A new dawn for post-trade derivatives markets: are you prepared?
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Global Regulatory Reform A new dawn for post-trade derivatives markets: are you prepared? European Market Infrastructure Regulation (EMIR) Contacts For more information on how we can help, please contact one of the following team members. John Liver +44 20 7951 0843 [email protected] Kieran Mullaley +44 20 7951 3216 [email protected] Anthony Kirby +44 20 7951 9729 [email protected] Abdullah Hiyatt +44 20 7951 8953 [email protected] European Market Infrastructure Regulation How EY can help We have a range of services and tools to assist firms with all aspects of OTC derivatives reform. We are able to leverage our extensive compliance and implementation experience across a wide spectrum of impacted firms in areas such as: • Business and operating model impact • Review, design and implementation of new client onboarding models, including client classification, ISDA protocol and documentation changes • Enhancements to processing and infrastructure for reporting and confirmations • Collateral process enhancement, margin account structure, risk and liquidity management • Risk, capital and IM/VM model calculation and validation • Analysis of CCP models, direct versus indirect clearing and clearing broker selection • Clearing and reporting architecture, design and implementation • Data architecture changes, e.g., LEI and UTI • Rule tracking and compliance assistance For more information on global regulatory reform please visit www.ey.com/financialreform. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2013 EYGM Limited. All Rights Reserved. EYG No. FP0012 1369707.indd (UK) 07/13. Artwork by Creative Services Group Design. ED None In line with EY’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com
Transcript of A new dawn for post-trade derivatives markets: are you prepared?
Global Regulatory Reform
A new dawn for post-trade derivatives markets: are you prepared?European Market Infrastructure Regulation (EMIR)
ContactsFor more information on how we can help, please contact one of the following team members.
John Liver +44 20 7951 0843 [email protected]
Kieran Mullaley +44 20 7951 3216 [email protected]
Anthony Kirby +44 20 7951 9729 [email protected]
Abdullah Hiyatt +44 20 7951 8953 [email protected]
European Market Infrastructure Regulation
How EY can help
We have a range of services and tools to assist firms with all aspects of OTC derivatives reform. We are able to leverage our extensive compliance and implementation experience across a wide spectrum of impacted firms in areas such as:
• Business and operating model impact • Review, design and implementation of new client onboarding models, including client
classification, ISDA protocol and documentation changes • Enhancements to processing and infrastructure for reporting and confirmations • Collateral process enhancement, margin account structure, risk and liquidity management • Risk, capital and IM/VM model calculation and validation • Analysis of CCP models, direct versus indirect clearing and clearing broker selection • Clearing and reporting architecture, design and implementation • Data architecture changes, e.g., LEI and UTI • Rule tracking and compliance assistance
For more information on global regulatory reform please visit www.ey.com/financialreform.
EY | Assurance | Tax | Transactions | Advisory
About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.
© 2013 EYGM Limited. All Rights Reserved.
EYG No. FP0012
1369707.indd (UK) 07/13. Artwork by Creative Services Group Design.
ED None
In line with EY’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content.
This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
ey.com
Overview
European Market Infrastructure Regulation
Global regulatory reforms are fundamentally reshaping the OTC derivatives industry
EMIR entered into force on 16 August 2012, and the majority of associated Regulatory Technical Standards (RTS) took effect on 15 March 2013.
The key aims of EMIR are to minimize systemic counterparty credit risk, reduce operational risk, increase transparency, and improve stability and robustness of the OTC derivatives market. It will require substantial implementation efforts across the industry over the next two years.
Despite being aligned to common G20 objectives, EMIR’s scope and impact differs from Dodd-Frank in a number of key areas. Even organizations with existing Dodd-Frank programs will have to adapt accordingly.
EMIR implements EU rules for the central clearing, reporting and risk mitigation of over-the-counter (OTC) derivatives trades in line with G20 objectives. The regulation affects all firms trading derivatives in the EU.
Key actionsCounterparty classification • Firms require representation from their counterparties to determine whether they are
financial counterparties (FCs) or non-financial counterparties (NFCs) and above or below the clearing threshold.
• Changes to legal documentation and the onboarding process are required. • NFCs must have a process in place for threshold calculation.
Trade reporting and trade repositories (TRs) • TRs must be registered and ESMA approved. • Reporting obligations date back to August 2012 – large volumes of data must be stored
and uploaded to TRs. • Delegated reporting services should be evaluated with an assessment of the challenges. • All exchange-traded and OTC derivatives contracts, exposures and modifications must be
reported to a TR without duplication.
Non-cleared trade risk mitigation • Firms must enhance and document procedures for timely confirmations, dispute
resolution, portfolio reconciliation and compression. • They should also ensure compliance with daily mark-to-market (or model) requirements.
FCs EU banks, broker dealers, funds, insurance firms and pension funds that transact derivatives
• Subject to clearing, reporting and risk mitigation obligations.
• Pension funds benefit from a three-year transitional relief from clearing obligation.
NFCs Other EU firms that utilize derivatives, e.g., commodities firms and corporate treasury
• Clearing obligation applies to those exceeding a threshold by asset class (excluding hedging of risks relating to commercial or treasury financing activity) and may be phased in.
• Reporting and risk mitigation requirements still apply, though the latter varies in some areas according to the clearing threshold determination.
Financial market infrastructure
CCPs • Subject to new authorization, oversight and risk management requirements.
• CCPs need to support individual and omnibus client segregation and portability.
TRs • Subject to registration and supervision from ESMA.
Trading venues and CSDs • These are indirectly impacted by the measures.
Non-EU firms Financial, non-financial and market infrastructure firms outside Europe
• OTC derivative contracts between an EU firm and a non-EU firm are impacted by clearing and potential risk mitigation requirements.
• OTC derivative contracts between two non-EU firms may also come in the scope, depending on the effect within Europe.
• Non-EU CCPs and TRs need to be recognized by ESMA to provide services in Europe.
Who is impacted
Collateral and margin • Types of acceptable, fungible collateral will need to be specified for each CCP. • Access to quality collateral will become critical for buy-and-sell firms alike. • Timely, accurate and appropriately segregated exchanges of collateral for non-cleared
OTC contracts are required. • Changes to margin models and processes must be implemented.
Clearing and CCPs • The economics of the derivatives business will change given the need to factor clearing
and collateral into pricing. • Firms must decide whether to select clearing broker(s), utilize indirect clearing or
self-clear. • CCPs must be authorized or recognized in the EU – a new registration process is required. • CCP, clearing broker and indirect clearer accounts must support omnibus and individual
client segregation and portability, even for the existing exchange-traded products. • New requirements for CCP capital, margin, default waterfall and model review must be
implemented.
