FX Regulation Summary – Corporates
Foreign exchange (FX) regulation has undergone significant changes in recent years, affecting corporate FX users. Three key regulations affecting corporate FX users are EMIR, MiFID II, and Dodd-Frank.
EMIR
EMIR, or the European Market Infrastructure Regulation, is a European Union regulation that aims to increase transparency and reduce risk in over-the-counter (OTC) derivatives trading. It requires companies to report their OTC derivative transactions to a trade repository, and to clear certain types of OTC derivatives through a central counterparty. Corporates are required to report all FX derivative transactions to a trade repository, regardless of whether they are cleared or not. This means that corporates must have the necessary systems and processes in place to capture and report the required data accurately and in a timely manner. The upfront responsibility for corporates is to ensure that they have the necessary infrastructure in place to comply with EMIR, including obtaining a Legal Entity Identifier (LEI), and the ongoing responsibility is to ensure that they continue to report all relevant FX derivative transactions to the trade repository. The EMIR regulation allows for corporates to delegate their reporting responsibility to the bank they are transacting with.
MiFID II
MiFID II, or the Markets in Financial Instruments Directive II, is a European Union regulation that aims to increase transparency and investor protection in financial markets. It includes provisions that affect FX trading, such as requirements for pre-trade and post-trade transparency, and restrictions on algorithmic trading. Corporates that trade FX derivatives with EU counterparties must comply with the pre-trade transparency requirements, which means that they must provide certain information about the trade before it is executed. They must also comply with the post-trade transparency requirements, which means that they must report the trade details to an authorized publication arrangement (APA) or approved reporting mechanism (ARM). The upfront responsibility for corporates is to ensure that they have the necessary systems and processes in place to comply with MiFID II, and the ongoing responsibility is to ensure that they continue to comply with the pre-trade and post-trade transparency requirements.
Dodd-Frank
Dodd-Frank, or the Dodd-Frank Wall Street Reform and Consumer Protection Act, is a U.S. regulation that aims to increase transparency and reduce risk in financial markets. It includes provisions that affect FX trading, such as requirements for swap dealers and major swap participants to register with the Commodity Futures Trading Commission (CFTC), and requirements for certain types of derivatives to be cleared through a central counterparty. Corporates that trade FX derivatives with U.S. counterparties must comply with the reporting requirements, which means that they must report certain information about the trade to a swap data repository (SDR). The upfront responsibility for corporates is to ensure that they have the necessary systems and processes in place to comply with Dodd-Frank, and the ongoing responsibility is to ensure that they continue to report all relevant FX derivative transactions to the SDR.
Summary
EMIR, MiFID II, and Dodd-Frank are regulations that affect corporate FX users. Corporates must ensure that they have the necessary systems and processes in place to comply with the reporting and transparency requirements of these regulations, and that they continue to report all relevant FX derivative transactions accurately and in a timely manner. It is important for corporates to stay up-to-date with changes to these regulations and to seek advice from their legal and compliance teams to ensure ongoing compliance.