FMIA’s reporting start date: More companies must deal with derivative reporting obligations

in Audit, 10.05.2017

FINMA’s recent approval of SIX and REGIS-TR as trade repositories for the Financial Market Infrastructure Act (FMIA) triggers the date for Swiss companies to begin reporting derivatives. Swiss NFC- firms must now analyze their portfolio and counterparties to assess the regulation’s impact.

The Swiss FMIA entered into force at the beginning of 2016. Embedded in the global effort to regulate the financial market, FMIA implements the Pittsburgh G20 summit procedures. Besides other areas, it regulates derivatives trading similar to the Dodd-Frank in the US and EMIR in the EU.

Comparable in scope to EMIR, FMIA’s obligations can be divided into four main tasks:

  1. Identification of FMIA derivatives (group level)
  2. Self-classification as NFC- (group level)
  3. Risk mitigation requirements for OTC derivative trading (Swiss-entity level)
  4. Reporting requirements for all derivatives (Swiss-entity level)

Overall the Swiss regulator is aiming to create requirements equivalent to EMIR. While companies can rely on slightly adjusted EMIR solutions for the identification of derivatives, self-classification and risk mitigation techniques – the impact of the reporting obligation was not clear until April 2017.

Self-classification, identification of FMIA derivatives and proof of hedging purpose is required on the group level and must already be implemented in 2017. Risk mitigation requirements are relevant on a Swiss-entity level and enter into force this year.

FMIA reporting obligation for derivatives to start as early as October 2017

FINMA approved SIX and REGIS-TR as trade repositories for FMIA derivatives reporting in its Aufsichtsmitteilung 2017/2 on 3 April 2017. The announcement triggered the starting dates for the obligatory trade reporting under FMIA for large Non-Financial Counterparties (NFC+) and small Non-Financial Counterparties (NFC-):

Over The Counter derivatives (OTCs):

  • 1 January 2018: NFC+ entities
  • 1 April 2018: NFC- entities

Exchange Traded derivatives (ETDs):

  • 1 July 2018: NFC+ entities
  • 1 October 2018: NFC- entities

A deal must be reported no later than one day after the execution or if certain deal data has changed during the lifetime of the deal (modification).

FMIA’s impact on non-financial counterparties

Initially, non-financial counterparties – most of which are small (NFC-) – were quite relaxed due to the one-sided reporting rule and the rules stipulating that only large non-financial counterparties (NFC+) and financial counterparties (FC) must report. Furthermore, in contrast to EMIR, deals between NFC- firms do not have to be reported – placing all intragroup deals out of scope.

However, the devil is in the details. At a second glance, it becomes clear that more corporate firms will have to deal with reporting obligations.

Why more firms will have to deal with FMIA?

If Swiss NFC- entities trade with Swiss counterparties there is no obligation for the Swiss NFC-. But if the counterparty is a non-Swiss FC or NFC+, the reporting obligation falls back to the Swiss NFC-. Currently, reporting under EMIR is not officially granted equivalence to FMIA reporting and non-Swiss counterparties do not have to report under Swiss law.

In any case, Swiss NFC- firms must analyze their portfolio and counterparties to gain a clear picture of the impact of the reporting obligation.

Will Swiss NFCs- firms have to setup their own reporting solution?

Not necessarily, there are two other alternatives:

  • If the non-Swiss counterparty provides a delegation service (meaning they have an interface to Swiss repositories) they could do the reporting on behalf of the Swiss entity.
  • Third-party reporting is another option. Meaning a third-party service provider which is not counterparty to the deal can report the deal on behalf the Swiss entity as an external service.

Speculating on FINMA’s course of action regarding the equivalence of EMIR reporting until the reporting start date is, in our view, not realistic. FINMA has stated in its Aufsichtsmitteilung 2016/1 that FMIA reporting can be done only via Swiss-authorized infrastructures.

Way forward for Swiss NFCs

Swiss non-financial counterparties must analyze whether they have to report (deals, counterparties). If so, the options of delegation, third-party reporting or self-reporting must be assessed and a decision made as to how to proceed. Relevant criteria to consider when making the decision include compliance matters, processes and license costs.

If the firm decides to self-report, it must assess whether manual reporting is an option. If only a handful of standard deals must be reported, this might be the first choice. For automated reporting, most treasury management or commodity trading systems already provide automated EMIR solutions, which could be adjusted for FMIA reporting as they share similar data fields.

Keep in mind, that in setting up the reporting solution, it’s the initial and subsequent extraction of required data that takes the most time. Also, you shouldn’t underestimate the time it takes to set up the accounts at the trade repository as well as the time required for ongoing communication with the trade repositories to clarify open issues.

 

 

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