Central Bank of Ireland designated as National Competent Authority

On 8 October and following a consultation process which began in February of this year, the Minister for Finance published the European Union (European Markets Infrastructure) Regulations 2014.  As expected, the Regulations designate the Central Bank of Ireland as Ireland’s National Competent Authority for the purposes of EMIR. As the National Competent Authority, the Central Bank has oversight of all Irish counterparties entering into OTC derivative contracts which are within the scope of EMIR (whether or not they are regulated by the Central Bank). The Regulations contain a number of significant provisions including:

• A basis for the CBI, from 1 December 2014, to require EMIR regulatory returns from counterparties (subject to some exceptions) confirming their compliance with the EMIR regulations and standards, signed by two directors (or principals) of the counterparty and countersigned by a third party assessor
• Power of the CBI, where it has reasonable grounds to suspect that a prescribed contravention is being/has been committed, to appoint one or more assessors to assess whether that is the case and, if so, to determine appropriate sanctions
• Power of the CBI to require a financial counterparty, or a non-financial counterparty above certain thresholds, to provide the CBI with a report on a specified matter prepared by an external reviewer approved by the CBI
• Powers for the CBI to appoint authorised officers, issue directions and issue contravention notices
• New offences and sanctions
• Potential individual accountability of directors, secretary, managers and officers where an offence is committed by a body corporate in particular circumstances

The Central Bank has indicated in FAQs published on its website that for financial counterparties (including investment fund companies and their managers) supervision of EMIR compliance will be incorporated into the Central Bank’s risk-based approach for supervision (PRISM) where relevant.  The role of supervising EMIR compliance by non-financial counterparties (NFCs) will be undertaken by a specialist EMIR unit within the Central Bank established for this purpose.  The EMIR unit will also process the various notifications and applications required by EMIR.  Larger NFCs will be required to submit a regulatory return on EMIR compliance sometime after Q1 2015.  The intention is that the Central Bank will subsequently follow up on any exceptions noted on a prioritised basis.  The current plan is that there will be a themed review of smaller NFCs later in 2015 on a sample basis to check that suitable arrangements are in place to report to trade repositories as required (taking into account any amendments to MiFID Level 2 guidance).

This change will therefore significantly increase the oversight role of the Central Bank and will result in a dramatic increase in the number of entities that are accountable to the Central Bank.

Interest Rate Swaps mandated for clearing

On 1 October ESMA issued final draft Regulatory Technical Standards (RTS) for clearing of certain interest rate swaps (IRS). The European Commission has now up to three months to endorse them and the RTS will become effective 20 days after publication in the Official Journal.

The RTS outline a clearing phase-in period which is between six months and three years, depending on the type of counterparty entering into the trade. They also define the time by which central clearing will become mandatory for the IRS.

UCITS and AIFs that are NFCs above the clearing threshold and which have an aggregate month-end average notional amount of uncleared derivatives for three months preceding the entry into force of the RTS of above €8 billion must clear the IRS from 12 months after the RTS come into force. UCITS and AIFs NFCs above the clearing threshold but which do not meet the €8 billion threshold have 18 months from the entry into force of the RTS to clear. Additionally, the RTS incorporate an element of frontloading of IRS such that counterparties (such as the UCITS and AIFs of the type referred to above) will be obliged to clear IRS before the Effective Time, depending on the outstanding maturity of the swap.

Clearing consultation for non-deliverable forwards

ESMA has also issued a third consultation paper on draft proposed RTS which seek to establish a clearing obligation for non-deliverable forward OTC derivatives of the type currently cleared by LCH.Clearnet Ltd (UK) (i.e. cash-settled, non-deliverable contracts that cannot result in the exchange of principal).This consultation process is open until 6 November 2014.

ESMA Updates EMIR Q&A

ESMA, on 24 October, published an updated Q&A. The updates focus on trade reporting obligations. They specifically deal with access to data by supervisory authorities, trades terminated before reporting deadline, block trades and allocations and field completion for trade repository reporting (i.e. unique transaction identifier generation, empty fields and buy / sell indicator for swaps). Additionally they clarify that third country entities which were not subject to the trade reporting obligation when it came into force on 12 February 2014 and which have subsequently become EU financial counterparties (for example because they re-located or became managed by an AIFMD registered / authorised AIFM) are required to report trades that were entered into before they became subject to EMIR.

European Commission adopts first equivalence decisions for third country CCP regulatory regimes

On 30 October 2014, the European Commission announced that it had adopted its first equivalence decision for the regulatory regimes of central counterparties (CCPs) in Australia, Hong Kong, Japan and Singapore.  This means that CCPs in these jurisdictions will be able to obtain recognition in the EU enabling them to be used by market participants to clear standardised OTC derivatives as required under EMIR while remaining subject solely to the regulation and supervision of their home jurisdiction.

Contributed by Patricia Taylor, Catharine Dwyer