Digital Asset Derivatives Reporting Requirements: Seeking Clarity

The treatment of cryptocurrency derivatives, including crypto CFDs (Contract for Differences), as financial instruments and their corresponding reporting requirements under the European Market Infrastructure Regulation (EMIR) and the Markets in Financial Instruments Regulation (MiFIR) is an area that lacks clarity.

As the global popularity of cryptocurrencies continues to rise, regulatory bodies such as the European Securities and Markets Authority (ESMA) and the Financial Conduct Authority (FCA) are actively working to amend, adjust, expand and adapt the existing regulations to ensure proper reporting of cryptocurrency-related activities.

ESMA has already made a request for feedback on amending pre and post-trade transparency and data reporting requirements, as well as how regulators can access the necessary data. This request is part of ESMA’s DLT Pilot Regime, which focuses on exploring the potential of distributed ledger technology in the regulatory framework.

CEO of the FCA, Nikhil Rathi, confirmed that the regulatory body is collaborating with the Bank of England on a digital reporting initiative. The aim of this initiative is to reduce the cost of compliance checks associated with reporting requirements

Despite efforts to improve the regulation of crypto derivatives, ESMA’s statement on crypto-assets still serves as the primary reporting guidance available. It acknowledges that certain crypto-assets may qualify as MiFID financial instruments, subjecting them to EU financial rules. However, existing rules were not initially designed with these instruments in mind, leading to challenges in their interpretation and adaptability to the specific characteristics of crypto-assets.

Under MiFIR, to be reportable within the EU, an instrument must be traded on a trading venue or have its underlying traded on such a venue within the European Economic Area (EEA). Similarly, UK MiFIR requires trading on a trading venue or the underlying being traded on a UK, Gibraltar, or EU trading venue. Currently, the only listed cryptocurrencies known are Bitcoin and Ether Futures traded outside the EEA, making them not reportable under MiFIR.

Regarding EMIR, currently only derivatives are reportable, meaning that CFDs on cryptocurrencies are in scope of Regulatory Reporting. It is expected that if a CFD on Bitcoin is reportable, all cryptocurrency derivatives would be as well. However, due to the lack of a “neat” category for cryptocurrencies in the EMIR Reporting Rules, some interpretation is necessary. The wider derivative industry and Trade Repositories agree with KYAX that suggest reporting should be under the Commodity asset class as a temporary measure, since cryptocurrencies lack an ISO standard currency code required for reporting them as Digital Assets and/or currencies.

1. Review Product Offering: Investment firms should review their current product offerings to identify whether they have offered or transacted in any cryptocurrency derivatives or CFDs.
2. Check Reporting Status: Verify whether all cryptocurrency CFDs have been reported. Any unreported transactions should be addressed promptly.
3. Backloading Requirements: Understand the backloading requirement for reporting cryptocurrency CFDs. It applies to derivative contracts entered into before February 12, 2014, and still outstanding on that date, as well as those entered into on or after that date.
4. Compliance Update: Update systems and processes to ensure daily reporting of all cryptocurrency derivatives and other reportable transactions, aligning with the applicable regulations.

The regulation and reporting requirements for cryptocurrency derivatives, including crypto CFDs, are still evolving. While efforts are being made by ESMA and the FCA to improve clarity and amend existing regulations, the current guidance issued by ESMA remains the primary source for reporting practices. Investment firms should stay informed.

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