Margin requirements Source: EMIR, Deloitte Analysis As a result of this reform the cost of dealing with derivatives has increased making OTC derivative transactions more expensive Reporting & other compliance costs + 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.
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). Risk Mitigation Techniques, except for margin, have been implemented quite easily 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. Implementation status FSA started compliance review Source: EMIR, Deloitte Analysis
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. EMIR Reporting: the first complete practical experience from a reporting point of view… 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 Implementation status Reporting in place on a best effort basis TRs are reaching a better stability Source: EMIR, Deloitte Analysis
… and the reporting journey is still ongoing and more challenges are coming… 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 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 Inter-TR Reconciliation & Data quality 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 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 position or trade report Clarifications in relation to MtM methods and meaning of “notional” Changes in the reporting 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? Market Consultation (open until 09 May 2014) asked by EC For the moment, the majority of counterparties are reporting to TRs the FX transactions Scope Source: EMIR, Deloitte Analysis
Account segregation framework Account segregation framework Re-use & re-hypothecation Re-use & re-hypothecation Eligibility & Haircuts Eligibility & Haircuts Buy-sideCustodian bankClearing Members/ CCP Protection mechanism Protection mechanism Propose to clients account structures: omnibus or individual segregations. CMs distinguish their own assets in separate accounts at the CCP from the clients assets 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 Accurate, timely, and appropriately segregation of exchanged collateral Set up individual segregation or omnibus account Define list of eligible collateral and methods to calculate collateral requirements and apply haircuts IM: Restriction in the re- use, re-pledge and re- hypothecation; VM: possible for cash and non-cash collateral Have enough high liquidity to exchange collateral (particularly during a period of financial stress) Apply risk-sensitive haircuts models Default waterfall: Received collateral; Defaulter’s default funds; CCP’s own capital; Default fund of non- defaulting CMs Dispute mechanism to timely regulate any discrepancy of collateral amount to be exchanged In addition, new collateral requirements are approaching…
Collateral Organisation Define strategic collateral model (including products strategy) Assess collateral services solutions Evaluate financial impacts 1 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 needs Anticipate and manage liquidity needs Collateral optimization Collateral transformation 3 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 4 …which will bring to a re-thinking of your collateral management operating model Collateral Management