Setting the EMIR scene - Laurent Collet, Deloitte

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Setting the EMIR scene ABBL conference

November, 2014

Following the introduction of EMIR in August 2012, two requirements came into force and have been implemented

From

15 March 2013

, all counterparties dealing with non-centrally cleared transactions shall: • timely confirm the deals • perform a daily valuation of the contracts From

15 September 2013

, all counterparties dealing with non centrally cleared transactions shall: • reconcile the outstanding derivative positions • resolve any dispute coming from non reconciled positions • perform a compression exercise

03/13

TR application begins 2 Source: EMIR, Deloitte Analysis

09/13 11/13 02/14 05/14 08/14

07 November 2013

• • • 4 TRs approved by ESMA: • Regis TR DTCC Unavista KDPW

28 November 2013

2 TRs approved by ESMA: • ICE TVEL • CME Reporting of all OTC and ETD transactions Daily collateral and valuation reporting Last day for back loading all the contracts still open on starting reporting date (i.e. 12 Feb) © 2014 Deloitte Tax & Consulting

As a result of this reform the cost of dealing with derivatives has increased making OTC derivative transactions more expensive

Reporting & other compliance costs + Margin requirements + Regulatory capital charge

Incremental cost arising from the implementation of:  Reporting requirement  Risk mitigation requirements.

According to Deloitte analysis based on “ESMA Impact Assessment of EMIR implementing measures”, in total we estimate the regulatory and other compliance cost to be about EUR 0.50 per EUR 1 mio of notional.

Source: EMIR, Deloitte Analysis

Risk Mitigation Techniques, except for margin, have been implemented quite easily

Requirements

For OTC derivative transactions entered into by FCs, NFCs (regardless NFC+ or –) that are not centrally cleared, specific risk management provisions have been introduced to mitigate the exposure to operational and counterparty credit risk: • Timely confirmation • Portfolio reconciliation • Dispute resolution • Portfolio compression • Daily valuation • Margin

(estimated starting date: Q3 2015)

These requirements will, as well, indirectly impact the counterparties established in a non-EU/EEA country (i.e. third country entities).

FSA started compliance review

Implementation status

Implementation actions

Timely confirmation

• Apply the

negative confirmation

principle • Electronic solution, which supports confirmation, affirmation and matching processes

Portfolio reconciliation and dispute resolution

• Adhere to the

ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol

– amending the master agreements relating to OTC derivatives (ISDA Master Agreement). This required the definition of the role covered in the process: portfolio data

receiving entity

or

sending entity

; • Alternatively, execute the bilateral agreement in circumstances where the counterparties do not wish to adhere to the ISDA PR/DR Protocol • Operational process: • Automated solution, like triResolve • Manual bilateral reconciliation, exchanging the file between the counterparties

Daily valuation

• Verification that all OTC derivatives are daily valuated • In case of market conditions that prevent marking-to market, implementation of marking-to-model

In all the cases a new or enhanced processes have been implemented, with required a proper documentation and sound description into the respective procedures.

Source: EMIR, Deloitte Analysis

EMIR Reporting: the first complete practical experience from a reporting point of view…

Implementation status

Requirements

Responsibility falls on both counterparties

Third Country Entities are indirectly impacted to the extent they trade with entities established in the EU who are directly impacted by EMIR. •

Delegation of the reporting to a third party or other counterparty is possible

Timing

: by the end of the day following the execution, the contract and all its characteristics are reported; •

Daily reporting

by FCs and NFC+s: • Fields on the contract valuation (at position level), as maintained and valued by the CCP; • Changes in market-to-market or market-to-model valuations on reported bilateral transactions; • Information on collateral to be reported on a portfolio or on a single transaction basis. •

85 fields

must be reported to the TR •

Record keeping

following termination of the contract •

Counterparty ID

is provided by the Legal Entity Identifier (LEI) and transaction ID is provided by the UTI; each counterparty (whether EU/EEA or non EU/EEA domiciled) to a derivatives contract, other than natural persons, must obtain an LEI.

Source: EMIR, Deloitte Analysis

Challenges & Implementation actions

Adhere to the ISDA 2013 Reporting Protocol or execute a bilateral consent

addressing disclosure limitations of the relevant information •

Definition of the reporting model

• Delegation is contemplated as model and it has been chosen by several players, especially in case of small volume of derivatives

;

in this case

contract

shall be put in place between the delegating and the delegated entity (e.g

. ISDA/FOA EMIR reporting Delegation Agreement

) •

Data gathering from different systems and validation of the common data with the other counterparty

Data mapping according to ESMA data fields

New data element:

LEI

: a pre-legal entity identifier can be issued by any of the endorsed pre-local operating units (LOU) of the global legal entity identifier system (GLEIS). As of today there are 21 pre-LOU in operations (e.g. in Luxembourg LuxCSD) •

UTI and its hierarchy for generating it

Reporting in place on a best effort basis

TRs are reaching a better stability

… and the reporting journey is still ongoing and more challenges are coming…

Inter-TR Reconciliation & Data quality

• Data should be

reconciled

between TRs if counterparties report to different TRs • TRs should apply validation rules to ensure that reporting is performed according to the EMIR regime

Changes in the reporting

Publication of a

Consultation Paper

by ESMA, aiming at • addressing shortcomings evidenced during the practical reporting; • introducing improvements to better fulfil the reporting objectives; • providing clarification on some data fields and/or their description • TRs check the LEIs valid UTIs validity before submit the trades to Inter-TR Reconciliation • Implement the arrangements to respect the “

validation rules”

• TRs to check the accuracy of data The principal proposed changes: • Introduction of new fields: from 59 to 74 fields globally • 15 fields will be amended (e.g. format of the information, type of code to report, etc.) • UTI: introduction of a clear rule in the absence of agreement between the 2 parties • Collateral: more information to report such as IM, VM, respectively the posted and received amount and the currency • Action type: introduction of 2 specific action types for “correction” and “position component” • Clear indication of “notional”

position

or

trade report

• Clarifications in relation to MtM methods and meaning of

Scope

FX financial instruments

(e.g. FX forward with a settlement date up to 7 days and FX forwards concluded for commercial purposes:

in or out

?

Source: EMIR, Deloitte Analysis • Market Consultation (open until 09 May 2014) asked by EC • For the moment, the majority of counterparties are reporting to TRs the FX transactions

In addition, new collateral requirements are approaching…

Account segregation framework Eligibility & Haircuts Re-use & re-hypothecation Buy-side

• Accurate, timely, and appropriately segregation of exchanged collateral • Set up

individual segregation or omnibus account

• Have

enough high liquidity

to exchange collateral (particularly during a period of financial stress) • Apply

risk-sensitive haircuts models

• •

IM

: Restriction in the re use, re-pledge and re hypothecation;

VM

: possible for cash and non-cash collateral

Custodian bank

• Adjust its framework offering both ways to match clients needs and CCP requirements • Introduce

control mechanisms

aiming at: • reconcile the collateral position deposited in the respective account • verify that the placed and received collateral is in line with the eligibility criteria (from the CCP or with the other counterpart) • verify the accuracy of the haircuts application, especially in case of bilateral exchanges

Clearing Members/ CCP

• Propose to clients

account structures:

• omnibus or individual segregations.

CMs

distinguish their own assets in separate accounts at the CCP from the clients assets • Define list of

eligible collateral and methods

to calculate collateral requirements and apply haircuts

Protection mechanism

Dispute mechanism

to timely regulate any discrepancy of collateral amount to be exchanged

Default waterfall:

• Received collateral; • Defaulter’s default funds; • CCP’s own capital; • Default fund of non defaulting CMs

…which will bring to a re-thinking of your collateral management operating model

3 1 Collateral Organisation

• Define strategic collateral model (including products strategy) • Assess collateral services solutions • Evaluate financial impacts

Collateral needs

• Anticipate and manage liquidity needs • Collateral optimization • Collateral transformation

Collateral Operations

• Manage both cleared and collateral process • Connectivity to market infrastructure (T2S / CSD) • Selection of brokers • Daily valuation and reporting • Margin requirements

2 Collateral Management 4 Collateral Safety

• Review depositary bank responsibility and compliance • Set up services level agreements and segregation of accounts • Rules on collateral eligibility and haircuts calculation • Limits on re-use/ re-hypothecation

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