Swap: typically indicates a contract that settles with multi periods and results in exchange of a series of cash flows. It may for example involve one market participant having a fixed-price contract for an energy commodity, while the other counterparty takes on the floating price of the same commodity. However also floating-to-floating trades might occur, as well as physical/geographical swaps where the hedging is based on different pricing in different locations
Firstly, there may arise an ambiguity on the overall problem who is the buyer and who is the seller in the swaps transactions. This must be determined for the TRUM Data Field No (10) of the non-standard reporting form (containing the Buy/Sell indicator). Generally, this field for a trade transaction should display the side of the matched trade for the market participant; a buyer or a seller, while for an order transaction, this field is intended to specify whether the market participant indicated to buy or sell the contract that the order transaction was placed on.
There are some situations where derivatives are not reported under EMIR, and therefore must be reported under REMIT. But how to fill in the REMIT reporting Buy/Sell indicator with respect to swaps? This requires a differentiation between fix to floating derivative and floating to floating one. The TRUM gives an example, in case of a fix to floating derivative, if party (A) buys a swap, then party (A) pays a fixed price and party (B) pays a floating price. This means that party (A) receives the floating leg and party (B) receives the fix leg.
In case of a floating to floating derivative, if party (A) buys a swap, party (A) pays the floating price of the first leg (or index) and party (B) pays the floating price of the second leg (or second index). In this case the two legs (indexes) of the swap should be sorted alphabetically. For example, if party (A) and party (B) enter into a swap transaction where the financial settlement is the difference between two floating indexes "XYZ Index" and "ABC Index", (A) is the buyer of the swap if (A) pays the floating price of ABC Index and receives the floating price of XYZ Index while (B) is the seller of the swap as (B) receives the floating price of ABC Index and pays the floating price of XYZ Index.
How to establish the estimated notional amount for the swap transaction
The estimated notional amount needs to be indicated in the Data Field No (16) of the REMIT non-standard reporting form. Overall, this field should be left blank for contracts that do not have a known price at the time of the trade. The same applies to any contracts which have a floating leg, e.g. gas/electricity financial swaps not reported under EMIR but reportable under REMIT.
TRUM gives the following example: in April, market participant (A) enters into an electricity financial swap contract for the month of July. Market participant (A) is the seller of the swap. Market participant (A) sells the forward fixed leg today and it buys the spot price (based on a reference price) in July. For the fixed leg, the forward price is known today but the spot price is not known until the end of July. In this case, this field should be left blank.
Option on swap
Swaps need also to be specifically accounted for in the Data Field No (31) of the non-standard reporting form containing the designation for the settlement method i.e. whether the traded contract is settled physically, in cash, both, optional or other.
Accepted values for this field are P=Physical C=Cash O=Optional for counterparty, as follows:
"P" is indicated if the contract is settled physically and
"C" is indicated if the contract is settled in cash.
"O" is indicated if the contract can be physically settled or may be settled in cash at the option of one of the parties.
For options on swaps the value "P" is appropriate as explained in the following passage of the TRUM: "[f]or contract such as option on futures or swaps, as they settle into the underlying future or swap, this should be considered for physical delivery of the underlying contract and the value of "P" should be reported."
Frequently Asked Questions (FAQs) on REMIT transaction reporting
Reference to documents: Implementing regulation No. 1348/2014, Annex (Details of reportable contracts), Table 1, data field 32 Linked Transaction ID Reporting geographical swaps across EU borders (e.g. one leg with delivery in EU, other leg with delivery out of EU).
1. EU market participant performing geographical swap – selling in Germany, Buying in Switzerland
2. EU market participant performing geographical swap - selling in Hungary, buying in Serbia
1. Only transaction with delivery in EU is reportable. Linked transaction outside EU is out of scope of REMIT. The respective EU leg is reported as a single transaction
Both legs of geographical swap is reportable as linked transactions as long as one side of trade is in EU
In case of a geographical swap where one leg has delivery in the Union and the other leg has delivery outside the Union, only the leg with the delivery in the Union shall be reported according to Article 3(1)(a) of Commission Implementing Regulation (EU) No 1348/2014.
Frequently Asked Questions (FAQs) on REMIT transaction reporting
Basis Swaps - defining who the buyer and seller are so counterparty fields can be correctly and consistently populated.
We trade products that are basis swaps. These are swaps where each leg is floating. Whereas for fixed-floating swaps we can use market convention to define the buyer, for floating-floating swaps there is no clear guidance on which leg the buyer is and which leg the seller is. For some jurisdictions we can report trades as generic so we don’t have to define buyer / seller for reporting purposes. Does ACER have any guidance? We have our own convention in our internal systems for defining buyer / seller that we apply consistently
In the TRUM, under Field (25) for Table 1 “Fixing index or reference price” there is clear guidance on which leg the buyer is and which leg the seller is.
For derivatives that have not already been reported under EMIR, and which are therefore reported under REMIT, the following buyer and seller logic should apply: for example, in the case of a fix to floating derivative, if party X buys a swap, then party X pays a fixed price and party Y pays a floating price. This means that party X receives the floating leg and party Y receives the fixed leg. X will be identified as a buyer (B) and Y will be identified as a seller (S).
In the case of a floating to floating derivative, if party X buys a swap, party X pays the floating price of the first leg (or index) and party Y pays the floating price of the second leg (or second index). In this case, legs (indexes) should be sorted alphabetically. X will be identified as a buyer (B) and Y will be identified as a seller (S).
ACER's Frequently Asked Questions (FAQs) on REMIT transaction reporting, Questions 3.1.35, 2.3.10