1. Peculiarities of the OTC derivatives regulation model in the EU
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015
Peculiarities of the OTC derivatives regulation model in the EU
Ing. Mgr. Martin Glajch LL.M.
ING. MGR. MARTIN GLAJCH, LL.M.

2. Introduction European Market Infrastructure Regulation Counterparties
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015
Introduction
European Market Infrastructure Regulation
Counterparties
Obligations
Risk mitigation techniques
Reporting
Clearing
Margining
Local experience in CEE
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015
ING. MGR. MARTIN GLAJCH, LL.M.

3. European Market Infrastructure Regulation (EMIR)
EU regulation No. 648/2012, as amended
on OTC derivatives, central counterparties and trade repositories
Effective as of 16 August 2012
Directly applicable in all EU member states
Regulatory technical standards (RTS)
developed by the European Securities & Markets Authority (ESMA)
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015

4. Counterparties Financial counterparties (FCs)
financial institutions authorised or registered in accordance with EU directives
Non-financial counterparties (NFCs)
all undertakings established in the EU which are not FCs
NFC+ exceed clearing thresholds
NFC- do not exceed clearing thresholds
Counterparties outside the EU = third country entities (TCEs)
may be subject to clearing and risk mitigation obligations
Exempt
EU central banks, public bodies dealing with public debt and BIS
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015

5. Counterparties - TCEs Extra-territoriality Equivalence
contracts with direct, substantial and foreseeable effect within EU
at least one TCE benefits from guarantee from EU FC
two TCEs enter into contract through their branches in EU
contracts without clear business rationale or economic justification
Equivalence
TCEs established in equivalent jurisdiction can adhere to rules of that jurisdiction
Australia, Hong Kong, Japan & Singapore
TCEs established in non-equivalent jurisdictions must ensure EMIR compliance
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015

6. Risk mitigation techniques
Timely confirmations
FCs/NFC+ to confirm contract by T+1 & NFC- to confirm contract by T+2
FCs to report unconfirmed transactions monthly
Daily valuation
FCs and NFC+ to carry out daily mark-to-market or mark-to-model valuations
Portfolio reconciliation
FC/NFC+ daily, weekly or quarterly & NFC- quarterly or annually
Portfolio compression
all counterparties semi-annually
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015

7. Risk mitigation techniques in CEE
Dispute resolution
all counterparties to identify, record, monitor and resolve disputes
FCs to report unresolved disputes to competent authority
Applicable since 15 March 2013 or 15 September 2013
Czech Republic
local master agreement amended to provide for risk mitigation obligations
no local protocol similar to 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol published by ISDA
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015

8. Reporting obligation All counterparties
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015
Reporting obligation
All counterparties
delegation to third party is possible but responsibility retained
All contracts: over-the-counter (OTC) & exchange-traded derivatives (ETD)
common data & counterparty data as well as collateral & valuation data
Applicable since 12 February 2014 and 11 August 2014
Frontloading
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015
ING. MGR. MARTIN GLAJCH, LL.M.

9. Reporting obligation in CEE
Trade repositories (TR): registered in EU or recognised by EU
obligation to report contracts to TR (or to ESMA) by T+1
Practicalities
counterparties should obtain global legal entity identifier (LEI)
register with Local Operating Unit (LOU) or pre-LOU
CEE
no local TR
local pre-LOUs
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015

10. Clearing obligation
Obligation to clear contract through central clearing counterparty (CCP)
only clearing members (CM) & counterparties will become client of CM
FCs/NFC+s & TCEs
NFC required to notify if it exceeds clearing threshold => NFC+
OTC derivative contracts which are subject to clearing obligation
OTC derivative contracts for hedging purposes are not in scope
intra-group (including a TCE) OTC derivative contracts
Margin, segregation & portability
To apply from December 2015, but phase-in until June 2018
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015

11. Clearing obligation in CEE
should it apply to interest rate swaps (IRS) in local currencies?
Poland: KDPW_CCP authorised to clear IRS in Polish Zloty
Czech Republic: no local CCP authorised to clear IRS in Czech crowns
if IRS in local currencies cleared, should business model change?
Notification obligation
Czech Republic & Hungary: intra-group exemption from NFCs’ notification
should local NFC notify local competent authority?
should local NFC become NFC+ on a group basis?
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015

12. Margining obligation
All counterparties except for non-EU NFC-s and sovereigns
Uncleared OTC derivative contracts
Risk management procedures: initial margin (IM) and variation margin (VM)
Margin methods: standardised method or initial margin models
Eligibility criteria & treatment of collateral: concentration limits & haircuts Operational procedures: segregation of IM & no ability to re-use IM
Procedures concerning intra-group OTC derivative contracts
To apply from September 2016, but phase-in until September 2020
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015

13. Margining obligation in CEE
ISDA Working Group on Margining Requirements
new ISDA templates for Credit Support Documents
new Credit Support Annex for regulatory VM and non-regulatory IM
new Credit Support Document for regulatory IM
Custodial agreements (tri-party agreements)
requirement for segregation of IM
New or updated netting opinions may be necessary
Slovakia
ISDA has published no collateral opinion
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015

14. Summary Local implementation in EU Local experience in CEE
EMIR is regulation directly applicable in all EU member states
no local law required to be adopted to implement EMIR
exception: local penalties for infringing EMIR
Local experience in CEE
direct consequences: legal & compliance issues
indirect consequences: business model issues
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015

15. Questions & answers Československá obchodní banka, a. s.
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015
Questions & answers
Československá obchodní banka, a. s.
Ing. Mgr. Martin Glajch LL.M.
Address:
Radlická 333/150
Prague 5
Czech Republic
Telephone:
+ 420 224 116 852
Address:
Vietnamská 8/1125
Prague 6
Czech Republic
Telephone:
 442
International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market
22 October 2015
ING. MGR. MARTIN GLAJCH, LL.M.