Riccardo Rossi, Overview of EMIR

Short overview and history of EMIR Workshop EMIR and the new challenges for commodity risk management

13th December 2012, Düsseldorf

Riccardo Rossi – Regulatory Affairs

EMIR, an history of more than four years

Short overview of EMIR requirements

Open issues

The timeline


Agenda

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3

An history of more than four years

2013 2009 2011 2010 2012

The financial crisis

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“All standardized OTC derivative contracts should be traded on exchanges or

electronic trading platforms, where appropriate, and cleared through central

counterparties by end-2012 at the latest. OTC derivative contracts should be

reported to trade repositories. Non-centrally cleared contracts should be subject

to higher capital requirements.

“OTC derivative contracts should be reported to trade repositories”

“Non-centrally cleared contracts should be subject to higher capital

requirements”

G20 – Pittsburgh

2013 2009 2011 2010 2012

The G20 Agreement


5

2013 2009 2011 2010 2012

Commission proposal for a regulation on OTC

derivatives, central Counterparties and trade

repositories [15 Sept 2010]

Mandatory clearing for 'standardised OTC

derivatives‘, including systemic relevant non-

financial counterparties

Risk mitigation techniques and margining

for non-cleared OTC derivatives

Harmonised framework for CCPs: licensing,

margin calculation and collateral posting,…

Trade Repositories and reporting of

derivative transactions


6

2013 2009 2011 2010 2012

The political debate has taken place

throughout 2011 and part of 2012

EMIR finally approved on 4 July 2012, entered

into force on 16 August 2012

ESMA has published

Discussion Paper in February 2012

Consultation on draft RTS in June 2012

Final Report on draft RTS in Sept 2012

ESAs published joint DP on RMTs

IOSCO BCBS published consultative

document


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Open issues

The timeline


Agenda

7

OTC derivatives

mandatory

clearing

CCPs

framework

Reporting of

derivative

transactions

Risk mitigation

techniques

Clearing threshold

approach for non-

financials

Exclusion of ‘risk-

reducing’ OTC

derivatives

Intragroup exemption

Reporting to Trade Repositories of

all transactions in derivatives

Timely confirmation

Dispute resolution

Portfolio

reconciliation

Portfolio

compression

Collateralization

Mark-to-market

Margin calculation

Default Fund

Default Waterfall

Collateral accepted

EMIR at a glance

The clearing obligation

‘Eligible OTC derivatives’: bottom up & top down

B-up: CA authorise CCP CA notifies ESMA ESMA develop

RTS (6months, including consultation) RTS submitted to the

Commission [class/date/maturity] Commission adopts RTS if

no phase-in, the clearing obligation takes effect as of the day of

notification.

T-down: ESMA initiative

ESMA to establish, maintain and keep up to date the

public register with eligible contracts

The clearing obligation procedure may take up to one

year: at the earliest the clearing obligation will be

effective in H2.2013

NFCs and the clearing threshold approach

The calculation shall take into account derivatives

concluded by all NFCs within the same group

To be accounted against the threshold OTC derivatives

‘which are not Objectively Measurable As Reducing

Risks directly relating to the commercial activity or

treasury financing activity of the NFC or of that group’

NFCs are subject to the clearing obligation for future

contracts within 4months, if exceeding the threshold

If the rolling average position does not exceed the

clearing threshold the NFC is no longer subject to the

clearing obligation

Regulatory standards by ESMA to define Objectively

Measurable…and values of the clearing thresholds 10

Objectively measurable when…

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…It covers risks arising from the potential change in the

value of…that the non-financial counterparty or its

group…

…it covers the risks arising from the potential indirect

impact on the value of …resulting from fluctuation of

interest rates, inflation rates, foreign exchange rates or

credit risk;

…it qualifies as a hedging contract pursuant to

International Financial Reporting Standards (IFRS)…

ESMA Final Report on Draft RTS under Reg.648/2012/EC | 27 September 2012

The level and the metrics of the thresholds

12

All outstanding OTC derivatives non-Objectively…

Gross Notional Value relevant

Level defined per asset class

€1bn: credit; equity derivatives

€3bn: interest rate; FX; commodity and other derivatives

Breaching one threshold mandates to clear in all asset

classes

But EMIR says CT “determined taking into account the

systemic relevance of the sum of net positions and

exposures per counterparty and per class of OTC

derivatives ESMA Final Report on Draft RTS under Reg.648/2012/EC | 27 September 2012

Risk mitigation techniques

13

Additional techniques apply to reduce operational, credit

and legal risk when dealing in OTC derivatives

Collateralization

Mark-to-Market

Intragroup Exempted under certain conditions from mandatory clearing and collateralization

on a daily basis outstanding contracts, where market conditions are in place

Timely confirmation

Portfolio compression

Dispute resolution

Portfolio reconciliation

Analyze the possibility to conduct portfolio compression twice a year

Reconcile portfolios, frequency depending on #outstanding derivatives

Max Standard timing for confirmation of OTC derivative transactions

Agree detailed procedures and processes in relation to disputes on derivatives

Risk-management procedures requiring timely, accurate and appropriately segregated exchange of collateral

Phased-in: from t+7 to t+2, depending on type of CP

Ap

ply

to

all

cou

nte

rpa

rtie

s N

FC c

ross

ing

th

e

thre

sho

ld

6months later; If two CPs have >500 outstanding derivative contracts

6months later; depending on type of CP and number of outstanding contracts

6months later; possible delegation; reporting of disputes >15M€ for >15BD

Regulatory Standards still pending; Global convergence

mark-to-model is allowed subject to specific conditions

Subject to notification and disclosure requirements

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Obligation to collateralize OTC derivatives

Timely, accurate and appropriately segregated exchange

of collateral for OTC derivative contracts entered into on

or after the clearing threshold is exceeded with

systemic relevant counterparties

ESMA, EIOPA, EBA (ESAs) to develop common RTS

specifying: procedures, levels and type of collateral and

segregation arrangements;

Draft RTS to the EU Commission due by 30.09.2012

on hold, waiting for global proposals: IOSCO and BCBS

Margin requirements for non-centrally-cleared derivatives

(July - Sept 2012)

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BCBS/IOSCO proposals

Appropriate margining practices in place for all derivative

transactions not cleared by CCPs

All FC and systemically-important NF (NFC+) must exchange

initial and variation margin as appropriate

Assets collected should be highly liquid and should hold their

value in a time of financial stress

Transactions between a firm and its affiliates (intragroup)

subject to variation margin arrangements to prevent the

accumulation of significant current exposure

Regulatory regimes should interact so as to result in sufficiently

consistent and non- duplicative regulatory margin requirements

for non-centrally-cleared derivatives across jurisdictions.

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Harmonised regulatory framework for CCPs

Margin calculation: initial margin calculation to cover exposures

over specific time period and with specific confidence intervals (99.5%

OTC derivatives, 99%other FIs)

Portfolio Margining:

allowed if significant and reliable correlation and covered by the same

default fund

margin reductions < 80% combined VS individual calculation, 100% only if

CCP not exposed to any potential related risk

Default Fund: minimum size based on policy framework reflecting

the risk profile of the CCP

Default Waterfall: margins defaulting CM default fund contribution

defaulting CM own dedicated resources (25% of Min Capital)

DF contribution of non-defaulting CM…

18

Highly liquid collateral for margining…

Collateral for margining accepted under certain conditions

Cash, financial instruments, Transferable securities and money-market

instruments, gold and…

Bank guarantees can be used, but

– Only for NFCs

– Low credit risk and specific currency

– Irrevocable, unconditional without legal or contractual exemption

– Not issued by an entity providing services critical to functioning of

the CCP

– …

– Fully backed by collateral not subject to wrong way risk and the

CCP has prompt access to it ‘grace period’ of 3years following

the entry into force of related RTS

19

Transaction Reporting obligation

Nearly 70 data fields for each derivative transaction

Details covering counterparty data, contract type, details

of the transaction, confirmation reporting, clearing, asset

specific section, options, modifications…

Expected timeline for commodity derivatives

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Start of transaction reporting on commodity derivatives*

(at the earliest)

2014

*Starting of transaction reporting linked to the registration of a Trade Repository. In general, the obligation starts 90 days after the registration

Info on collateral for transactions (for FC/NFC+)

Back-loading of derivatives entered into after 16.08.2012 and not outstanding at kick-in date for reporting

(3years)

Back-loading of derivatives entered into after 16.08.2012 and outstanding at kick-in date for reporting

2015 2016 2017

Directly report to ESMA if NO TR is available



Open issues

The timeline

Open issues

Agenda

21

Some of the regulatory issues under debate

Scope: Definition of derivatives: legal definition VS ‘real world’

Clearing obligation:

Single Asset Class VS all asset classes

Clearing threshold:

EMIR states ‘sum of net positions and exposures per counterparty’

Is it the calculation of notional values clear for all types of derivatives?

When intragroup deals be considered non-risk reducing?

How to consider centrally cleared OTC derivatives?

Possible to avoid the clearing obligation if average positions again below

threshold before the clearing obligation becomes effective?

Who is who? How to know which NFCs are ‘systemic relevant’?

RMT: Bilateral margining practices ESAs RTS expected in 2013.

What the final content will be?

…

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Open issues

The timeline The timeline

Agenda

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ESMA estimations on regulatory timeline

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What’s next?

Endorsement of ESMA RTS by Commission Dec 2012

ESAs consultations on margining/RMT Q1/2013

Entry into force of ESMA RTS Mar 2013

Kick-in of the (first) clearing obligation Jun-Jul 2013

Applicability of delayed RMT in ESMA RTS Sept 2013

ESAs final RTS on margining/RMT Q3-4/2013

Reporting obligation starting (at earliest) Jan 2014

…

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Thank You For Your Attention

Short overview and history of EMIR Workshop EMIR and the new challenges for commodity risk management

13th December 2012, Düsseldorf

Riccardo Rossi – Regulatory Affairs

Riccardo Rossi, Overview of EMIR

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