EMIR
Implimentation Question
I wanted to follow up on ID number 490. We asked how to populate the field ‘Identifier of the basket’s constituents’ (2.18) if none of the constituents have an ISIN and you asked for examples noting that it is already a requirement to report the ISINs of basket constituents. I have requested firms provide examples of such trades, however the reason such basket trades can be successfully reported today is because a value of ‘NA’ can be populated and so this has not been a significant issue previously.
Given that ‘NA’ will not be a permitted value under the new Refit rules, the proposal is to populate the field with the European Financial Stability Facility ISIN (EU000A1G0EB6) as the default value. The reason this ISIN was chosen is because it has been proposed in Answer 5 of the SFTR Q&A as a default value. The alternative is to leave the field blank but this would result in the message being rejected by the TRs.
As and when I have any examples of basket trades where no constituents have an ISIN, I will share these with you. For now though, firms will look to populate ‘EU000A1G0EB6’ if they execute any such basket trades in order to successfully submit the message.
Response
Thank you for clarifying.
Please note that the default value proposed under SFTR was envisaged to cover a scenario of zero collateral, i.e. where applicable rules required provision of an ISIN but in fact no security is exchanged.
The situation here is different, as there are instruments in the baskets and - to the extent they are reportable - they should be identified with an ISIN.
We have also considered a similar question in the past in the context of SFTR reporting, where the instruments used as collateral in some instances would not yet have an ISIN.
While ESMA acknowledges that there may be cases where a security cannot be identified with an ISIN, having in mind the residual character of this problem and the fact than unique and consistent identification of the instruments is necessary to enable monitoring of the risks, ESMA reiterates the importance of a correct identification of the issuance through the ISIN in the context of regulatory reporting. Consequently, an ISIN should be obtained forthe component of the underlying basket in order for it to be reported correctly under EMIR.
Finally, it would be indeed important to understand to what extent firms trade baskets where none of the components is expected to be reported under EMIR (the only scenario where a workaround may be needed).