The reporting deadline for companies to be compliant with EMIR is February 12, but many companies are struggling to come to terms with the complexities of implementing procedures and systems that will enable them to report on derivative transactions.
From attending recent webinars and meetings on EMIR reporting, my impression is that a significant number of corporates are not ready at this point in time to be fully compliant with the derivative reporting requirements, says Michelle Price, associate policy and technical director at the Association of Corporate Treasurers.
Given the deadline of February 12 is only three weeks away, the question is how many will be compliant by then?
A question that appears difficult to answer.
EMIR is the European Commissions response to the commitment by G20 countries to address risks related to the OTC derivative markets.
Since derivatives have become synonymous with the financial crisis, the regulation is aimed at increasing transparency in the derivatives market, thereby reducing and minimizing systemic risk by reducing counterparty and operational risk.
It not only applies to European Union member states but also applies globally to certain transactions and counterparties outside the EU.
The regulatory framework is being implemented by the European Securities and Markets Authority, but some market participants say the information on the regulation has been released in dribs and drabs so companies are confused by the process.
First off, companies have to have a clear overview of their derivatives usage relating to credit, interest rate, equity, foreign exchange and commodities, and will be required to report derivatives to approved trade repositories, of which there are six.
Companies are expected to provide daily reports on any new or maturing derivative trades and any changes to existing ones and corporates whose derivatives exceed given thresholds also have to clear them via a central clearing house.
Whilst the requirement to report derivatives has been known for some time, it has been the implementation details that corporates have struggled with, says Price.
For example, the first trade repositories, who all derivative trades must be reported to, were only registered in November 2013. This shows a lack of understanding and appreciation for how long it takes commercial and industrial companies to define, install and test the necessary system changes.
One bone of contention appears to be receiving or generating, and reporting, the unique trade identifier (UTI) for each trade.
All trades must have a UTI with both parties to a transaction reporting the same UTI, says Price. However, there is no internationally agreed or recommended UTI but various ideas and precedents are developing, notably with ISDA [International Swaps and Derivatives Association] taking a lead.
Companies also need to apply for a legal entity identifier (LEI), but as yet the final system for creating these reference numbers does not exist, adds Price. Instead, pre-LEIs are being generated by pre-local operating units, such as the London Stock Exchange.
The regulator has a huge amount of work ahead before it can come up with a meaningful overview of the positions held by each market player, says Marcos Barrabés-Rebollo, a consultant at treasury consultancy Zanders.
The adoption of legal entity identifiers by all market participants is key for this. At the moment, many of them are still requesting it or have doubts about how to request it.
As of now, no explicit penalty for missing the February 12 date exists, says Barrabés-Rebollo. Some companies are therefore putting more of their efforts into complying with the Single Euro Payments Area (Sepa) project, without which a company would not be able to receive or make payments for receivables, or pay its staff.
While all of Europes public-sector institutions, financial institutions and companies should have migrated their payment systems to the new Sepa credit-transfer and direct-debt system by February 1, earlier this month the European Commission announced a further six-month transition period for the changeover due to the complexity of the new system.
However, UK regulator the Financial Conduct Authority has sent a shot across corporate bows on EMIR, stating on its website: If there is a reason why full compliance cannot be achieved in specific circumstances, a firm should prioritize having a detailed and realistic plan to achieve compliance within the shortest timeframe possible.
However, this does not prejudge our approach to any instances of non-compliance.
In other European countries such as Germany, the local regulator is expected to act if a company fails to meet the deadline, says Frank Richter, financial instruments specialist in product management at Hanse Orga.
This Germany-based software vendor has a number of midsized corporate clients across Europe. In some cases where German companies are unable to meet the deadline, Richter noted that the larger German banks have offered to take over the reporting process for clients free of charge.
Barrabés-Rebollo adds: The time for seeing how other market participants are moving towards compliance has now passed. The execution of risk-mitigation techniques should already be in place and February 12 reporting deadline is looming. This leaves market participants with very tight deadlines to become EMIR compliant.
However, companies will not cease to function if they do not meet the EMIR reporting deadline, but they would have grave liquidity issues if they were Sepa non-compliant. And for some companies late to implementing either regulation, the choice is clear.