On 4 February 2019 the Central Bank of Ireland issued a welcome statement confirming that, pending the entry into force of the EMIR Refit proposal, it will apply its risk-based supervisory powers in a proportionate manner in the day-to-day enforcement of the reporting and clearing obligations under EMIR and MiFIR’s trading obligation.
Over the past two years, a long awaited package of reforms to EMIR (commonly known as EMIR Refit) has been working its way through the European legislature. Delays in the legislative process led to concerns in the derivatives market that some of the EMIR Refit amendments (designed to exempt smaller market participants from complying with onerous EMIR obligations that will phase-in this year) will be of limited use, as EMIR Refit will likely enter into force only after these obligations have already phased-in. The chief concerns relate to (i) the phase-in of the EMIR clearing obligation for Category 3 firms, and (ii) the obligation to backload reporting for trades terminated more than five years ago.
The phase-in date for the clearing obligation for so called “Category 3 firms” under EMIR is 21 June 2019. The EMIR Refit proposal will create a new category of small financial counterparties (SFCs) which are exempt from the clearing obligation. It is expected that many SFCs would be Category 3 firms. In the event that EMIR Refit only enters into force after 21 June 2019, SFCs would need to have clearing arrangements in place and start clearing their derivative contracts on 21 June 2019, but would then be exempted from clearing once EMIR Refit comes into force.
The backloading issue arises from the obligation under EMIR to report derivative transactions entered into on or after 16 August 2012, but terminated before 12 February 2014. The deadline for meeting the backloading obligation has already been postponed from 12 February 2017 to 12 February 2019 and EMIR Refit proposes to waive the obligation entirely; again, the lack of certainty about the entry into force of EMIR Refit creates a timing gap.
The European Securities and Markets Authority (ESMA) on 31 January published a statement addressing these concerns.
ESMA has no power to disapply or delay EU legislation (and neither do national competent authorities); only further EU legislation can do that. Therefore, ESMA indicated in its recent statement that it expected national competent authorities – which includes the Central Bank – “not to prioritise their supervisory actions towards financial counterparties whose positions are expected to be below the clearing thresholds when Refit enters into force, and to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner… This might include not prioritising counterparties’ reporting of backloaded transactions in their day-to-day supervision and enforcement of EMIR.”
Central Bank Statement
The Central Bank on 4 February welcomed ESMA’s statement and confirmed that, in accordance with ESMA’s statement, it would exercise its supervisory powers in a proportionate manner. The Central Bank’s statement is to be welcomed and provides some certainty and comfort to affected entities until EMIR Refit comes into force.