EMIR fulfils several of the European Union’s (EU) G20 commitments to reform the global $630trillion over-the-counter (OTC) derivative markets. The reforms are designed to reduce systemic risk and bring more transparency to both OTC and listed derivatives markets. These regulations will impact all corporates whom have OTC derivatives, even it if is just a plain vanilla FX forward. Most corporates anticipate they will be exempt from some of the requirements as they use derivatives for hedging their financial risks only. However, all entities will be subject to onerous reporting and record keeping requirements and increased risk management processes around prompt exchange and confirmations.
On 15 March 2013 the first EMIR compliance deadline came into force. As a result:
- Financial counterparties (FCs) must provide a daily valuation of their OTC positions as part of their internal valuation process;
- All firms, including non-financial counterparties (NFCs) must provide timely bilateral confirmation of OTC derivative trades as part of their internal confirmation process, including confirmation for internal derivatives; and
- In addition, the FSA set a UK specific deadline for this date. The FSA expected UK based NFCs to notify the regulator if their non-hedge trading activity exceeded the EMIR thresholds, thereby obliging them to comply with full FC EMIR requirements once these come into force in the near future.
Further EMIR requirements are expected to come into force over the next twelve months. In particular:
- An obligation for all firms (FC and NFC) to report derivative transactions to the regulator or to the newly established trade repositories is likely to apply from July 2013; and
- FCs, together with NFCs exceeding the thresholds, will be required to centrally clear many OTC trades from Q1 2014.
- Did you meet the deadline?
- Were you clear on what and to whom to report?
- How did you collect the data to assess if you exceed the EMIR thresholds and how does the inclusion of the intragroup derivatives impact the assessment?
- Are your controls, processes and systems ready to comply with the prompt confirmation and reporting process?
- Are your controls, processes and systems ready to comply with the central clearing requirement, should you be a NFC above the hedging threshold?
- Have you seen changes in derivative pricing reflecting the increased banking costs?
- Will you be able to demonstrate all your derivatives are for hedging purposes?
Are you ready for the next deadlines?