1. Updated FAQ
In August 2014 the Central Bank of Ireland (the
"CBI") updated its "Frequently
Asked Questions"(1) on the application of the reporting
obligation under EMIR to state that, as a temporary measure:
(a) all FX transactions with settlement before or on the relevant
spot date (generally T+2) are not required to be reported;
(b) all FX transactions with settlement beyond seven days are
required to be reported;
(c) all FX transactions between an Irish counterparty and a
non-Irish counterparty with settlement between the spot date and
seven days (inclusive) are only required to be reported by the
Irish counterparty if local laws, rules or guidance in the
jurisdiction of the non-Irish counterparty require the non-Irish
counterparty to report. The Irish counterparty should rely on
documentation from the non-Irish counterparty as to whether it is
required to report; and
(d) all FX transactions between two Irish counterparties with
settlement between the spot date and seven days (inclusive) are not
required to be reported.
In respect of (d) above, the CBI recommends that counterparties
that have the capacity to report such trades do report them
(notwithstanding that there is no obligation to report), and it
further recommends that counterparties build a capacity to report
such trades in the future.
While this updated guidance is to be welcomed, it does raise a
number of fresh questions. Set against a background of
divergent regulatory approaches throughout Europe, and the European
Commission and the European Securities and Markets Authority
("ESMA") being unable to provide any
further guidance, it appears that the precise limits of the
application of EMIR to FX trades are still yet to be settled.
2. Regulatory developments so far
The CBI's previous guidance, issued in February 2014, had
stated that generally any FX trade settling greater than T+2 was to
be considered an FX forward. The previous version of the FAQ
stated that all FX forwards were to be considered within the scope
of EMIR regardless of:
(i) their actual settlement date; and
(ii) whether they are concluded for
"commercial" (as opposed to speculative or
investment) purposes.
The previous guidance was inconsistent with guidance issued by a
number of other European regulators such as the UK's Financial
Services Authority and Luxembourg's Commission de Surveillance
du Secteur Financier.
In light of the conflicting national guidance ESMA wrote to the
European Commission on 14 February 2014 (2) seeking clarification
on what constituted a "derivative" within the
scope of EMIR. ESMA stated that, in the absence of
clarification from the European Commission, it understood that
national competent authorities would not apply EMIR to "FX
forwards with a settlement date up to 7 days, FX forwards concluded
for commercial purposes, and physically settled commodity
forwards..." Notwithstanding ESMA's letter, the
CBI did not alter its guidance.
Following ESMA's letter, the European Commission issued a
consultation document on FX financial instruments(3) in April
2014. The consultation document was intended to assist the
European Commission in developing a legislative proposal to define
the scope of EMIR. However, on 23 July 2014 the European
Commission wrote to ESMA(4) noting that its legal power to
adopt implementing legislation that could clarify the definition of
FX financial instruments lapsed on 1 December 2012.
Presumably such lack of authority had previously been overlooked
when the European Commission commenced its consultation.
In its 23 July 2014 letter, the European Commission noted that the
definition of financial instrument is due to be revised by the
implementation of MIFID 2 in 2017, and that ESMA should carefully
consider "whether the current approach by Member States
achieves a sufficiently harmonised application of the EMIR
reporting obligation in the period before the application of MIFID
2 or whether further measures by ESMA, eg guidelines, are
necessary", bearing in mind that any guidelines adopted
now "may need to be changed again in 2017 if these
measures are not fully aligned with the future MIFID 2 implementing
measures". This appears to indicate that the
European Commission feels that no further guidelines should be
issued before the implementation of MIFID 2.
Following the European Commission's decision not to clarify the
definition of what constitutes a "derivative", the CBI
issued its latest guidance. However, the CBI has indicated
that this guidance is a "temporary measure". The
CBI has advised that it may revise its guidance again in the
future, or its guidance may be superseded by developments at EU
level.
3. Continued uncertainty
The CBI's updated guidance does not make any reference to
the "commercial purpose" exemption (or indeed
the treatment of physically settled commodity forwards). The
"commercial purpose" exemption was expressly
recognised in the guidance of the FSA and the CSSF, and was
mentioned in ESMA's letter of 14 February 2014. In the
absence of any additional guidance from the CBI or ESMA, it appears
that the CBI does not view FX forwards concluded for
"commercial purposes" as being exempt from
EMIR.
It is noteworthy that the CBI's updated guidance distinguishes
between otherwise identical contracts on the basis of where the
counterparty is located. It states that if a contract is
considered to be within the scope of the EMIR reporting obligation
according to the "local laws, rules or guidance"
of the counterparty's jurisdiction, then it should be reported
by the Irish counterparty. As the EMIR reporting obligation
only applies to "derivatives" within the scope
of EMIR, this suggests that the Irish interpretation of what
constitutes a "derivative" will vary depending
on the "local laws, rules or guidance" of the
counterparty's jurisdiction. This could result in an
Irish counterparty having to treat two otherwise identical trades
as subject to different regulatory regimes, by reference to
guidance issued by a counterparty's regulator.
1. Central Bank of Ireland FAQs
2. Letter to Commissioner Barnier
3. Consultation document on FX Financial
Instruments
4. European Commission letter to
ESMA Chair
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