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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?