Large corporates unconvinced by Emir reporting gift

Corporates ask for opt-out from Emir reporting changes proposed for their benefit

Gift giving

A change to European derivatives reporting rules meant to ease the burden for corporates could end up increasing their costs, companies are warning, prompting calls for a redraft or an opt-out.

“If there remains a small amount of trades we have to report, we will have to maintain the IT infrastructure processes. Then it is not really a big relief, it is just reporting less trades. If I automatically process every day 500 deals, or if I only have to do 15 deals, then there is no relief if I have to still report those 15 trades,” says Wolfsburg-based Thomas Bartelt, head of financial risk control at Volkswagen.

On May 4, the European Commission (EC) published its review of the European Market Infrastructure Regulation (Emir). Under current rules, corporates are classed as either non-financial counterparties whose derivatives positions are above a clearing threshold (NFC-plus) or below (NFC-minus). Regardless of the classification, they have to report all derivatives they transact with financial counterparties – including banks – or any internal risk transfers known as intra-group reporting.

In the Emir review, the EC proposes reducing the reporting burden for NFC-minus firms by exempting them from reporting intra-group transactions and requiring financial counterparties to report on their behalf. The EC estimated this would help save NFCs €350 million to €1.1 billion in operational costs, and €1.8 billion to €5.3 billion in fixed costs.

However, larger corporates – some still captured within the NFC-minus class owing to limited derivatives usage – may have banking partners located outside the European Union. They will receive little to no benefit from the changes because they will still have to report transactions with those non-EU counterparties.

In particular, the Emir rules will have no legal force on financial counterparties located outside the EU to report on behalf of their EU clients. Corporates expect those third-country financial counterparties will either refuse to report on their behalf, or attach an additional fee to the transaction.

One European corporate treasurer says large companies tend to have banking partners in Asia and the Middle East, and the number of non-EU financial counterparties could increase significantly if the UK leaves the single market.

“The first two groups alone, if you have a lot of these, you have spheres where there is no comparable reporting regime, and if you have banking partners there then it would be difficult to see or to get them to report something for you in your [place],” he says.

As EU corporates will still have to report these transactions, they will have to maintain their own in-house infrastructure to report derivatives trades.

Even for transactions with EU financial institutions, corporates are uncertain how far they hold the legal liability for ensuring the accuracy of information submitted by the financial counterparty.

If I automatically process every day 500 deals, or if I only have to do 15 deals, then there is no relief if I have to still report those 15 trades

Thomas Bartelt, Volkswagen

“For the smaller counterparty, there seems to be no obligation for them to give the reporting party all of the information they need to do the report,” says Chad Giussani, head of transaction reporting compliance at Standard Chartered, based in London.

“Currently the way banks do it, the International Swaps and Derivatives Association developed a delegated reporting agreement, which is an industry standard, and that agreement includes the reference data required to complete a delegated report. If the legal obligation goes to the bigger firm, then it would be very hard to get clients to sign up to that protocol to get the data we require,” Giussani says.

But some larger corporates fear the opposite scenario: that they will still carry full legal liability even if they delegate the reporting to their dealers. NFCs will, therefore, need to run the infrastructure to check and send the relevant information.

“The existing delegation is kind of watery because you can delegate, but the responsibility regarding the correctness of the data will stay with you. So [that is] another reason not to have someone else to report for you because you need to double-check it,” says the corporate treasurer.

In or out?

There are also questions around responsibilities for reporting intra-group transactions where the other subsidiary of the group is located outside the EU. It is currently unclear whether EU corporates will have to report these transactions, but most assume the intra-group exemption does not apply in the case of third-country operations located in a jurisdiction whose regime has not been judged equivalent by the EC.

“We think the exemption is restricted to transactions with a subsidiary in the EU and a subsidiary in a third country having in place an equivalence decision. This is due to the fact that the recent definition refers to the exemption of intra-group transactions from the collateralisation requirement,” says Frankfurt-based Norbert Kuhn, head of corporate finance at German listed company lobby group Deutsches Aktieninstitut.

In Article 3, paragraph 1 of the original Emir text, intra-group transactions are exempted from exchanging collateral only if the counterparty is in the EU or a jurisdiction deemed equivalent. If Kuhn’s interpretation is correct and this definition also extends to reporting requirements, then it means NFC-minus firms will still have to report those intra-group transactions with subsidiaries in non-equivalent jurisdictions. The interpretation could be particularly problematic for corporates that transfer their derivatives positions to a head office in the EU.

“Looking at fellow corporates, they have financial holdings where all group companies have to deal with the head office. The head office takes the risk and hedges it on the external market. They will have quite a few intra-group deals located in third countries,” says Bartelt at Volkswagen.

One option for the affected corporates would be to ask EU financial counterparties to report on their behalf. But this is not appetising for NFCs that have already set up Emir reporting capabilities in Europe.

It doesn’t make sense to delegate the external reporting responsibility to the banks because they will charge us somehow a fee for this service. Why should we pay for a service when we could do it on our own?

Corporate treasurer, European firm

“It doesn’t make sense to delegate the external reporting responsibility to the banks because they will charge us somehow a fee for this service. Why should we pay for a service when we could do it on our own?” says the corporate treasurer.

He is also concerned the European Parliament might cancel the intra-group exemption, even for trades within the EU. If corporates had chosen to delegate the non-EU trade reporting to banks, they would then have to extend this delegation to all intra-group trades, potentially resulting in further fees. 

Fixing the fix

To avoid the potential increase in costs resulting from delegated reporting fees, large corporates are asking for a possible opt-out from delegated reporting in the Emir review.

“As many detailed problems wait for clarification to make the proposed reporting regime a success story, we strongly recommend that NFCs should have the chance to assess their situation individually and hence the option to stick to the current dual-sided system, having the required infrastructure in place anyway,” states the Deutsches Aktienstitut in a position paper published on June 8.

An opt-out would allow corporates with reporting obligations for derivatives they have with banking partners and operations outside the EU to maintain only one reporting infrastructure rather than two.

“The whole thing would be OK if it would be optional. I would even say you could do it easier [by] putting it as a standard and having an opt-out clause or something like that. So everyone who thinks this is a great idea can go with it while others can say ‘stop, we would like to leave it as it is’,” says the corporate treasurer

There are other ways to improve on the EC’s attempt to fix Emir reporting. Some corporates propose requiring third-country banks to register in the EU under Emir, which would oblige them to report on behalf of EU NFC-minus firms if they wanted to transact with them.

This is similar to the approach taken in the US in their reporting regime under the Dodd-Frank Act, where third-country banks have to register as swap dealers and report on behalf of smaller counterparties.

“We believe what worked very well in Dodd-Frank is requiring third-country banks to sign and accept to work as a swap dealer and so have responsibility and liability to report,” says Bartelt at Volkswagen.

If banks do not register in the EU, however, it could result in corporates cancelling the trades they have with third-country banks that are relatively small counterparties.

“The next question [is] if corporates would like to cancel their business lines with those counterparties due to the fact they have a small percentage of deals with them, should they stick with them or should they cut the business line? This could become a question,” says Bartelt.

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