EMIR


What and why is EMIR for?

Definition

  • European Market Infrastructure Regulation (EMIR) is one of the first major EU regulatory response to the 2008 crisis, in line with G20 requirements.
  • The regulation aims to reshape the whole OTC Derivatives market and make it more transparent and secured through a set of dedicated requirements. EMIR contributes as well to the rise, empowerment and reinforcement of market infrastructures such as Trade Repositories and Central Counterparties.
  • EMIR is in force since August 2012, and the first Risk Mitigation Techniques entered into force on 15 March 2013. Yet, important regulatory provisions, including margin requirements and clearing obligations, are phased-in and major changes are not yet all applied.
  • Furthermore, the regulation is scalable:
    • New delegated acts could be issued to amend or complete the framework
    • Current review by European Commission in the frame of the regulatory fitness and performance program (REFIT) which aims to reduce burdens for smallest financial and non-financial counterparties
  • EMIR is part of a global framework along with MAR, CSDR, SFTR and MIFIR which are bringing deep transformation on European trade and post-trade environment.

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Characteristics

What is EMIR all about?

  • Reduction of systemic risk:
    • Central clearing of standardised OTC Derivatives contracts including major Interest Rate Swaps in G4 currencies, and Credit Default Swaps which are mandatory tradable under MIFIR
    • A set of Risk Mitigation Techniques for Derivatives contracts that are not centrally cleared, including both initial and variation margin requirements and potential appropriate and proportionate amount of capital to manage the risk not covered by the margins.
  • Transparency: Both OTC Derivatives and Exchange-Traded Derivatives shall be reported to a Trade Repository in order to be monitored by the European regulators.
  • Empowering the Central Counterparties by providing a frame on prudential, governance and operational dimensions in order to face the risk related to mandatory clearing and to provide different clearing models.
  • Ensuring an effective transparency by providing business requirements for Trade Repositories aiming to perform checks on the data collected and revert to their client regarding the lack of relevance or accuracy.

Why is EMIR required?

Purposes

  • Regulate the post-trade processing of OTC derivatives
  • Set operational and governance standards for CCPs and TRs

Goals

  • Reducing counterparty risks & operational risks ⇒ Central Counterparties
  • Increasing transparency ⇒ Trade Repositories

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Latest update

19 December 2017: The European Supervisory Authorities issued an amending draft RTS related to the margining of physically settled FX forwards

The European Supervisory Authorities (ESAs) issued an amended draft RTS aiming to soften the obligation of variation margins on physically settled FX Forward contracts, where at least one of the counterparties is a non-institution firm (e.g. investment fund), as defined by the Capital Requirement Regulation n°575/2013.

The text is being submitted to the European Commission and is due to enter into application after 3 January 2018, allowing National Competent Authorities to define on a risk based basis the margin requirements for such contracts in the meantime.

Please refer to our latest flash news for further information.

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Key challenges and opportunities

The new regulation brings challenges, opportunities and risks to the OTC derivative business and their market participants.

Challenges

Asset managers*

  • Review of investment policies to comply with collateral requirements
  • Impact on portfolio performance to comply with collateral requirements (eligibility)
  • Segregation of assets
  • Review of risk management and dispute process
  • Review of contractual agreements (e.g. clearing broker, collateral manager, custodian bank)
  • Additional IT investments
  • Necessity to improve the efficiency of OTC and collateral related processes

Securities services (custody and FA)*

  • Review and update operational processes
  • Additional IT investments
  • Additional interfaces for collateral management
  • Additional interfaces for reconciliation

Banks**

  • Assess if OTC trading is in scope of execution for Private & Retail clients
  • Review of portfolios' investment policies to comply with collateral requirements
  • Impact on portfolios' performance to comply with collateral requirements (eligibility)
  • Segregation of assets
  • Review of risk management and dispute process
  • Review of contractual agreements (e.g. clearing broker, collateral manager)
  • Additional IT investments

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Opportunities

Asset managers*

  • Reduction of counterparty risk
  • Increased efficiency of derivative clearing
  • Increased efficiency of collateral settlement through more standardised processes

Securities services (custody and FA)*

  • Collateral management
  • Data collection and reporting
  • Management of dispute process
  • Monitoring of the value chain actors

Banks**

  • Reduction of counterparty risk
  • Increased efficiency of derivative clearing
  • Increased efficiency of collateral settlement through more standardised processes
  • Additional value added services

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Risks

Asset managers*

  • Entry and ongoing costs not justified in case of small OTC business (#contracts, volumes)
  • Possible difficulties in providing eligible collateral due to funds features and setup

Securities services (custody and FA)*

  • Potential high cost burden
  • Increased organisational effort

Banks**

  • Entry and ongoing costs not justified in case of small OTC business
  • (Corporate banking) Loss of revenue due to the shrink of volumes

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*If the scope of EMIR is applicable to the business carried out by the company

**e.g. Private and Retail execution; Investment, Corporate Banking, Proprietary trading
 


How can PwC help you?

PwC, with a team of over ten specialists focusing on regulatory and operational matters, has the expertise and the knowledge to help you ensure that your firm is operationally ready to meet EMIR requirements.

Health-check

We perform health-check in order to assess your compliance with EMIR regulatory provision and issue remediation plans identifying quick wins and Working plan with estimated effort to close gaps identified.

Reporting

  • Identification of the current “Reporting Operating Model” to system and processes enabling to generate the report to be uploaded to the TR
  • Analysis of reporting data quality produced and rating according to 6 criteria (Accuracy, Completeness, Relevance, Consistency, Reliability, Accessibility)
  • Analysis of major issues regularly met with the Trade Repository (related to Not-acknowledgment or no reconciliation)

Documentation and contract

  • Review and analysis of existing documentation
    • Operational procedures
    • Governance
  • Review and analysis of contractual framework suitability with EMIR (Delegation contract, Credit Supports, Investment management agreements, collateral management agreements, etc)

Operating model

Assessment on how the existing operating model can answer to EMIR operational requirements from a front-to-back perspective (including but not limited to (i) trade booking and capture (From MTF, OTF, or bilateral), (ii) collateral management capabilities for bilateral and CCP margining, (iii) clearing operating scheme, as well as (iv) account structure model through the custody chain.

  • Identification, mapping and analysis of existing model implemented (system, processes, procedures, governance)
  • Identification and analysis of the monitoring of delegation where relevant
  • Identification of operational risks and related gaps with the regulation

Contact us

Olivier Carré

Partner

Tel: +352 49 48 48 4174

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