Article 12 of EMIR gives Member States the power to set their own penalties for breach of the Regulation. This has led to deferred publication of the fines and left firms in many countries with a lack of clarity over what they are putting at stake (and a consequent inability to react proportionately). So what do we know?
Beginning with the Regulation itself, competent national authorities were required, by 17 February 2013, to have laid out their penalties for breach of Articles 4, 5 and 7-11 to the Commission. The guidance they were given was fairly minimal but they were told that any penalties must be ‘effective, proportionate and dissuasive.’
So what constitutes a breach? A breach for these purposes means anything in contravention of the clearing rules (Articles 4 and 5) or the rules for accessing a CCP/market, reporting and mitigating risk against non-financial counterparties (Articles 7-11), and the technical standards pursuant to those Articles. However, a breach doesn’t have to be a complete failure to comply (e.g. failing to clear a trade at all) but can rather be a smaller failure (e.g. reporting a data item in the wrong format). Therefore, the penalties have to be flexible and constitute a full range that encompasses all possible levels of breach.
So what kind of numbers are we talking about? How much will an example fine be? Recently Italy has published its response to Article 12 – there, the regulator (Consob) has scope to fine counterparties between €2,500 and €250,000. This seems small, especially given the often high value of derivatives trades and the fact that breach of the Short Selling Regulation in Italy carries a penalty of €250,000 to €2,500,000. Therefore, can we safely say that penalties for breaches of EMIR will be relatively low across Europe?
The answer is no. In the UK, the FCA continues to keep its cards close to its chest: The amendments to the Decision Procedure and Penalties manual (DEPP) only say that the FCA will impose a financial penalty ‘of such amount as it considers appropriate’ for breaches of EMIR. Therefore, firms required to comply with EMIR remain in the dark as to the level at which penalties will be set at, and will have to look to precedent to determine what the FCA is thinking.
The FCA is under no obligation from EMIR to disclose its penalties and so there may be no clarity until the fines start appearing (the amounts of which must be published). However, it seems difficult to describe the level of Italy’s fines as ‘dissuasive’ or ‘effective’ and therefore we may yet see much higher penalties from other European States.