Setting the EMIR scene - Laurent Collet, Deloitte

Report
Setting the EMIR scene
ABBL conference
November, 2014
Reporting to an authorised TR
TR application begins
2 Source: EMIR, Deloitte Analysis
07 November 2013
4 TRs approved by ESMA:
• Regis TR
• DTCC
• Unavista
• KDPW
28 November 2013
2 TRs approved by ESMA:
• ICE TVEL
• CME
05/14
Reporting of all OTC
and ETD transactions
08/14
Daily collateral and
valuation reporting
Last day for back
loading all the contracts
still open on starting
reporting date (i.e. 12
Feb)
© 2014 Deloitte Tax & Consulting
Daily reporting
02/14
Back loading
(1st waiver)
11/13
Reporting obligation
starts
09/13
From 15 September 2013, all
counterparties dealing with noncentrally cleared transactions shall:
• reconcile the outstanding derivative
positions
• resolve any dispute coming from
non reconciled positions
• perform a compression exercise
TR authorization
03/13
Portfolio reconciliation, portfolio
compression and dispute resolution
From 15 March 2013, all
counterparties dealing with
non-centrally cleared
transactions shall:
• timely confirm the deals
• perform a daily valuation of
the contracts
Timely confirmation
and marking to market
Risk mitigation for non-cleared trades
Following the introduction of EMIR in August 2012, two
requirements came into force and have been implemented
As a result of this reform the cost of dealing with derivatives
has increased making OTC derivative transactions more
expensive
Reporting & other
compliance costs
+
Margin requirements
+
Regulatory capital
charge
Incremental cost arising from
the implementation of:
 Reporting requirement
 Risk mitigation
requirements.
According to Deloitte analysis based on “ESMA Impact Assessment of EMIR
implementing measures”, in total we estimate the regulatory and other compliance cost to
be about EUR 0.50 per EUR 1 mio of notional.
Source: EMIR, Deloitte Analysis
Risk Mitigation Techniques, except for margin, have
been implemented quite easily
Requirements
Implementation
status
Implementation actions
For OTC derivative transactions entered into by FCs, NFCs
(regardless NFC+ or –) that are not centrally cleared, specific
risk management provisions have been introduced to mitigate
the exposure to operational and counterparty credit risk:
• Timely confirmation
• Portfolio reconciliation
• Dispute resolution
• Portfolio compression
• Daily valuation
• Margin (estimated starting date: Q3 2015)
These requirements will, as well, indirectly impact the
Timely confirmation
• Apply the negative confirmation principle
• Electronic solution, which supports confirmation,
affirmation and matching processes
Portfolio reconciliation and dispute resolution
• Adhere to the ISDA 2013 EMIR Portfolio Reconciliation,
Dispute Resolution and Disclosure Protocol – amending the
master agreements relating to OTC derivatives (ISDA
Master Agreement). This required the definition of the role
covered in the process: portfolio data receiving entity or
sending entity;
• Alternatively, execute the bilateral agreement in
circumstances where the counterparties do not wish to
adhere to the ISDA PR/DR Protocol
• Operational process:
• Automated solution, like triResolve
• Manual bilateral reconciliation, exchanging the file
between the counterparties
counterparties established in a non-EU/EEA country (i.e. third
country entities).
FSA started
compliance
review
Source: EMIR, Deloitte Analysis
Daily valuation
• Verification that all OTC derivatives are daily valuated
• In case of market conditions that prevent marking-tomarket, implementation of marking-to-model
In all the cases a new or enhanced processes have been
implemented, with required a proper documentation and
sound description into the respective procedures.
EMIR Reporting: the first complete practical experience
from a reporting point of view…
Implementation
status
Requirements
Challenges & Implementation actions
• Responsibility falls on both counterparties
Third Country Entities are indirectly impacted to the extent they
trade with entities established in the EU who are directly
impacted by EMIR.
• Adhere to the ISDA 2013 Reporting Protocol or execute
a bilateral consent addressing disclosure limitations of the
relevant information
• Delegation of the reporting to a third party or other
counterparty is possible
• Timing: by the end of the day following the execution, the
contract and all its characteristics are reported;
• Daily reporting by FCs and NFC+s:
• Fields on the contract valuation (at position level), as
maintained and valued by the CCP;
• Changes in market-to-market or market-to-model valuations
on reported bilateral transactions;
• Information on collateral to be reported on a portfolio or on a
single transaction basis.
• 85 fields must be reported to the TR
• Record keeping following termination of the contract
• Counterparty ID is provided by the Legal Entity Identifier (LEI)
and transaction ID is provided by the UTI; each counterparty
(whether EU/EEA or non EU/EEA domiciled) to a derivatives
contract, other than natural persons, must obtain an LEI.
Source: EMIR, Deloitte Analysis
• Definition of the reporting model
• Delegation is contemplated as model and it has been
chosen by several players, especially in case of small
volume of derivatives; in this case contract shall be put
in place between the delegating and the delegated
entity (e.g. ISDA/FOA EMIR reporting Delegation
Agreement)
• Data gathering from different systems and validation of
the common data with the other counterparty
• Data mapping according to ESMA data fields
• New data element:
• LEI: a pre-legal entity identifier can be issued by any of
the endorsed pre-local operating units (LOU) of the
global legal entity identifier system (GLEIS). As of today
there are 21 pre-LOU in operations (e.g. in Luxembourg
LuxCSD)
• UTI and its hierarchy for generating it
• Reporting in place on a best effort basis
• TRs are reaching a better stability
… and the reporting journey is still ongoing and more
challenges are coming…
Inter-TR Reconciliation & Data quality
• Data should be reconciled between TRs if
counterparties report to different TRs
• TRs should apply validation rules to ensure that
reporting is performed according to the EMIR
regime
• TRs check the LEIs valid UTIs validity before submit the
trades to Inter-TR Reconciliation
• Implement the arrangements to respect the “validation
rules”
• TRs to check the accuracy of data
Changes in the reporting
Publication of a Consultation Paper by
ESMA, aiming at
• addressing shortcomings evidenced during
the practical reporting;
• introducing improvements to better fulfil the
reporting objectives;
• providing clarification on some data fields
and/or their description
The principal proposed changes:
• Introduction of new fields: from 59 to 74 fields globally
• 15 fields will be amended (e.g. format of the information,
type of code to report, etc.)
• UTI: introduction of a clear rule in the absence of
agreement between the 2 parties
• Collateral: more information to report such as IM, VM,
respectively the posted and received amount and the
currency
• Action type: introduction of 2 specific action types for
“correction” and “position component”
• Clear indication of position or trade report
• Clarifications in relation to MtM methods and meaning of
“notional”
Scope
• FX financial instruments (e.g. FX
forward with a settlement date up to 7
days and FX forwards concluded for
commercial purposes: in or out?
Source: EMIR, Deloitte Analysis
• Market Consultation (open until 09 May 2014) asked by
EC
• For the moment, the majority of counterparties are
reporting to TRs the FX transactions
In addition, new collateral requirements are approaching…
Buy-side
Account
segregation
framework
Eligibility &
Haircuts
Custodian bank
• Accurate, timely, and
appropriately segregation
of exchanged collateral
• Adjust its framework offering
both ways to match clients
needs and CCP requirements
• Set up individual
segregation or omnibus
account
• Introduce control
mechanisms aiming at:
• Have enough high liquidity to
exchange collateral (particularly
during a period of financial
stress)
• Apply risk-sensitive haircuts
models
Re-use &
re-hypothecation
• IM: Restriction in the reuse, re-pledge and rehypothecation;
• VM: possible for cash and
non-cash collateral
Protection
mechanism
• Dispute mechanism to
timely regulate any
discrepancy of collateral
amount to be exchanged
• reconcile the collateral
position deposited in the
respective account
• verify that the placed and
received collateral is in line
with the eligibility criteria
(from the CCP or with the
other counterpart)
Clearing Members/ CCP
• Propose to clients
account structures:
omnibus or individual
segregations.
• CMs distinguish their own
assets in separate
accounts at the CCP from
the clients assets
• Define list of eligible
collateral and methods
to calculate collateral
requirements and apply
haircuts
• verify the accuracy of the
haircuts application,
especially in case of bilateral
exchanges
Default waterfall:
• Received collateral;
• Defaulter’s default funds;
• CCP’s own capital;
• Default fund of nondefaulting CMs
…which will bring to a re-thinking of your collateral
management operating model
1
2
Collateral Organisation
Collateral Operations
• Manage both cleared and collateral process
• Connectivity to market infrastructure (T2S /
CSD)
• Selection of brokers
• Daily valuation and reporting
• Margin requirements
• Define strategic collateral model (including products
strategy)
• Assess collateral services solutions
• Evaluate financial impacts
3
Collateral
Management
Collateral needs
• Anticipate and manage liquidity needs
• Collateral optimization
• Collateral transformation
4
Collateral Safety
• Review depositary bank responsibility and
compliance
• Set up services level agreements and segregation
of accounts
• Rules on collateral eligibility and haircuts
calculation
• Limits on re-use/ re-hypothecation
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9
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