EMIR-Compliance-System:

31 December is approaching and the three-month commissioning and nine-month implementation period for the independent audit of the EMIR compliance system begins for companies with a financial year on the same calendar.

Such an EMIR compliance system must be set up as soon as over-the-counter (OTC) derivative contracts are concluded in the past financial year. The obligation is not limited exclusively to financial companies (such as credit institutions), but also includes non-financial companies (such as industrial companies).

► The obligation to set up an EMIR compliance system results from EU Regulation 648/2012 of 4 July 2012, which was adopted by the European Parliament and Council in response to the 2008 financial market crisis. The aim of this regulation is to increase the transparency of the unregulated OTC derivatives market and limit potential default risks.

The use of over-the-counter derivative contracts, on the other hand, is by no means exotic in Risk management, but rather serves to hedge interest rate and foreign currency risks as well as commodity price risks resulting from the company's activities. If a company enters into an OTC derivatives transaction, an EMIR compliance system must always be implemented.

The EMIR compliance system consists of the following regulatory areas specified by the EU regulation:

Abb. 1: EMIR-Compliance-System

Source: KPMG AG

In particular, the mandatory reporting of derivatives transactions to a trade repository is intended to increase transparency in the derivatives market. Such a trade repository must be registered with the European Securities and Markets Authority (ESMA), which regularly publishes a list of registered trade repositories on its website. As of 30 November 2024, the following trade repositories are included in this list on the ESMA website:

• Regis-TR
• DTCC Data Repository (Ireland) Plc
• Krajowy Depozyt Papierów Wartosciowych S.A. (KDPW)
• LSEG Regulatory Reporting B.V.

If derivatives transactions are concluded with a financial counterparty domiciled in the EU, the obligation to report to a trade repository is transferred informally to the financial counterparty. Accordingly, the financial counterparty must not only report its side of the derivative transaction, but also the non-financial counterparty's side of the same transaction. In principle, the obligation to report derivative transactions is not limited to external derivative transactions. Under certain circumstances, however, an exemption from reporting internal derivative transactions is possible. Such an exemption must be notified to the national supervisory authorities and can be complex depending on the circumstances.

The necessary risk mitigation techniques must be contractually agreed before an OTC derivative transaction is entered into, regardless of the location of the financial counterparty. The master agreement published by the International Swaps and Derivatives Association (ISDA) and the German Master Agreement (DRV) with the associated EMIR annex can be used for the agreement.

When is the EMIR compliance system subject to the statutory audit obligation?

Fig. 2: EMIR audit obligation checklist

Source: KPMG AG

The above checklist can provide assistance in determining the EMIR audit obligation by Corporate Treasury. In this context, the legal definition of "OTC derivatives" within the meaning of EMIR is of particular importance. On the one hand, the categorisation of whether an EMIR compliance system must be set up and, on the other hand, whether such a system is subject to audit within the meaning of Section 32 of the German Securities Trading Act (WpHG) regularly gives rise to practical questions and thus an increased need for advice.

► The obligation to audit the EMIR compliance system applies to legal entities domiciled in the Federal Republic of Germany. Companies domiciled outside the Federal Republic of Germany are therefore not subject to a statutory audit in accordance with Section 32 WpHG.

If you have identified an EMIR audit obligation, the audit must be carried out by a suitable auditor. Pursuant to Section 32 (2) WpHG, only auditors and auditing firms qualify as such.

► The auditor must be appointed within three months of the reporting date in accordance with Section 32 (2) sentence 2 WpHG.

Even if neither the requirements for an EMIR compliance system nor an EMIR audit obligation are new, the regular monitoring of the affectedness in the past financial year should not be underestimated for Corporate Treasury. Particularly in the case of derivatives transactions that are not carried out regularly, such as interest rate hedging for borrowing, it can be easy to forget to determine the audit obligation. If you have any questions or need advice on the EMIR compliance system or an EMIR audit, please do not hesitate to contact us.

Source: KPMG Corporate Treasury News, Issue 150, December 2024

Authors:
Robert Abendroth, Partner, Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG
Manuel Seick, Manager, Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG