Background

The Financial Conduct Authority (FCA) and the Bank of England (BoE) previously published Policy Statement (PS23/2) setting out changes to the derivative reporting framework under UK EMIR. We have previously summarised the key changes, the majority of which are applicable from 30 September 2024 for derivatives entered into from that date (with a separate requirement that derivatives outstanding on 30 September 2024 must have additional information reported by 31 March 2025). Our summary also noted that the EU has made similar changes under EU EMIR from 29 April 2024.

The FCA and the BoE are now seeking feedback on draft guidance (in the form of Q&As) for reporting under the revised UK EMIR reporting requirements. The guidance will assist market participants in applying the amended reporting rules.

Draft Q&As

The Q&As will be divided up into the following topics.

1. Transitional Arrangements;  
2. Reconciliations;
3. Errors and Omissions;
4. Derivative Identifiers;
5. Action and Events;
6. Venues;
7. Exchange Traded Derivatives; 
8. Margin and Collateral;
9. Clearing;
10. Position Level Reporting; and
11. Asset Class and Product Specific.

The first consultation covered topics 1 to 5 and was finalised on 2 May 2024. The FCA and the BoE have now commenced a second consolation covering topics 6 to 11, as well as any additional questions which have arisen under the earlier topics.

Key considerations for buy-side firms

For buy-side firms that have delegated reporting to another party, most of the Q&As in respect of topics 6 to 11 are technical and relate to reporting of derivatives in certain scenarios. However, topic 11 (on “Asset Class and Product Specific” considerations) may be of interest. In particular, draft Q&A 11.4 (copied below) provides that derivatives based on cryptoassets should be reported under the asset class of the cryptoasset they are based on. For example:

• derivatives based on share-like tokens should be reported as equity derivatives;
• derivatives based on unregulated exchange tokens that do not clearly fall into one of the specified asset classes (such as Bitcoin and Ether) should be reported as commodity derivatives; and
• derivatives based on cryptoassets should not be reported under the currency asset class (as cryptoassets do not have an ISO 4217 currency code required for currency derivatives).

For buy-side firms that have delegated reporting to another party and that use derivatives related to cryptoassets as part of their strategy, this Q&A provides additional insight as to how those derivatives might be reported.

“11.4 What asset class should derivatives based on cryptoassets be reported as? 

Derivatives based on cryptoassets should be reported under the asset class of the cryptoasset they are based on. For example, derivatives based on security tokens akin to traditional shares (see FCA’s Guidance on Cryptoassets (PS19/22)) would be reported as equity derivatives. Derivatives not clearly falling into one of the specified asset classes should be reported under the asset class most closely resembling the derivative. Derivatives based on cryptoassets should not, however, be reported under the currency asset class, since cryptoassets don’t have an ISO 4217 currency code required for currency derivatives. 

Derivatives based on unregulated exchange tokens that don’t clearly fall into one of the specified asset classes, such as Bitcoin and Ether, should be reported under the commodity asset class. This is the asset class that most closely resembles these derivatives. 

Noting that the regulatory regime for cryptoassets is developing, the Authorities will monitor regulatory developments and consider if further guidance is needed.”

Next steps

The FCA and BoE have invited feedback on the draft Q&As and the proposed changes to the UK EMIR validation rules (applicable from 30 September 2024) by 12 June 2024.  

Market participants should review the draft Q&As and consider the impact these may have on any systems, processes or policies that they have in place. If clients feel strongly about any of the guidance and wish to respond to the consultation, Macfarlanes can assist with that response.