Commission Delegation Regulation (EU) No 149/2013 of 19 December 2012 (“EMIR”) which came into force on 15 March 2013 set out technical standards (the “Technical Standards”) on a number of derivative related obligations, including the obligation to utilise prescribed risk mitigation techniques.
EMIR applies to all entities entering into OTC derivatives including banks, funds, insurers and even unregulated entities.
The risk mitigation techniques can be classified into the following categories:
- Timely confirmation
- Portfolio Reconciliation
- Portfolio compression
- Dispute Resolution.
The obligation to confirm trades as soon as possible has been in force since the 15 March 2013. The remaining obligations come into force on the 15 September 2013. We have set out below a short explanation on each of the categories shortly coming into force.
Financial and non-financial counterparties to an OTC derivative contract shall, before entering into a derivative contract, agree in writing or other equivalent electronic means the arrangements under which portfolio shall be reconciled.
The reconciliation requirements vary between Financial counterparties (FC), Non-Financial Counterparties which exceed the clearing threshold (NFC+) and Non-Financial Counterparties which are below the clearing threshold (NFC-).
FCs and NFCs with 500 or more OTC derivative contracts outstanding with a counterparty shall have in place procedures to regularly (and at least bi-annually) analyse the possibility to conduct a portfolio compression exercise in order to reduce their counterparty credit risk and engage in such a portfolio compression exercise.
FCs and NFCs have an obligation to agree detailed procedures and processes in relation to:
- the identification, recording and monitoring of disputes relating to the recognition or valuation of the contract and to the exchange of collateral between counterparties. The procedures are required to record the length of time for which the dispute remains outstanding, the identity of the counterparty and the disputed amount.
- resolve dispute in a timely manner (with a specific process for those disputes that are not resolved within five business days.
If you require any assistance or advice in relation to your obligations under EMIR please get in touch with Dr Conrad Portanier (firstname.lastname@example.org) and Dr Leonard Bonello (email@example.com).