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Regulation on OTC derivatives, central counterparties and trade repositories (EMIR)

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05 October 2013

Entry into force of RTS. Following some uncertainty in early February 2013 in respect of whether the European Parliament would object to certain EMIR regulatory technical standards (RTS), the European Parliament finally accepted the six draft RTS and they entered into force on 15 March 2013.

The six RTS relate to:

(i) Trade repositories (including the minimum details of the data to be reported to trade repositories and the data to be published and made available by trade repositories).

(ii) Capital and other requirements for central counterparties (CCPs).

(iii) Risk mitigation techniques for OTC derivatives contracts not cleared by a CCP (other than collateral requirements – as to which see further below), indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue and non-financial counterparties (NFCs).

Upon entry into force, some of the RTS apply immediately (for example, those relating to timely confirmation – pursuant to which financial counterparties (FCs) and NFCs must confirm OTC derivative transactions within certain prescribed time frames and FCs must have procedures in place to report on a monthly basis the number of OTC derivative transactions that have been outstanding for more than five business days – and mark-to-market valuation – pursuant to which FCs and NFC+s are required to value outstanding OTC derivative contracts on a daily basis). However, it is worth noting that the European Commission EMIR FAQs published on 8 February 2013 recognise that it may not be possible to effect timely confirmations immediately and so Member States will be given some flexibility in respect of how this RTS will be applied – at least initially.

The other RTS in respect of risk mitigation (other than collateral requirements) – namely, dispute resolution, portfolio compression and portfolio reconciliation – will enter into force in six months' time and are currently generating some discussion in the market.

ISDA NFC Representation Protocol and Timely Confirmation Amendment Agreement

A number of the key EMIR obligations do not apply to all NFCs in the same way. There is a distinction between (i) an NFC that is subject to the clearing obligation (NFC+), and (ii) an NFC that is not subject to the clearing obligation (NFC-). Consequently, the classification of a counterparty as an NFC+ or NFCis important as it determines the application of certain risk mitigation techniques (including collateral requirements when they come into force) required by EMIR and the application of the clearing obligation when it comes into force.

To facilitate compliance with certain KYC requirements under EMIR, ISDA published the ISDA 2013 EMIR NFC Representation Protocol (the Protocol) and a Timely Confirmation Amendment Agreement (the Amendment Agreement) on 8 March 2013. The Amendment Agreement is a form of agreement to assist with the obligation to provide timely confirmations. Further information can be accessed via the ISDA website.

NFC notifications

ESMA and the FSA have published notification forms for NFCs, who from 15 March 2013 are required to notify ESMA and the relevant competent authority if they have exceeded or no longer exceed the clearing thresholds specified by ESMA. Details can be accessed via the ESMA and FSA web pages.

Structured finance vehicles

There is some uncertainty as to whether structured finance vehicles will be regarded as having exceeded the clearing threshold (ie as an NFC+) and analysis will be required on a case-by-case basis in this regard taking into account the nature of the swaps entered into by such vehicles and, to the extent such entities are consolidated with a wider group on a relevant accounting or regulatory basis, the aggregate relevant swaps position across the non-financial entities within such group. If a vehicle is an NFC+, it may be difficult for such vehicle to comply with certain requirements which would then apply (eg the margin requirements and clearing obligation) without significantly amending current structures.

Key RTS still outstanding

Significantly, two important RTS are still outstanding:

  • Collateral: The consultation and draft technical standards in respect of collateral (risk mitigation techniques for OTC derivatives that are not cleared by a CCP) had been delayed pending the outcome of other consultations, notably the IOSCO/BCBS second consultation on margin requirements for non-centrally cleared derivatives. The IOSCO/ BCBS consultation has now been published and raises some significant concerns for derivatives market participants (see further in Ed Murray's article above). We expect that the associated EMIR consultation and technical standards may be published later this year.
  • Extraterritoriality: Similarly, a separate paper on extraterritorial issues is due to be published in 2013 once discussions on extraterritoriality occurring at an international level have been completed.