OTC Derivatives: Evaluating the Impact of New Regulation in Europe, Brice Henry, Allen & Overy


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Brice Henry, Partner, Allen & Overy
Presentation at DerivSource/Omgeo briefing 'OTC Derivatives: Evaluating the Impact of New Regulation in Europe' held in Paris on November 12th 2013

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OTC Derivatives: Evaluating the Impact of New Regulation in Europe, Brice Henry, Allen & Overy

  1. 1. 12th November 2013 OTC Derivatives: Evaluating the impact of New Regulation in Europe
  2. 2. EMIR Regulatory Update Brice Henry Partner DerivSource Paris Seminar 12 November 2013 © Allen & Overy 2013 2
  3. 3. What European Market Infrastructure Regulation (EMIR) means? – EMIR is arguably the key regulation for the derivatives market – Key obligations introduced by EMIR for derivatives: – Mandatory clearing through authorised central counterparties (CCPs) of “eligible” derivative contracts entered into between relevant market participants (subject to limited exemptions). – Risk mitigation requirements for OTC derivatives not subject to clearing (including margin and collateral requirements) – Mandatory reporting of all derivative contracts (including any modification or termination) by all counterparties to a registered/recognised trade repository – Other: requirements for CCPs and trade repositories (including that CCPs apply for authorisation by their competent authority (non-EU CCPs can apply to ESMA for recognition) and that trade repositories apply for registration with ESMA (non-EU trade repositories can apply to ESMA for recognition)). – Three categories of counterparties – Financial Counterparties (FCs) – Non-Financial Counterparties above the clearing thresholds (NFCs) and below the clearing thresholds (NFC-) – Third Country Entities (TCE) © Allen & Overy 2013 3
  4. 4. On-Going EMIR Legislative/Implementation Process – EMIR entered into force 16 August 2012 – EMIR is binding and directly applicable in all EU member states – 6 RTS published in the EU Official Journal on 25 February 2013 and entered into law on 15 March 2013 – Consultation on contracts having a direct, substantial and foreseeable effect closed on 16 September 2013 – draft RTS to be submitted to the Commission by 15 November 2013 – Consultation on the Clearing Obligation under EMIR closed 12 September 2013 – BCBS/IOSCO final report on margin requirements for non-centrally cleared derivatives published September 2013 – draft RTS under EMIR expected end of 2013 – The ESMA approved four trade repositories on 8 November 2013 (registration taking effect on 14 November 2014 and reporting obligations beginning on 12 February 2014). © Allen & Overy 2013 4
  5. 5. EMIR Timeline according to the ESMA © Allen & Overy 2013
  6. 6. © Allen & Overy 2013 201 6
  7. 7. The 15 September Obligations: Portfolio Reconciliation – What we know – FCs and NFCs must agree in writing or by other equivalent electronic means with their counterparties the terms on which portfolios will be reconciled – Portfolio Reconciliation must cover key trade terms and valuation – Frequency of reconciliation set out in Article 13 of RTS and dictated by counterparty status and number of OTC derivative contracts outstanding – Portfolio reconciliation can be delegated – What we still don’t know – static portfolios – when does the agreement in writing need to be in place – what constitutes an agreement in writing – is acceptance by conduct or some other means sufficient – reconciliation of valuations – scope of portfolios © Allen & Overy 2013
  8. 8. The 15 September Obligations: Dispute Resolution – What we know – FCs and NFCs must 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 exchange of collateral – the resolution of disputes in a timely manner with a specific process for disputes outstanding for more than five business days – What we still don’t know – what constitutes a dispute? © Allen & Overy 2013
  9. 9. The 15 September Obligations: Portfolio Compression – What we know – Applies to FCs and NFCs with over 500 uncleared OTC derivative contracts outstanding to a single counterparty – Obligation to analyse the possibility of compression twice a year and be able to provide a reasonable and valid explanation to the relevant competent authority if conclude portfolio compression not appropriate – What we still don’t know – reasonable and valid explanation as to why portfolio compression is not appropriate © Allen & Overy 2013
  10. 10. The Up-coming 2014 EMIR Obligations – Reporting Obligation, i.e. all counterparties and CCPs must report details of all derivative contracts concluded, modified or terminated to a registered or recognised trade repository – Clearing Obligation, i.e. CCPs have launched or are launching various OTC cleared offerings – Collateral Obligation: FCs and NFC+s will have risk management procedures that require the timely, accurate and appropriately segregated exchange of collateral with respect to OTC derivative contracts (Article 11(3) EMIR) © Allen & Overy 2013
  11. 11. Where we stand on EMIR in France?  Law no. 2013-672 dated 26 July 2013 relating to the separation and regulation of banking activities  Arrêté dated 1 October 2013 amending the General Regulation of the AMF  New Chapter regarding CCPs which will apply from 16 June 2014  Relevant impacts of the new legal framework :  The legal status of the CCP : a credit institution vs. the new definition provided by the CRR  The compulsory consultation of the AMF and the Banque de France before granting the licence to the expected CCP  The possibility to provide the AMF with the Rule Book not only in French but also in English language for approval  a decree is still expected  The new concept regarding the deposits/collateral given to the CCP  The obligation to give back to investors the balance available after completion of the defaulting management process of the clearing member © Allen & Overy 2013 201 11
  12. 12. EMIR Hot Topics From a Legal/Regulatory Perspective – Bankruptcy remoteness : the individual segregation vs. the physical segregation – Efficient collateral management – Documenting and negotiating client clearing agreements – Dealing with/meeting the Buy-side conflicting investment rules – UCITS V/VI rules – Solvency II rules – Extraterritoriality © Allen & Overy 2013 201
  13. 13. Sign up for DerivSource (it’s free) to receive newsletters and e-vites for future events and Please join us for our next webinar on [::date::] webinars The online community and information source for professionals active in derivatives processing, technology and related services. www.DerivSource.com