European Union: A New Direction: First Central Bank Enforcement Against A Fund Under EMIR

The Central Bank of Ireland (the "Central Bank") has fined GlobalReach Multi-Strategy ICAV (the "Fund") €192,500 pursuant to the European Union (European Markets Infrastructure) Regulations 2014, as amended (the "EMIR Regulations") for a breach of Article 9 of EMIR arising from a failure by one of the Fund's sub-funds to report over 200,000 derivative trades between January 2018 and May 2020. This enforcement is the first time the Central Bank has imposed a fine against a fund and demonstrates the Central Bank's determination that funds and their boards retain effective responsibility and accountability for compliance with applicable legislation and regulatory requirements. This enforcement is also the first time that the Central Bank has taken an enforcement action under the EMIR Regulations.

The Fund appointed a management company (the "ManCo") to act as its manager and the ManCo in turn delegated responsibility for investment management to an investment manager (the "Investment Manager"). As this is a standard operating model for regulated Irish investment funds, the Central Bank's commentary on it is noteworthy for all funds; it said (our emphasis added) that "these delegations did not remove the ICAV's legal responsibility to comply with its regulatory obligations or the Board's ultimate responsibility for all activities of the ICAV".

Central Bank findings

The version of EMIR in place at the relevant time obliged the Fund to ensure that in-scope derivatives transactions were correctly reported to an EU trade repository. In fact, the Fund had over 200,000 non-reported trades between 2016 and 2019. In addition, this non-compliance was only identified by the Fund following the Central Bank's industry letter on EMIR reporting of 20 February 2019 in which it reminded firms of EMIR reporting obligations.

This non-compliance was a fairly simple case – the reports were not filed at all – and as such the Central Bank had clear grounds to issue a sanction. However, there are two aspects of it that are noteworthy.

First, at the time of the contravention, Article 9 of EMIR applied directly to the Fund itself and not the ManCo. Since June 2020, the EMIR reporting obligations have been updated by EMIR refit to apply to ManCos and AIFMs rather than funds. This approach is in line with all other major legislative regimes relevant to funds which apply the obligations to fund managers rather than funds, though it is interesting to note that EMIR remains an outlier, as all EMIR obligations other than compliance with Article 9 still remain the responsibility of the fund.¹ As such, while this sanction does demonstrate a willingness by the Central Bank to enforce financial regulations which apply to funds directly, the fact is that, outside the context of EMIR, the majority of regulatory obligations relevant to funds apply to the ManCo rather than the fund itself.

The second noteworthy aspect is that the Central Bank said that the Fund board has "ultimate responsibility for all activities of the ICAV". While this suggests that even where obligations fall on the ManCo (as the Article 9 EMIR reporting obligations do today), the Central Bank expects the Fund board to take responsibility for compliance, we would expect, where the relevant legislation imposes the regulatory obligation directly on the ManCo, the Central Bank to focus its enforcement actions directly on the ManCo, rather than on the relevant Fund.

Central Bank expectations as regards EMIR

From an EMIR compliance perspective, the Central Bank emphasised that firms must have appropriate oversight of data reporting from board level down, including where data reporting is delegated or outsourced. The delegation of reporting obligations must be appropriately managed in order to avoid confusion between the delegates as to their respective reporting responsibilities.

The Central Bank also outlined that it expects firms to bring material failures to the Central Bank's attention at the earliest opportunity and to act expediently to address identified issues. This investigation found that, despite the Fund identifying in May 2020 that thousands of its derivative trades had not been reported to a trade repository in breach of its EMIR reporting obligation, the Fund only notified the Central Bank of this failure in March 2021 and only following engagement which was initiated by the Central Bank. This was viewed as an aggravating factor by the Central Bank in assessing the quantum of fine payable by the Fund.

Since the coming into force of EMIR in 2012, the Central Bank has issued a number of guidance statements and recommendations in relation to EMIR. In its EMIR reporting letter of 20 February 2019, the Central Bank recommends that compliance with the transaction reporting rules under EMIR should be a standing agenda item at all board meetings for Irish entities trading derivatives. Moreover, in its third Securities and Markets Risk Outlook Report published on 2 March 2023 the Central Bank stressed that it expects derivatives users to "have appropriate oversight of data reporting from Board level down (including where data reporting is outsourced)". In particular, the Central Bank expects formalised policies and procedures to be in place to ensure compliance. This enforcement action represents further evidence of the Central Bank's focus on this issue and the importance of compliance with EMIR, including the transaction reporting rules contained therein.

Given this background and the forthcoming new reporting rules under EMIR Refit (which will apply from 29 April 2024 for both new and outstanding derivatives transactions and which you can read about in our separate insight here), we have seen a number of our clients putting in place formal EMIR compliance policies, which are approved at board level. These policies cover compliance with the EMIR transaction reporting rules, as well as compliance with EMIR more generally. It is anticipated that the news of the first sanctions issued under the EMIR Regulations will lead more firms to adopt formalised and board approved policies and procedures, in line with Central Bank expectations.

Conclusion

Although this sanction is very specific to the factual scenario in question, it is indicative of the views of the Central Bank that boards retain responsibility for ensuring that sub-funds maintain compliance with all relevant regulatory requirements and that the delegate model will not automatically result in accountability being delegated.

Footnote

1. The Securities Financing Transactions Regulation (SFTR) applies to securities financing transactions (such as securities lending and repurchase agreements) and, like EMIR, also provides that responsibility for compliance with SFTR (other than SFTR reporting obligations) sits directly with the fund.

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