No. 648/2012 on OTC derivatives, central counterparties and trade repositories) might be verified on a sample basis.
Furthermore, in accordance with Article 2(1) of the Law of 15 March 2016, the CSSF requires all NFCs who conclude derivative transactions to provide the CSSF, within 30 days of publication of this notice with the name, email address and telephone number of the person responsible for the organisational unit referred to in point (a), NFCs not prudentially supervised shall send information to firstname.lastname@example.org.
2 Cf. Articles 4 and 5 of EMIR, and Chapters II, III, IV of Commission Delegated Regulation (EU) No 149/2013.
3 Cf. Article 11 of EMIR and Chapter VIII of Commission Delegated Regulation (EU) No 149/2013.
4 Cf. Article 9 of EMIR and Commission Delegated Regulation (EU) No 148/2013.
5 Exchange Trade Derivative.
6 Cf. Article of 10 EMIR and Chapter VII of Commission Delegated Regulation (EU) No 149/2013.