10-02-2013, 10:17 AM
EMIR Now Occupies the Treasury Agenda
André Frugte , Orchard Finance - 27 Sep 2013
Over the summer, the European Market Infrastructure Regulation (EMIR) has quickly moved off the legislative drawing board to become a reality, the full impact beginning to dawn after months of relative silence. Financial institutions have bombarded corporate treasurers with amendments to current contracts, new bilateral contracts and adjustments to the International Swaps and Derivatives Association’s (ISDA) guidelines.
At the same time the European Securities and Markets Authority (ESMA) announced two weeks ago that the reporting obligation, originally due to take effect this month, would now be postponed until February 2014 at the earliest. So mixed signals from different sources is leading to much confusion. But what does this all mean for you as a corporate treasurer?
Contractual adjustments
All of these contractual adjustments are necessary from the financial institution’s (FI) viewpoint of view because each is a ‘financial counterparty’ and must comply with the full range of EMIR regulations.
From 15 September 2013 the following resolution came into force for financial counterparties:
“Financial Counterparties must report any disputes between counterparties about an over-the-counter [OTC] derivative contract, its valuation or the exchange of collateral for an amount or a higher value than €15 million and outstanding for at least 15 business days.”
For you as a corporate this implies that your contract needs to be adjusted, as your current contract with your financial counterparty probably does not specify how to act in case of a dispute. This contract probably also provides your company with confidentiality; your financial counterparty is currently not allowed to share transaction information with others.
The new EMIR regulation addresses exactly these points; hence financial counterparties need to confirm/agree the necessary contractual adjustments with you. Without such confirmation, they run the risk of non- compliance with the regulation or breaching the confidentiality regulations of the contract with you.
To make things even more confusing, financial counterparties request (and without offering much explanation) that you confirm the adjustments to your current contract, provide confirmation of your current status (according to the EMIR definition) and offer an additional reporting service, all within one single letter.
1.Bilateral contract: Describes how corporates need to have a dispute resolution in place, how often the derivative portfolio needs to be reconciled and with whom the information may be shared by the financial counterparty.
2.Confirmation of Non-Financial Counterparty [NFC] status: A harmless requirement if you are an end-user and use derivatives only for hedging purposes; you will be a so-called ‘NFC’. Confirmation provides the financial counterparty with the basic information to determine the frequency and scope of services to be offered.
3.Services offered: As a result of being your counterparty in these transactions the financial counterparty has all the information it needs to report the trades which you have conducted to a trade repository (another EMIR novelty). However if you also have intercompany derivatives – for example foreign exchange (FX) forwards) you still need to report these transactions yourself!
In the same letter the financial counterparty refers to an International Swaps and Derivatives (ISDA) contract, which deals with the same items but in a standardised manner. More importantly, if you adhere to this ISDA contract, it will be binding for all financial counterparties included under it (assuming they all adhere to ISDA rules), thus implying that you only have to monitor a single contract.
Postponement of reporting date
As readers might recall, initially ESMA intended for the EMIR reporting obligation to be introduced in August 2012. This deadline proved overly ambitious, as technical standards still needed to be designed at the time and authorised trade repositories were (and still are) not lacking. So even if you want to comply to the reporting requirement, at present derivative transactions cannot be reported because no trade repositories have yet been approved. Furthermore legal entity identifiers (LEIs) - a unique counterparty identifier needed for proper reporting - cannot yet be requested with the local chamber of commerce.
ESMA’s intention is to approve multiple trade repositories in one fell swoop, thus avoiding the first mover(s) gaining a temporary monopoly. That implies that for as long as there continue to be no approved trade repositories, ESMA will have to keep putting off the introduction of the reporting obligation. Earlier this month ESMA admitted that it does not expect to approve and register trade repositories before mid-November 2013.
Assuming that this does actually happen in November, you will have 90 days to choose and contract a trade repository because once the first have been approved and registered corporates will have to start reporting all their derivative trades. It might come as no surprise to learn that a virtual queue is expected to build up during this 90-day period. Corporates need to prepare themselves, get familiar with the reporting standards, know the implications for their internal (reporting) processes and get acquainted with what trade repositories have to offer.
Conclusion
The EMIR regulation is quickly becoming a reality, even if the foundations on which it will be built are still under development. For the first time, corporates must confront the implications of EMIR through the contractual adjustment presented by their financial counterparty. A first small step maybe, but bigger steps will follow shortly.
André Frugte , Orchard Finance - 27 Sep 2013
Over the summer, the European Market Infrastructure Regulation (EMIR) has quickly moved off the legislative drawing board to become a reality, the full impact beginning to dawn after months of relative silence. Financial institutions have bombarded corporate treasurers with amendments to current contracts, new bilateral contracts and adjustments to the International Swaps and Derivatives Association’s (ISDA) guidelines.
At the same time the European Securities and Markets Authority (ESMA) announced two weeks ago that the reporting obligation, originally due to take effect this month, would now be postponed until February 2014 at the earliest. So mixed signals from different sources is leading to much confusion. But what does this all mean for you as a corporate treasurer?
Contractual adjustments
All of these contractual adjustments are necessary from the financial institution’s (FI) viewpoint of view because each is a ‘financial counterparty’ and must comply with the full range of EMIR regulations.
From 15 September 2013 the following resolution came into force for financial counterparties:
“Financial Counterparties must report any disputes between counterparties about an over-the-counter [OTC] derivative contract, its valuation or the exchange of collateral for an amount or a higher value than €15 million and outstanding for at least 15 business days.”
For you as a corporate this implies that your contract needs to be adjusted, as your current contract with your financial counterparty probably does not specify how to act in case of a dispute. This contract probably also provides your company with confidentiality; your financial counterparty is currently not allowed to share transaction information with others.
The new EMIR regulation addresses exactly these points; hence financial counterparties need to confirm/agree the necessary contractual adjustments with you. Without such confirmation, they run the risk of non- compliance with the regulation or breaching the confidentiality regulations of the contract with you.
To make things even more confusing, financial counterparties request (and without offering much explanation) that you confirm the adjustments to your current contract, provide confirmation of your current status (according to the EMIR definition) and offer an additional reporting service, all within one single letter.
1.Bilateral contract: Describes how corporates need to have a dispute resolution in place, how often the derivative portfolio needs to be reconciled and with whom the information may be shared by the financial counterparty.
2.Confirmation of Non-Financial Counterparty [NFC] status: A harmless requirement if you are an end-user and use derivatives only for hedging purposes; you will be a so-called ‘NFC’. Confirmation provides the financial counterparty with the basic information to determine the frequency and scope of services to be offered.
3.Services offered: As a result of being your counterparty in these transactions the financial counterparty has all the information it needs to report the trades which you have conducted to a trade repository (another EMIR novelty). However if you also have intercompany derivatives – for example foreign exchange (FX) forwards) you still need to report these transactions yourself!
In the same letter the financial counterparty refers to an International Swaps and Derivatives (ISDA) contract, which deals with the same items but in a standardised manner. More importantly, if you adhere to this ISDA contract, it will be binding for all financial counterparties included under it (assuming they all adhere to ISDA rules), thus implying that you only have to monitor a single contract.
Postponement of reporting date
As readers might recall, initially ESMA intended for the EMIR reporting obligation to be introduced in August 2012. This deadline proved overly ambitious, as technical standards still needed to be designed at the time and authorised trade repositories were (and still are) not lacking. So even if you want to comply to the reporting requirement, at present derivative transactions cannot be reported because no trade repositories have yet been approved. Furthermore legal entity identifiers (LEIs) - a unique counterparty identifier needed for proper reporting - cannot yet be requested with the local chamber of commerce.
ESMA’s intention is to approve multiple trade repositories in one fell swoop, thus avoiding the first mover(s) gaining a temporary monopoly. That implies that for as long as there continue to be no approved trade repositories, ESMA will have to keep putting off the introduction of the reporting obligation. Earlier this month ESMA admitted that it does not expect to approve and register trade repositories before mid-November 2013.
Assuming that this does actually happen in November, you will have 90 days to choose and contract a trade repository because once the first have been approved and registered corporates will have to start reporting all their derivative trades. It might come as no surprise to learn that a virtual queue is expected to build up during this 90-day period. Corporates need to prepare themselves, get familiar with the reporting standards, know the implications for their internal (reporting) processes and get acquainted with what trade repositories have to offer.
Conclusion
The EMIR regulation is quickly becoming a reality, even if the foundations on which it will be built are still under development. For the first time, corporates must confront the implications of EMIR through the contractual adjustment presented by their financial counterparty. A first small step maybe, but bigger steps will follow shortly.