1. Global Trade Repositories Industry
DTCC Deriv/SERV
November 2012

2. DTCC Deriv/SERV: A short history
2003: DTCC establishes Deriv/SERV subsidiary providing confirmation matching for OTC credit derivatives (CDS) market
2006: Users request confirmation service expanded to “warehouse” confirmed CDS trades - Trade Information Warehouse (TIW) is ‘born’
September 2008: Lehman Bros default – the Trade Repository is ‘born’:
TIW becomes source of CDS data for marketplace, regulators/supervisors and the public
DTCC works with OTC Derivatives Regulators Forum (ODRF) to develop & implement regulatory and public reporting
Weekly summary market data is posted on
DTCC Regulator portal established in January 2010 – over 40 regulators world-wide currently subscribed and receiving transaction data and aggregate exposure reporting
Summer 2009 : G20 Summit in Pittsburg.
July 2010: DTCC establishes London-based subsidiary DTCC Derivatives Repository Ltd. DDRL) to house the global equity derivatives repository and maintain global CDS data identical to US database
2010/2011: Through industry selection process (via ISDA and AFME) from potential service providers , DTCC identified to provide Trade Repository services for all 5 asset classes (CDS and Equities already with DTCC)
2012: Global trade repository service operationally live for Interest Rates and Commodities reporting under voluntary reporting regime to primary regulators

3. Global Legislation – at a glance ODRF – OTC Derivative Regulator Forum
G15 made commitments to the ODSG (OTC Derivative Supervisor Group) to increase transparency of OTC Derivative transactions
These commitments included amongst others to provide the ODSG and ODRF regulator groups with better data through reporting
Entity position level data provided to the appropriate firms prudential supervisor/s
Aggregated industry data provided to the broader ODRF
Market specific data provided to market regulators of certain jurisdictions
Product
Credit
Rates
Equities
Commodities FX
Users
Market through TIW
G16 dealers
G15 Dealers
G14 Dealers
core AFME members
Live
Sept 2008
Dec 2011
July 2010
March 2012
January 2013
Products
All – cleared and un-cleared
Financial oil un-cleared
All – cleared and un-cleared. Excludes spot.
Notional Coverage
99%
2,500,000 Rec’s
70% (est)
4,000,000 Rec’s
60% (est)
600,000 rec’s
Limited
Not known
Public data
Yes No

4. Key Principals: Public Reporting
Public Report provide:
Aggregated and anonymous industry level information
Updated on a weekly basis
Includes week on week changes
Multiple reports available (trade volumes and notionals):
By product type and customer type
By currency denomination
By reference entity or index names/versions

5. Credit Public Data Net Open Notional - Weekly
Date sourced for the last week of each month

6. Credit Public Data Activity - Weekly

7. Credit Public Data Single Name Activity

8. Credit Public Data Single Name: CM & Restructuring

9. Credit Public Data Single Name: Coupon & Tenor

10. Credit Public Data Indices: On-the-Run vs Off-the-Run

11. Rates Public Data – CZK

12. Key Principals: Regulatory Reporting
Regulatory access dependent upon setup
Access controls and permissions depending on jurisdictional coverage
Access levels differ for prudential regulators, market regulators or central banks
Access to public reports, standardised reports and to ad-hoc report output (55 so far in 2012)
Transaction level data for certain regulators where access approved
Examples of standardised reports can include:
Exposure by reference entity
Counterparty exposure

13. GTR Organic Growth ODRF Europe EMIR/ESMA Japan - JFSA US - Dodd Frank
Electronic
Snapshot
Platform
Functional growth of GTR as global requirements are defined for each asset class in each location. 9 13

14. Global Regulatory Outlook
2012
2013
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Q3 2013
Q4 2013
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec US
ODRF Commodities Compliance (30 Mar)
CFTC Credit & Rates Compliance Reporting (12 Oct)
All data electronic – Credit & Rates
SEC Sequencing Statement (12 Jun)
CFTCSD registrations (Dec 31)
CFTC Equities, FX & Commodities Compliance Reporting (10 Jan)
All data electronic – Equities, FX & Commodities
Non-SD/MSP All data electronic –All Classes
CFTC Swap Definitions (10 Jul)
Non-SD/MSP Reporting All Classes
Japan
DTCC draft TR Architecture proposal for JFSA and BOJ complete
JFSA reporting requirements proposal published to DTCC and industry (24 Mar)
DTCC rule proposal for JFSA complete (late April)
JFSA TR Rules Effective (01 Nov)
JFSA Regulatory Compliance Reporting (April 1)
TR Registration Open (18 May)
Back loading of all open positions as of April 1
Hong Kong
HKMA HKTR-GTR Connectivity Validation Testing
Amendments to legislation (Q4)
HKMA GTR Functional Testing
HKMA Industry UAT
Response to previous consult published (11 Jul)
HKMA Production Launch (TBC)
HKMA Compliance Reporting (TBC)
Taiwan
Gre-Tai NDF, FX, Vanilla Swaps, Taiwan-Equity Compliance Reporting (01 Apr)
Gre-Tai FX Forwards, Vanilla FX Options Compliance Reporting (31 Dec TBC)
Gre-Tai All Products Compliance Reporting (30 Jun TBC)
Singapore
DTCC response to MAS Consultation Paper submitted (26 Mar)
DTCC response to MAS Consultation Paper submitted (31 August)
Compliance Reporting ( Mid 2013)
DTCC response to MAS draft legislation
India
USD/INR interbank & FCY- INR Options (31 May)
Phase III and IV compliance dates TBD by RBI
Cross Currency Interbank forwards (CLS currencies)
FCY- INR Interbank forwards & FCY –FCY Options (31 Aug)
Canada
DTCC awaits dates TBD by Canada EU
ESMA technical standard consult response due (5 Aug)
ESMA rules published (30 Sep)
ESMA-MIR Compliance Reporting (
Rates & Credit (1 Jul 2013 )
EC approves rules (31 Dec)
Summary RAG Status
Australia
Legislation complete
( 31 Dec TBD)
Australia Compliance Reporting (Mid 2013 TBD)
Target delivery date cannot currently be met
Closing Comments to Proposals (15 June)
Comments to Exposure Draft (20 August)
Significant delivery risk exists, target date still possible
Russia
NSD announces TR (TBD)
FFMS Reporting Compliance (Aug 2011)
Russian Derivatives Conference in Moscow (11 Sep)
On track
FFMS Reporting Anticipated Compliance (Dec 2012)
Complete

15. Awaiting publication of detailed rules and dates
Appendix
Global Regulatory Outlook (continued)
2012
2013
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Q3 2013
Q4 2013
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Argentina
Outreach in progress
Awaiting publication of detailed rules and dates
Brazil
Chile
Mexico
China
Indonesia
Korea
Saudi Arabia
South Africa
Closing Comments to Proposals (1 Jun)
Financial Markets Bill passed (TBD)
Regulations passed (TBD)
DTCC visit to South Africa ( 11 Jun)
Switzerland
Summary RAG Status
Target delivery date cannot currently be met
Turkey
Significant delivery risk exists, target date still possible
On track
Complete

16. Global Legislation – at a glance US
US – Trade Repository rules under Dodd-Frank (CFTC rules):
December 20th, the CFTC approved rules for real-time reporting (Part 43) & swap data recordkeeping and reporting requirement (Part 45)
Key reporting dates:`
CFTC has defined compliance dates that apply to both real-time public dissemination and regulator data (PET/confirmation). Initial compliance are below but these are still to be finalized:
Credit and Interest Rates (SD/MSP’s) – Oct 12th, 2012
FX, Equities and Commodities (SD/MSP’s) – Jan 10th, 2013
All asset classes – non-SD/MSP reporting begins April 10th, 2013
Reporting obligations
DFA – one sided dealer reports all.
SEF-DCO – are obligated.
Reporting Requirements
Real time – 30 minutes after execution – block - public disseminated
PET – e.g. non cleared 1 hour after execution
Confirmation – e.g. non cleared from confirm execution. 30mins for electronic, 24 hours for paper.
Valuations – Daily reported T+1
Back loading.
Final rules still pending (relating to reporting):
SEC final reporting rules
Extra-territoriality 6

17. Global Legislation – at a glance Asia
Hong Kong, Japan and Singapore moving ahead.
Growing support across the region for a global data set to ensure transparency of OTC derivatives markets
Hong Kong
Hong Kong has functionally completed its new financial regulations and has begun to build a repository for local trades.
Regulators and market participants have expressed interest in establishing a system for trades to be reported through DTCC, serving as an industry “agent” to the Hong Kong repository.
Phased reporting compliance by May 2013
Product coverage – initially Rates Swaps in HKD and NDF’s
Japan
The legal framework for trade reporting established. Under the law, Japan FSA can collect trade data or delegate that authority to an off-shore entity,
Officials indicate they prefer to use established repository providers
TR rules effective November 2012
Reporting compliance start 1st April 2013
Product coverage – Rates, Credit, Equities, FX
Singapore
The Monetary Authority of Singapore (MAS) has indicated that its regulatory regime will be consistent with the structure outlined by the (ODRF).
Consultation paper published January 2012
DTCC have worked with MAS to set-up a Data Center in Singapore to support APAC region 7 17

18. Global Legislation – at a glance Europe
European Market Infrastructure Regulation (EMIR): Goal is to increase transparency to allow identification of systemic risk issues by regulators
Establishes reporting obligation
Outlines business/operational requirements for Trade Repositories
Estimated go live 6 month window from compliance date of the 1st Jan 2013
Markets in Financial Instruments Directive & Regulation (MiFID & MiFIR): Goal is to introduce more completeness of post-trade transaction reporting than exists today
Trade Repositories register as Approved Reporting Mechanisms (ARMs) to help identify market abuse (MAD/MAR)
Estimate compliance for end 2014/beginning 2015
Reporting obligations
both sides report without duplication
recognition of non dealer limitations
Reporting party has the choice of reporting route.
Listed products. The Futures and Options Association (FOA) which is the listed market equivalent of ISDA are engaging with certain Euro regulators to highlight the amount of reporting that already exists for listed products and try to persuade ESMA that there is duplication here.
Reporting Requirements
ESMA Final draft of Technical Standards to be approved by 31st December 2012.
All Derivatives, not just OTC.
End of Day, key economic fields (PET)
Valuations/Collateral.
Participants have 90 days to report derivative contracts that are outstanding on 16 August 2012, and are still outstanding on the reporting start date of respective asset classes.
Participants have 3 years to report derivative contracts entered into before, on or after 16 August 2012, that are not outstanding on or after reporting start date of respective asset classes. 18 3

19. Global Legislation – at a glance Europe Cont’d
Legislative Scope
Event scope
Who reports
Data elements definition
frequency
Push/ pull
EMIR
All derivatives
Each trade
Counterparties and CCPs (without duplication )
ESMA Level 2
T+1
Pull Mechanism (regulatory access)
MiFID +
MiFIR
All instruments
Counterparties (both)
Push to regulators
(transmit reports)
EMIR
Repositories to offer access to regulators (pull mechanism)
Parties & CCPs report details of all derivative contracts to a repository (incl any modification, or termination of the contract)
Details to be determnined at Level 2 ESMA but should at least include:
a) the parties to the contract and, where different, the beneficiary of the rights and obligation arising from it
b) the main characteristics of the contracts including the type, underlying maturity, notional value, price, and settlement date
Counteparties and CCPs ensure reporting avoids duplication and hold data of contract for 5 years
A counterparty that reports contract details or an entity that reports on behalf of a counterparty, are not in breach of any restriction on disclosure of information imposed by that contract or by any legislative, regulatory or administrative provision.
MiFID/R
Repositories required to transmit reports to the competent authorities (push mechanism) A
Avoid double reporting
All transactions in financial instruments must be reported except for those: traded in an organized way but are not susceptible to market abuse/cannot be used for abusive purposes;
All trading venues need to store data for 5 years-data stored will need to contain all information for reported transactions (indl client identification, number of instruments sold and bought, quantity, date and time of execution, person responsible for execution, traders and algorithms)
Trade repositories established within EMIR may be approved as Approved Reporting Mechanisms (ARM's) for transaction reporting purposes.
Article 21 lays out the conditions for ARMs focusing on report mechanism and security of data.: incl maintain effective admin arrangements designed to prevent conflicts of interest with clients, adequate resources and back up facilities in place, mechanisms to identify omission and obvious errors)
If reporting is not deemed appropriate, a review clause after 2 years will give ESMA the power to introduce a system that is able to capture all relevant data 4

20. EU Legislation time line
EMIR Level 1 text released on 15 June 2012
Level 1 text to go through final phase of procedural approval by the council 20 and 21 June 2012
To be published in EU’s official journal by end of July 2012
Level 1 text to be effective mid- late August 2012
EMIR draft standards (Level 2 text) to be open for consultation before week ending 25th June for 5-6 weeks consultation.
Level 2 text to be presented by ESMA on September 30
To be finalised by end of December/early January 2012
Registration of TR by January
Mandatory reporting Phased approach per asset class
Credit & Rates- 1, July 2013
Other asset classes -1, Jan 2014
2003, DTCC established a subsidiary known as Deriv/SERV LLC providing a confirmation matching service to the OTC credit derivatives market (CDS)
Automated the paper confirmation service that was market norm at the time
2006, Users requested the confirmation service be expanded to “warehouse” confirmed CDS trades, Trade Information Warehouse provides:
A single central database of agreed “Gold” records, i.e. the legal contract behind a trade
A standardized API to reduce the costs and operational risk of multiple bilateral processes
Accurate tracking of positions through the asset servicing element
2006 onwards, Deriv/SERV confirmation service adopted rapidly and globally
Dec ,000 organisations using the system
Nov 2010, 1,800 organisations (approx 17,000 legal entities/funds) in 52 countries
Expanded to cover both OTC Equity Derivatives and Interest Rate Derivatives
2007 Warehouse expanded to take tracked positions and calculate payments due on contracts.
Through a partnership with CLS Bank, these TIW calculated amounts are settled centrally
2008, functionality added to support central processing of re- organisations and renames of underlying entities plus the calculation and settlement of credit events
DTCC works with ISDA determinations committee in processing credit events
DTCC adds “Copper” record facility to enable firms to record details of trades not eligible for the ‘gold’ record processing, i.e. not confirmed electronically, no asset servicing by DerivSERV
September, 2008, Lehman Bros panic, Trade Repository is ‘born’:
Due to its global market coverage, TIW becomes the source of CDS data for industry participants, regulators/supervisors and public
DTCC works with OTC Derivatives Regulators Forum to develop and implement standards for data disclosure ensuring appropriate aggregation and anonymisation of global data
Weekly summary market data is posted on 5

21. DTCC Global Trade Repository solution GTR Services & Operating Model - Core solution
Single interface for global regulatory reporting
Rules based regulator access to positions
Participants reporting to enable regulatory position management
Replication to local regulators where required
Public price dissemination where required
Cross-asset including 5 main OTC asset classes 10

22. Global Coverage DTCC Global Trade Repository One trade message
Offices in NY, London and Brussels
Offices in Tokyo and Singapore soon
Rules based regulator access to positions
Participants reporting to enable regulatory position management
Replication to local regulators where required
Public price dissemination where required
One trade message
One interface
Multiple regulatory solutions
Participant entity logic
Reporting rules logic
Regulator entitlement logic
Global Data
One Record
GTR
Data Entitlements & rules logic
JPN TR Local repository
Connected local repository
(US SDR)
Direct Regulatory Access. 11

23. Global Trade Repository services: Connectivity
Supported Connectivity MQ
Secure FTP
Web Service
Web Upload
SWIFT
Message Formats
CSV
FpML 12

24. DTCC Global Trade Repository solution One Global Record
GTR ADMIN FIELDS
Data fields based on ESMA Final Draft technical standards for the regulation on OTC Derivatives, CCPs and Trade  Repositories, June 2012
59 data fields is a subset of the core 125 PET fields that has already being built in the GTR solution to support Dodd Frank requirement.
90% of ESMA fields are common to the current ODRF/DF/JFSA requirements.
GTR primary fields
(common across all regulators)
JFSA Only required fields
ESMA Only required fields
CFTC Only required fields
HKMA Only required fields 13

25. ESMA Requirements- TR Table of fields
Table 1 PARTIES TO THE CONTRACT
Reporting timestamp
Counterparty ID
ID of the other counterparty
Name of the counterparty
Domicile of the counterparty
Corporate sector of the counterparty
Financial or non-financial nature of the counterparty
Broker ID
Reporting entity ID
Clearing member ID
Beneficiary ID
Trading capacity
Counterparty side
Contract with non-EEA counterparty
Directly linked to commercial activity or treasury financing
Clearing threshold
Mark to market value of contract
Currency of mark to market value of the contract
Valuation date
Valuation time
Valuation type
Collateralisation
Collateral portfolio
Collateral portfolio code
Value of the collateral
Currency of the collateral value
Table 2 - Common Data
FIELD
Section 2a - Contract type
Taxonomy used
Product ID 1
Product ID 2
Underlying
Notional currency 1
Notional currency 2
Deliverable currency
Section 2b - Details on the transaction
Trade ID
Transaction reference number
Venue of execution
Compression
Price / rate
Price notation
Notional amount
Price multiplier
Quantity
Up-front payment
Delivery type
Execution timestamp
Effective date
Maturity date
Termination date
Date of Settlement
Master Agreement type
Master Agreement version
Section 2c - Risk mitigation /Reporting
Confirmation timestamp
Confirmation means
Section 2d – Clearing
Clearing obligation
Cleared
Clearing timestamp
CCP
Intragroup
Section 2e Interest Rates
Fixed rate of leg 1
Fixed rate of leg 2
Fixed rate day count
Fixed leg payment frequency
Floating rate payment frequency
Floating rate reset frequency
Floating rate of leg 1
Floating rate of leg 2
Section 2f – Foreign Exchange
Currency 2
Exchange rate 1
Forward exchange rate
Exchange rate basis
Section 2g - Commodities
General
Commodity base
Commodity details
Energy
Delivery point or zone
Interconnection Point
Load type
Delivery start date and time
Delivery end date and time
Contract capacity
Quantity Unit
Price/time interval quantities
Section 2h - Options
Option type
Option style (exercise)
Strike price (cap/floor rate)
Section 2i - Modifications to the report
Action type
Details of action type 14

26. DTCC Global Trade Repository solution GTR Functionality and Message Interfaces
Message Type
Message Summary
RT (Real-Time)
*Not needed for DCO*
Provide real-time price information for public dissemination
RT messages are not included in Regulatory position reports.
GTR Rules determine whether or not to disseminate the price
PET (Primary Economic Terms)
Transaction level trade message.
Trades reported via PET are included in Regulatory position reports.
Transaction Types supported include Trade, Novation, Termination, Amendment, etc
GTR reported position will take into account all reported transactions for a USI
Confirm
Confirmed details of trade
Trades reported via Confirm are included in Regulatory position reports.
Snapshot
Full and Partial Portfolio position report.
Positions reported via Snapshot are included in Regulatory position reports.
May be combined with transaction messages to report position.
Valuation
Report valuation of a position to the GTR
Valuation provided per USI
Event Processing
Provide Data related to events which result in trade modification to large numbers of trades across counterparties (compression, credit events, etc)
Provided by event processors / vendors (e.g. TriOptima, TIW) 15

27. Snapshot vs. Life Cycle Day 1 Day 2 Day 3
SnapShot – full file Replace.
The is a method of uploading your full portfolio.
Each file overwrites all of the previous records.
can be done at a frequency of the users choice.
The GTR provides a variance report.
The GTR stores the historical records
Day 1
Partial SnapShot – Delta Reporting
The is a method of uploading only what has change in your portfolio.
Either a full record or an economic within a full record which replaces the previous record.
can be done at the frequency of the users choice.
The GTR provides a variance report.
The GTR stores the historical records
Day 2
Day 1
Day 2
Life Cycle – Transaction based.
This is a method of sending in just specific transaction data.
There are various transaction types such as increase, termination, novation etc.
The GTR takes the previous days record then adds the transaction to create a new transaction
can be done at the frequency of the users choice.
The GTR stores the historical records
Increase 16

28. Exchange Traded flow chart
Local FSA
Counterparty B β
Derivatives Exchange/SEF α
Counterparty A/Execution broker
Current MiFID transaction reporting
Clearing Agent
Client
Clearing Agent
CCP/Clearinghouse
Client Reporting interface/Middleware
Exchange can send “primary economic terms” incl. USI to GTR near real time for α and β
Global Trade Repository
Operational flow
Reporting flow 18

29. Global Trade Repository services: Participant Reporting
Participants see:
Trades submitted by the participant
Trades submitted by other parties where the participant is named as the counterparty
Trades submitted by or against other legal entities that the participant is permissioned (explicit permission granted) to see
Certain trade attributes will be masked from counterparties (internal trade ref, trade valuation, trader id)
Reporting suite will include:
Submission reports
Position reports
Reconciliation/break reports 19

30. International Identifiers
3 main identifiers which have growing international support:
Counterparty - Legal entity identifier (LEI)
Trade – Unique trade identifier (UTI) / Unique swap identifier (USI)
Product – Taxonomy / Unique product identifier (UPI) 22

31. International Identifiers Counterparty - Legal Entity Identifier (LEI)
Overview:
Common schema to identify market participants and some related data
LEI is backed by global political and regulatory community and you can register a CICI (CFTC Interim Compliant Identifier) via Contact the helpdesk by
CFTC finalized rules requiring firms to register for an LEI within 90 days of reporting (interim LEI is known as the CICI)
Industry (group of trade associations) has recommended principles and a proposed solution to the regulatory community
ISO 17442: 18 alphanumeric and 2 check digits
Initial design focuses on information that can be publicly validated
Address, jurisdiction, limited hierarchy
SIFMA official document on LEI (
Trade Repository implications:
Only one LEI per legal entity conflicts with the way firms use their account structure today
Funds manager, branch locations, PB designations, trading strategy/desk identifiers
Each GTR identifier will have a namespace + value
Mapping table managed by repository
Multiple alternate ID’s can be set-up by each participant in the GTR (LEI, CICI, BIC, AVID)
Other considerations include data privacy issues, LEI for individuals, and impact of non-participating jurisdictions 23

32. International Identifiers Trade - Unique Trade Identifier (UTI) / Unique Swap Identifier (USI)
A Unique Swap Identifier (UTI) must be assigned to every new transaction
Unique global trade IDs are required in order to ensure accurate identification of reported trades. This will improve the ability to reconcile trades both with and between counterparties, CCPs and TRs, and reduce the likelihood of duplicate reporting.
ESMA has placed the responsibility of creating UTIs on the counterparties to the contract.
The UTI should remain constant despite any changes reporting parties might make to their own internal trade references
USI/UTI gaining global recognition 24

33. International Identifiers Product – Taxonomy / Unique Product Identifiers (UPI)
This is the identifier that is to be used to describe the underlying product
Today each firm creates it’s own set of product identifiers which drive risk aggregation, system defaults, and various workflows within the organization
No clear direction on timing of a UPI
Eventually UPI may be used to default field values within the trade
ISDA worked with the industry to develop a high-level matrix of taxonomy values
The GTR will leverage these taxonomy values as identifiers of products reported by participants
Each asset-class has a unique taxonomy but a common structure
Link to ISDA OTC Taxonomies and UPI - 25

34. Current clearing timelines
2012
2013
2014
28th July
Latest potential date for CCP authorisation
29th April
Entry into
force
27th Nov
Draft
RTS
27th Dec
Endorsement
by Commission
28th March
Accept by Council
And Parliament
28th October
CCP authorisation
Window opens
30th May
Notification for
the clearing
obligation
28th April
Notification of
Authorised CCPs
obligation 34 34

35. Clearing obligation All OTC derivative contracts must be cleared if:
The contract has been determined to be clearable and is notified in ESMA’s public register – top down and bottom up process
ESMA to decide within 6 months of notification date
There is a CCP authorised to clear that class of contracts
Not likely before April 2014:
For a non-financial, the contract value exceeds the clearing threshold
If one asset class goes over the threshold, all need to be reported
Exemptions: intragroup transactions
'financial counterparty' means an investment firm, a credit institution, an insurance undertaking, an assurance undertaking, a reinsurance undertaking, a UCITS and, where relevant, its management company, an institution for occupational retirement provision or an alternative investment fund managed by AIFMs
EMIR imposes an obligation on financial and non-financial counterparties to clear certain classes of OTC derivative contracts. Broadly speaking this includes certain options, futures, swaps, forwards and contracts for differences falling within Annex 1, Section C (4) to (10) of the Markets in Financial instruments Directive.
However, an OTC derivative contract will not be subject to the clearing obligation unless: (i) the relevant transaction is of a class of derivative mandated by the Commission as being subject to the clearing obligation in accordance with the procedures outlined in EMIR and (ii) the parties to the contract are subject to clearing.
Process:
Clearability of Contracts: From the moment of notification by the national competent authority to ESMA, ESMA has 6 months to decide on the clearability of the contracts and submit RTS to the EC setting out that they should be cleared, as well as any phase-in and the extent to which there will be frontloading (inc the ‘remaining maturity’ cut-off). Not that clear how long the EC would take with this, but one assume s it wouldn’t be too long (reference EMIR Article 5.1 and 5.2). Legal analysis suggest the total time may be up to 9 months from the date that the relevant home state authority notifies ESMA that it has authorised a CCP to clear a class of derivatives (the "notification date").
Time: under EMIR, a CCP has to apply for authorisation under article 14 – and the assessment of this authorisation by the regulator is specific to the services it wants to provide – including clearing of certain classes of instrument. So this process should happen first, and only then should the notification to ESMA take place*.
*There is a slight area of doubt at the moment re whether ESMA would use article 89.5 (transitional measures) to get CCPs authorised early, thus moving the whole process of getting contracts cleared forward in comparison to where it might otherwise be. Chief among concerns here is that this would extend backwards the period over which contracts entered into would then, subsequently, have to be (retrospectively) cleared. There are hawks in ESMA (FP, the AMF) who think as so, other who would oppose it.
EMIR introduced two approaches for assessing the eligibility of a class of OTC derivative contracts for mandatory clearing (known as the 'top down' and 'bottom up' processes). The final technical standards do not provide much that is new on the clearing obligation procedure, although following feedback from market participants ESMA has attempted to make the "bottom up" process more transparent by confirming that member state notifications which may trigger potential future clearing obligations will be made available as soon as possible and on ESMA's public register.
Less helpful is ESMA's comment that it will not publicly notify the market of a negative assessment (i.e. where ESMA is not minded to recommend to the Commission that a clearing obligation should apply to a particular class of derivatives). Rather under the bottom up process, market participants will have to keep a close check on ESMA's public register and should assume that ESMA has made a negative assessment in the absence of a public consultation being launched and/or draft technical standards being published within the required 6 month period It is puzzling why ESMA is unwilling to publicise details of a negative assessment at an early stage in the process as it seems likely to create uncertainty for market participants.
What is no CCP is authorised? under the bottom-up approach (article 5.1 EMIR), a contract needs an authorised CCP offering clearing in its class if it is to be deemed subject to mandatory clearing. If there is none offering this service (and authorised to do so), by definition, it can’t be clearable on a mandatory basis. If a CCP that was offering this service withdraws from offering the service, ESMA has the ability to take the contract off the mandatorily clearable list. Under the top-down approach (article 5.3), ESMA can only call for proposals from CCPs to offer clearing for a contract it believes should be clearable – it can’t make the contract clearable if no CCP is providing clearing services for that contract. If the contract is not mandatorily clearable, it can be risk managed OTC (MIFID will address venue, of course).
Collateral/Margin
Process
o Meeting of the international level WG on margin at end of this week in Basel will be important.
o Basel Committee itself meet early December and the report will be published shortly afterwards.
Not clear what types of collateral will be acceptable. Some corporations prefer to be able to provide letters of credit. This seems like the type of thing where there would be much scope for divergence of implementation of the global recommendations, at regional level (or the global conclusions will be vague on this point – compromise).
• Re the second tier banks, the Fed had, as I understood it, proposed that IM be posted one way to SIFIs, so guess the second tier banks would not like that.
Other issues
1. Indirect clearing arrangements : Under EMIR financial and certain non-financial counterparties will be required to clear certain classes of OTC derivatives (yet to be determined by the Commission) through a CCP.
To meet this obligation, counterparties will have to:
become clearing members of a CCP; or
become a client of a clearing member of a CCP, who will act as its clearing broker; or
establish indirect clearing arrangements with a client of a clearing member.
In order to facilitate access to CCPs, ESMA previously proposed that clearing members would be required to offer indirect clearing services; and guarantee the trades of 'indirect clients' for at least 30 days following the failure of a direct client. However, following feedback from market participants who complained that these provisions were 'unworkable', these proposed requirements have been dropped. Indeed, the imposition of the 30-day requirement would have given indirect clients a greater degree of protection than direct clients and would not have been consistent with EMIR which simply required EMSA to ensure that both groups of clients were protected by equivalent safeguards.
ESMA has clarified that clearing members who are willing to provide indirect clearing services must do so on a reasonable commercial basis. Nevertheless, the removal of the mandatory requirement to provide indirect clearing services is likely to mean that some market participants may have difficulty accessing CCPs.
2. Confirmations rules will fall on everyone – NFCs above/below the threshold and second tier banks alike. This contrasts with the US, where the burden of regulations falls on SDs and MSPs, who are required to send acknowledgements (their counterparties are not). Here, both sides of the trades have to do this, confirming by e-means where available – and by the latest 1 March 2013!
Intra-group transactions exemption : The intra-group transactions exemption in EMIR does not apply automatically to transactions within its scope – rather financial and non-financial counterparties that wish to use it must apply to their home state regulator for approval. The final technical standards contain details of the information that counterparties must provide to their home state regulator. ESMA has confirmed that intragroup credit limits need not be disclosed and legal opinions to support the intra-group exemption application will only be required on request from the national regulator.
Counterparties that are exempted must publicly disclose details of the exemption. However, in response to feedback concerning the disclosure of commercially sensitive information, ESMA stresses that any quantitative data that must be disclosed in this respect will be in aggregate and limited and therefore not commercially sensitive. Technical standards that will set out the criteria to assess the applicability of the intragroup exemption are to be developed jointly by the ESAs at a later date (yet to be confirmed by the Commission). 35 35

36. Clearing thresholds for non-financials
For a non financial, below these thresholds, clearing obligation does not apply:
(a) EUR 1 billion in gross notional value for OTC credit or equity derivative contracts;
(b) EUR 3 billion in gross notional value for OTC interest rate, FX and commodity derivative contracts;
(c) EUR 3 billion in gross notional value for OTC foreign exchange derivative contracts;
(d) EUR 3 billion in gross notional value for ‘other’ OTC derivative contracts
Definition of non-financial counterparty –EMIR Article 2, page 58
Offset by hedging transactions which are not included in the gross notional value
Definition of hedging – ESMA RTS Article III.V, para 58-72
'financial counterparty' means an investment firm, a credit institution, an insurance undertaking, an assurance undertaking, a reinsurance undertaking, a UCITS and, where relevant, its management company, an institution for occupational retirement provision or an alternative investment fund managed by AIFMs
A non financial (NFC) is not one of the above
Contracts entered into by non-financial counterparties will be subject to the clearing obligation if the rolling average position of a non-financial counterparty (and its non-financial counterparty group members) over 30 working days exceeds the relevant clearing threshold (excluding certain contracts which are objectively measurable as reducing risks directly related to their commercial or treasury financing activities).
Main concern of NFCs is that breaking one threshold, in one asset class, forces you to clear everything (hedges and non-hedges alike).
Clearing obligation calculation
In the ESMA RTS, ESMA confirms that proxy hedging (e.g. where an instrument to carry out a direct hedge is not available), portfolio hedging and OTC derivative contracts that offset hedging contracts may qualify as 'hedging contracts' for these purposes. Equally, OTC derivatives relating to employee benefits, such as stock options, and OTC derivative contracts which are considered to be 'hedges' under international accounting rules (IFRS) rules may also be treated as hedges for EMIR purposes and thus be excluded for the purposes of the clearing threshold calculation. However, ESMA clarifies that the exemption does not include contracts considered to be 'hedges' solely under local accounting rules.
Intra-group transactions exemption
The intra-group transactions exemption in EMIR does not apply automatically to transactions within its scope – rather financial and non-financial counterparties that wish to use it must apply to their home state regulator for approval. The final technical standards contain details of the information that counterparties must provide to their home state regulator. ESMA has confirmed that intragroup credit limits need not be disclosed and legal opinions to support the intra-group exemption application will only be required on request from the national regulator.
Counterparties that are exempted must publicly disclose details of the exemption. However, in response to feedback concerning the disclosure of commercially sensitive information, ESMA stresses that any quantitative data that must be disclosed in this respect will be in aggregate and limited and therefore not commercially sensitive. Technical standards that will set out the criteria to assess the applicability of the intragroup exemption are to be developed jointly by the ESAs at a later date (yet to be confirmed by the Commission).
Risk Mitigation Techniques
Overview
Both financial counterparties and non-financial counterparties that are subject to the clearing obligation will be required to have procedures in place to measure, monitor and mitigate risk in respect of non-cleared OTC derivatives. The final technical standards contain provisions relating to: (a) the timing of confirmations, (b) reconciliation procedures, (c) portfolio compression, and (d) marking to market/to model. The ESAs are required to produce technical standards on certain other risk mitigation techniques (including the levels and type of collateral and segregation arrangements required and the level of additional capital). A fresh deadline for the submission of these standards is yet to be set by the Commission.
Reconciliation of non-cleared OTC derivative contracts
Financial and non-financial counterparties to an OTC derivative contract are required to agree in writing or in other equivalent electronic means with each of their counterparties the terms on which portfolios shall be reconciled before entering into the OTC derivative contract. In order to identify at an early stage any discrepancy in a material term of the OTC derivative contract, the portfolio reconciliation should be performed on a regular basis as outlined in the Technical Standards.
Portfolio compression
In the final technical standards, ESMA clarifies that portfolio compression is not mandatory but financial and non-financial counterparties with 500 or more OTC derivative contracts outstanding with a counterparty which are not centrally cleared must have procedures to regularly, and at least twice a year, analyse the possibility of conducting a portfolio compression exercise in order to reduce counterparty credit risk. They must ensure they can provide a reasonable and valid explanation to their regulator for concluding that a portfolio compression exercise is not appropriate should they not carry out one.
Marking to market and marking to model
ESMA states that market conditions that prevent marking to market include: (a) when the market is inactive (e.g. when quoted prices are not readily and regularly available) or (b) when the range of reasonable fair values estimates is significant and the probabilities of the various estimates cannot be reasonably assessed. In such circumstances financial counterparties and non-financial counterparties exceeding the clearing threshold must use marking to model with the model complying with stated criteria. The board of the counterparty is responsible for approval of the model even where the model is developed externally. 36 36

37. Contact Information
Europe and Middle East 
Daniel Olajide
Hanna Svensson
Daniela Aulinger
Asia-Pacific
Katherine Delp
Shoko Kitamura
Canada, North, Central and South America. 
John Dimeglio
John Kim
Frank Lupica                     
Global GTR Lead
Andrew Green  
Onboarding
Hotlines:
North America (Option 3, 2, and 1)
Europe and Asia +44 (0) (Option 2 and 2) 26