Riccardo Rossi, Overview of EMIR
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Riccardo Rossi, Overview of EMIR Riccardo Rossi, Overview of EMIR Presentation Transcript

  • Short overview and history of EMIRWorkshop EMIR and the new challenges for commodity risk management13th December 2012, DüsseldorfRiccardo Rossi – Regulatory Affairs
  • Agenda EMIR, an history of more than four years Short overview of EMIR requirements Open issues The timeline2
  • An history of more than four years 2009 2010 2011 2012 2013The financial crisis 3
  • An history of more than four years 2009 2010 2011 2012 2013 The G20 Agreement “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 4
  • An history of more than four years 2009 2010 2011 2012 2013Commission proposal for a regulation on OTCderivatives, central Counterparties and traderepositories [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 5
  • An history of more than four years 2009 2010 2011 2012 2013 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 document6 6
  • Agenda EMIR, an history of more than four years Short overview of EMIR requirements Open issues The timeline7
  • EMIR at a glance  Reporting to Trade Repositories of all transactions in derivatives Clearing threshold Reporting of  Timely confirmation approach for non- derivative  Dispute resolution transactions  Portfolio financials Exclusion of ‘risk- OTC derivatives Risk mitigation reconciliation reducing’ OTC mandatory techniques  Portfolio derivatives clearing compression Intragroup exemption CCPs  Collateralization framework  Mark-to-market  Margin calculation  Default Fund  Default Waterfall  Collateral accepted
  • 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 thresholds10
  • Objectively measurable when… …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 201211
  • The level and the metrics of the thresholds 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 derivativesESMA Final Report on Draft RTS under Reg.648/2012/EC | 27 September 201212
  • Risk mitigation techniques  Additional techniques apply to reduce operational, credit and legal risk when dealing in OTC derivatives Timely Max Standard timing for confirmation of Phased-in: from t+7 to t+2, confirmation OTC derivative transactions depending on type of CPcounterparties Portfolio 6months later; If two CPs Analyze the possibility to conduct Apply to all have >500 outstanding compression portfolio compression twice a year derivative contracts Portfolio Reconcile portfolios, frequency 6months later; depending on type of CP and number of reconciliation depending on #outstanding derivatives outstanding contracts Dispute Agree detailed procedures and processes 6months later; possible delegation; reporting of resolution in relation to disputes on derivatives disputes >15M€ for >15BD Risk-management procedures requiringNFC crossing the Regulatory Standards still Collateralization timely, accurate and appropriately pending; Global segregated exchange of collateral convergencethreshold on a daily basis outstanding contracts, mark-to-model is allowed Mark-to-Market where market conditions are in place subject to specific conditions Exempted under certain conditions from Subject to notification and Intragroup mandatory clearing and collateralization disclosure requirements 13 13
  • 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)14
  • 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.15 15
  • 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.16 16
  • 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.17 17
  • 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 RTS19
  • 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 2014 2015 2016 2017 Start of Info on collateral transaction for transactions Directly report to Back-loading reporting on (for FC/NFC+) ESMA if NO TR of derivatives entered into commodity is available after 16.08.2012 and not derivatives* outstanding at kick-in date (at the earliest) Back-loading for reporting of derivatives entered into after 16.08.2012 and (3years) outstanding at kick-in date for reporting*Starting of transaction reporting linked to the registration of a Trade Repository. 20In general, the obligation starts 90 days after the registration
  • Agenda EMIR, an history of more than four years Short overview of EMIR requirements Open issues The timeline21
  • 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?…22
  • Agenda EMIR, an history of more than four years Short overview of EMIR requirements Open issues The timeline23
  • ESMA estimations on regulatory timeline24
  • 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…25
  • Thank You For Your AttentionShort overview and history of EMIRWorkshop EMIR and the new challenges for commodity risk management13th December 2012, DüsseldorfRiccardo Rossi – Regulatory Affairs