March 2014

LEGAL EASE: How EMIR trade reporting obligations affect funds

OSullivan DurkinThe European Market Infrastructure Regulation (Emir) requires entities that transact derivatives to report prescribed details of the financial derivative instruments (FDIs) they conclude with record keepers known as trade repositories. The reporting obligation commenced on February 12, 2014 (the Reporting Deadline) and applies to all financial counterparties and non-financial counterparties.

COLLECTIVE INVESTMENT SCHEMES
Ucits authorised in accordance with the Ucits Directive and alternative investment funds within the scope of the Alternative Investment Fund Managers Directive are classified as financial counterparties and are subject to the full reporting requirements of Emir if they transact in FDIs.

WHAT IS THE REPORTING OBLIGATION?
Emir sets out the minimum details that should be reported to a trade repository such as the asset class, notional amount, economic exposure, currency and maturity date of the derivative contract. The reporting obligations will apply to both exchange-traded FDIs and over-the-counter FDIs from certain dates.

Spot transactions that settle within T+2 are not subject to the reporting requirement; however, member states take differing views on the reporting obligation for foreign exchange transactions with a longer settlement timeframe. To ensure consistent reporting throughout the EU, European Securities and Markets Authority (Esma) has requested the Commission to clarify the definition of FDIs that are subject to the reporting requirement.

WHAT’S AN LEI?
In order to report derivative transactions, each counterparty will need a Legal Entity Identifier (LEI). An LEI is a unique alphanumeric code that is assigned to all entities that are counterparties to financial transactions and any legal entity that enters into a derivative transaction. Ucits and alternative investment funds (AIFs) that are subject to the reporting requirement under Emir should obtain an LEI for each sub-fund of the Ucits or AIF.

LEIs are not currently available. However, counterparties should use an interim entity identifier known as a pre-LEI issued by pre-Local Operating Units (LOU). The Irish Stock Exchange, the London Stock Exchange and the CICI Utility in the US are some of the designated LOUs with authority to issue pre-LEIs.

Ucits and AIFs should clarify if they are subject to Emir reporting requirements and, if so, arrange for the reporting of FDIs from the Reporting Deadlines.

Ucits and AIFs may delegate their reporting obligations to a third party or arrange for a counterparty to report on their behalf. Ucits and AIFs nonetheless remain liable for compliance with Emir reporting requirements and thus could be liable for the failure of a delegate to report or for the misreporting of FDIs by a delegate to a trade repository.

Declan O'Sullivan and Conor Durkin are partners at Dechert in Dublin

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