Finance and treasury

Did you comply with EMIR on 15 March?

By Olga Cileckova

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:

1. Financial counterparties (FCs) must provide a daily valuation of their OTC positions as part of their internal valuation process; 
2. 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
3. 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.

The complexity of these new obligations, and the short time frame for implementation, mean that many firms were not ready for last Friday’s deadline. What was your experience?

• 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?

Olga Cileckova
Read profile | Contact by email | Tel: 0207 213 1664

Are you ready for EMIR?

By Sally Nicholson

It seemed as though EMIR (European Markets Infrastructure Regulation) was never going to become law, but it’s now reality.  On March 15th 2013 the first of these regulations will apply, with further requirements being phased in over 2013 and 2014. These regulations  will impact all corporates whom have OTC derivatives, even it if it just a plain vanilla FX forward.

Although we anticipate most corporates will qualify as NFCs (Non Financial Counterparties), they will be subject to onerous reporting and record keeping requirements, likewise they will become subject to the requirements around prompt exchange and confirmations.

Does your corporate treasury confirm all deals the following day (both internal and external), and is the information readily available to complete the forty plus information fields for each OTC trade?

Currently there are no exemptions for intercompany derivatives - the same strict record and reporting requirements will apply.  EMIR does allow the reporting requirements to be delegated, but ultimate responsibility remains with the corporate, and do third parties have the visibility to report intercompany trades?

The regulations become more complex if you are treated as financial counterparty. For the avoidance of doubt pension funds will be a financial counterparty (although with a significantly delayed implementation timetable). 

We expect most vanilla corporate treasuries, to be able to meet the thresholds limits (once they have demonstrated the hedging criteria), but where does that leave the commodity trading companies?  Will they be able to demonstrate hedging, or will they need to meet the additional central clearing and collateral requirements?

We know that banks will be forced to clear their OTC’s and this may mean that corporates will be requested to novate derivatives in hedging relationships, changing the coorporate’s counterparty and hence the designated hedging relationship. An amendment to IAS 39 has been proposed to provide an exemption to preserve the hedging relationship, have you reviewed the wording of the draft ED?

Finally will this be a game changer for the OTC market?  Financial institutions will be forced to post collateral, and whom will bear the cost of this?  Will corporate’s move to CSA’s, resulting in better rates but increased liquidity requirements?

Sally Nicholson:
Read profile | Contact by email | Tel: 020 7804 9376

Actively managing commodity risk for competitive advantage

Companies faced with significant exposures to commodities are experiencing unprecedented challenges as a result of volatile and rising commodity prices fuelled by population growth, climate change and a growing prosperity. This in turn is having a direct impact on company performance and many companies who have issued profit warnings over the past few years have found this is partly being driven by rising commodity prices.

Market data indicates that this rise in commodity prices is more structural and will remain going forward, and companies therefore need to consider fundamental changes to their business model. Our attached article discusses why organisations might consider commodity risk as a significant issue and sets out factors to consider when looking to set up a Commodity Risk Management (‘CRM’) function.

View / download Actively managing commodity risk for competitive advantage

For further information please contact Paul Ward on 020 7804 2438 or via email.