EMIR IMPLEMENTATION UPDATE Dana Anagnostou Hubert de Vauplane July 17, 2013
Risk Mitigation – Timely Confirmation ( in effect since March 15 ) Confirmation = documentation of agreement by parties to terms of OTC derivatives contract Also applies when novation, portfolio compression, partial terminations… Negative affirmation allowed, i.e. if agree in advance, can confirm by deeming document final and accepted after a fixed deadline ISDA EMIR Timely Confirmation Amendment Agreement Form available
Risk Mitigation – Timely Confirmation ( in effect since March 15 ) Timeliness: for NFCs, confirmation must occur as soon as possible, : For credit/ interest rate swaps entered into: Before 08/31/2013 5 business days (+1) From 08/31/2013 to 08/31/2014 3 business days (+1) After 08/31/2014 2 business days (+1) For other type of contracts (equities, forex, commodities…): Before 08/31/2013 7 business days (+1) From 08/31/2013 to 08/31/2014 4 business days (+1) After 08/31/2014 2 business days (+1) Transactions concluded after 16h, or with a counterparty in a different time zone not allowing for confirmation by deadline have +1 BD to confirm
Risk Mitigation – Mark-to-Market ( in effect since March 15 ) FCs and NFCs+ must mark-to-market on a daily basis the value of outstanding contracts. Where market conditions prevent marking-to-market, reliable and prudent marking-to-model will be used. Market conditions preventing marking-to-market occur either when: the market is inactive (quoted prices are not readily and regularly available and those prices available do not represent actual and regularly occurring market transactions on an arm’s length basis) or where the range of reasonable fair value estimates is significant and the probabilities of the various estimates cannot be reasonably assessed.
Risk Mitigation – Mark-to-Market ( in effect since March 15 ) If marking-to-model, FCs and NFCs must use a model that: Incorporates all factors counterparties consider in setting a price, including using as much marking-to-market information as possible Is consistent with accepted economic methodologies for pricing financial instruments Is calibrated and tested for validity using prices from any observable current market transactions in the same financial instrument or based on any available observable market data Is validated and monitored independently, by a different division from the division taking the risk Is duly documented and approved by the board of directors at least annually and as frequently as necessary following any material change (such approval can be delegated to a committee)
Risk Mitigation – Portfolio Reconciliation ( in effect as of September 15, 2013 ) FCs and NFCs to a derivative contract are required to agree in writing (or electronically) with each of their counterparties on the arrangements under which portfolio reconciliation will occur. Agreement must be reached before entering into a derivative contract. Portfolio reconciliation must cover the key elements of the transactions (value of the contract, date, maturity, date of the payments, nominal value, currency, underlying, fixed or floating exchange rates…). Portfolio reconciliation can be performed by the counterparties or a qualified third party appointed by a counterparty. The reconciliation must cover key trade terms that identify each particular derivative contract and include, at the least, the daily mark-to-market (or mark-to- model) value attributed to each contract.
Risk Mitigation – Portfolio Reconciliation ( in effect as of September 15, 2013 ) ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol (DRAFT) provides for: Status election: Portfolio Data Sending Entity (PDSE) or Portfolio Data Receiving Entity (PDRE) Choice of methodology: One way delivery method (Portfolio Data providing by PDSE to PDRE who reconciles data with their own records and notifies any discrepancies; agreement assumed if no discrepancy raised within fixed time period) Exchange of data method (both parties are PDSEs, each delivers, reconciles and notifies discrepancies; no assumption of agreement if no discrepancy raised within fixed time period)
Risk Mitigation – Portfolio Reconciliation ( in effect as of September 15, 2013 ) Frequency of Portfolio Reconciliation (based on number of derivatives contracts outstanding between the counterparties) Counterparties Daily Weekly Quarterly Yearly FC and NFC+ 500 Between 499 and 50 or less 51 FC/NFC+ and More than 100 or less NFC- 100
Risk Mitigation – Portfolio Compression ( in effect as of September 15, 2013 ) NFCs with 500 or more uncleared derivatives contracts outstanding with a counterparty must have procedures in place to regularly (at least 2x/year), analyze the possibility to conduct a portfolio compression exercise in order to reduce counterparty credit risk and actually engage in such portfolio compression. Portfolio compression does not prevent offsetting transactions to be concluded with a counterparty different from the counterparty to the initial transaction.
Risk Mitigation – Portfolio Compression ( in effect as of September 15, 2013 ) If an NFC does not conduct a portfolio compression exercise, it must ensure that it is able to provide a reasonable and valid explanation to their local regulator for such failure to do so. Depending on the circumstances, the justification could include that: The portfolio is purely directional and does not allow any offsetting transactions; Multilateral compression services are not available in the relevant markets, for the relevant products, or to the relevant participants and that compression on a bilateral basis would not be feasible; or Compression would materially compromise effectiveness of the firm’s internal risk management or accounting processes.
Risk Mitigation – Dispute Resolution ( in effect as of September 15, 2013 ) Counterparties to a derivatives contract must agree to detailed procedures and processes for: Identifying, recording and monitoring disputes relating to the recognition or valuation of the contract and to the exchange of collateral between the counterparties. These procedures must at least record the length of time the dispute remains outstanding, the counterparty and the disputed amount. The resolution of disputes in a timely manner with a specific process for disputes not resolved within 5 business days.
Risk Mitigation – Dispute Resolution ( in effect as of September 15, 2013 ) FCs must report to their local regulator any disputes between counterparties relating to a derivatives contract, its valuation or the exchange of collateral for an amount or value higher than €15M and outstanding for at least 15 business days. ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol (DRAFT) provides mechanism for dispute resolution identification and escalation.
Contacts Dana Anagnostou Hubert de Vauplane Partner Partner Kramer Levin Naftalis & Frankel LLP Kramer Levin Naftalis & Frankel LLP 47, Avenue Hoche 75008 Paris 47, Avenue Hoche 75008 Paris Tel (33-1) 44 09 46 10 Fax (33-1) 44 09 46 01 Tel (33-1) 44 09 46 80 Fax (33-1) 44 09 46 01 Mob (33-6) 20 07 75 70 Mob (33-6) 80 11 74 82 danagnostou@kramerlevin.com hdevauplane@kramerlevin.com New York Paris Silicon Valley www.kramerlevin.com New York Paris Silicon Valley www.kramerlevin.com
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