From 18 June 2020, the regulatory obligation under EMIR on certain types of fund to report derivative transactions to an approved trade repository will shift from the trading entity to its manager. Pension fund, AIF and UCITS managers need to act now to ensure such entities are correctly reporting their derivative transactions.

Under EMIR, both parties to a derivative contract are obliged to report it to a trade repository. Currently under EMIR, the legal obligation to report for a pension scheme, UCITS fund or an AIF rests with the fund itself. Along with other modifications (as detailed in our note), last year’s EMIR Refit will (as of 18 June 2020) change who is responsible for such trade reporting. The new regime provides that:

  • where a UCITS is a counterparty, the UCITS management company;
  • where an AIF is a counterparty, the AIF Manager (AIFM); and
  • where an institution for occupational retirement provision is a counterparty, the authorised entity responsible for managing and acting for the institution;

shall in each case be responsible, and legally liable, for reporting the details of the derivative contracts and ensuring the correctness of the details reported.

Failure to comply with reporting obligations under the EMIR can attract substantial fines. Whilst all other member states have notified ESMA of their minimum and maximum fines for non-compliance, the UK has only offered a broad definition that gives the Financial Conduct Authority (FCA) the freedom to determine its own fines. We understand that the FCA’s fines are similar to those imposed by the FCA on companies breaching their MiFID obligations: £1 per line of non/inaccurately reported transaction, rising up to £1.5 per line for repeated failures. As an illustration of how such an incremental fine can accumulate quickly, in 2017 the FCA fined Merrill Lynch £34.5m (discounted on early settlement from £49.32m) for failing to report 68.5m exchange traded derivative transactions.

Fund managers therefore need to ensure that they have effective policies and procedures in place to check that reporting is being done, and being done correctly, and they should be able to verify this on an ongoing basis. As putting in place such procedures often takes time, fund managers should begin taking steps to ensure compliance well in advance of the 18 June 2020 deadline.

Should you have any questions on this development or on the EMIR in general, please contact any member of the derivatives & trading team.