EU Watchdog Wants Trade Repositories To Face Stiffer Fines

Law360, London (January 30, 2017, 5:59 PM GMT) —
The European Union’s securities watchdog pushed Monday for the European Commission to give it greater power to fine trade repositories that run afoul of market rules as the bloc reviews its derivatives rulebook.
The European Securities and Markets Authority has written to Europe’s executive arm to demand that its enforcement and supervisory powers be strengthened as part of a legislative review of the European Markets Infrastructure Regulation, the EU’s rulebook for derivatives markets passed in 2012.

Trade repositories collect and maintain the records of derivatives. They play a key role in enhancing the transparency of derivative markets and reducing risks to financial stability.

The letter follows the commission’s Nov. 23 report into EMIR, which provided a summary of the areas where the requirements could be adjusted ahead of a planned legislative review of the rules this year.

“We appreciate the acknowledgement of ESMA’s suggestion that fines for trade repositories need to be increased to ensure effective supervision,” wrote ESMA chairman Steven Maijoor.

In March last year, ESMA fined the trade repository DTCC Derivatives Repository Ltd. €64,000, and issued a public notice, for negligently failing to put in place systems capable of providing regulators with direct and immediate access to derivatives trading data. It was the first time ESMA has taken enforcement action against a trade repository registered in the European Union.

It is a key requirement under EMIR in order to improve transparency and facilitate the monitoring of systemic risks in derivatives markets.

ESMA also called for an enhancement of its supervisory tools and the inclusion of additional requirements for trade repositories related to data quality and data access, and further specification of certain reporting requirements.

In August 2015, ESMA produced three reports to the commission ahead of the EMIR review report. These called for a tenfold increase in the level of specific fines that can be imposed and the creation of a 2 percent floor with regards to the relationship between the fines and the turnover of the trade repository.

ESMA wants the type of enforcement decisions it can adopt to be extended to those already available to national regulators under the Markets in Financial Instruments Directive, known as MiFID II, a complex set of rules passed in 2014 that governs the financial services sector, covering everything from trading to data recording and transparent research costs.

These would include the power for ESMA to require a temporary stop to any practice that it considered contrary to EMIR, the power to impose a temporary prohibition on the acceptance of new reporting counterparties or the extension of the services that the trade repository offers, and the possibility for an accelerated procedure for adoption of enforcement decision, when needed.

“Given the high-level nature of the [EMIR review] report, it is unclear to us whether these suggestions will be taken into account and to what extent,” Maijoor wrote.

Last month, ESMA set out plans to enhance the data made publicly available by trade repositories which maintain the records of over-the-counter derivatives, in an effort to combat problems related to the comparison and aggregation of data.

The consultation focuses on the aggregate position data to be made publicly available by the trade repositories under EMIR

According to ESMA, the practical implementation of EMIR revealed several shortcomings and limitations that need to be addressed.

The commission review into EMIR also covered the streamlining of trade reporting, the treatment of nonfinancial counterparties, pension fund clearing exemptions and clearing access for small financial counterparties.

–Editing by Ed Harris and Rebecca Flanagan.

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