Thomas Heinatz, Senior Manager, PwC Presentation at the DerivSource/Omgeo briefing 'OTC Derivatives: Evaluating the Impact of New Regulation in Europe' held in Frankfurt on November 13th 2013.

1. www.pwc.de/de/asset-management
www.pwc.com/assetmanagement
EMIR Status Update
Regulatory Requirements and
Implementation
BVI/Omgeo
OTC Derivatives:
Evaluating the
Impact of New
Regulation in Europe
13 November 2013

2. Contents
Section
Page
1
Executive Summary
1
2
Risk Mitigation Requirements
6
3
Trade Repository
8
4
Clearing
10

3. Section 1
Executive Summary

4. Section 1 – Executive Summary
Simplified timeline for the OTC derivatives requirements to take effect
16 Aug
2012
Milestone
Risk
reducing
techniques
19 Dec
2012
RTS2)
EMIR
passed
taking effect
byEC
15 Mar
2013
15 Sep
2013
12 Feb
2014
est. Jun
20141)
est. Sep
20141)
est.
20151)
Obligation to
RTS2)
implement
taking effect risk reducing
techniques
EMIR in force, no RTS
Bilateral collateralization according to ‚best
possible effort‘
Application of risk reducing techniques for non-central cleared OTC derivatives
Reporting obligation for OTC derivatives
Reporting
Reporting obligation for ETD
Clearing
Bilateral
Collateralization
1)
2)
Clearing obligation
via CCP
Obligation to
collateralize all OTC
transactions
Data based on ESMA information as of 13th of Sep
Technical regulation standards for risk reducing measures; RTSD for bilateral collateralization still due
EMIR Status Update • Regulatory Requirements & Implementation
PwC
13 November 2013
2

5. Section 1 – Executive Summary
According to a PwC Study ‘The future of capital markets’ EMIR will require
the highest implementation effort
Key Findings
Estimated implementation effort
EMIR
MiFID II
& MiFIR
Basel III/
CRD IV 1
• The implementation effort for each
regulatory requirement mainly corresponds
with their deadlines
Financial
Transaction
Tax
100%
Short-term
2012
50%
0%
100%
Mid-term
2013-14
• In the short and mid-term, EMIR will have
the highest implementation effort – followed
by Basel III
Very high
High
Low
50%
Very Low
0%
No effort
100%
Long-term
from 2015
Unknown
• The requirement for additional OTC
derivatives to be centrally cleared in the
future is expected to be implemented with
less effort
• Most participants are unsure of the impact of
the Financial Transaction Tax
• The part of “unknown” regarding MiFID II
reflects that the market awareness of the
difference between MiFID I & II is still not
given
50%
0%
(of participants in %)
EMIR Status Update • Regulatory Requirements & Implementation
PwC
1 Banks
only
13 November 2013
3

6. Section 1 – Executive Summary
The new regulation has foreseeable implications on the business and
operating model as well as on the contractual relationships
•
Business Model
•
•
•
Contractual
Relationships
Operating Model
•
•
•
If applicable, higher costs and reduced liquidity because of collateralization – with noteworthy implications
on performance, provided that cash collaterals are not centrally provided
Impact on the profitability of the funds (especially when using not-cleared OTC derivatives)
If applicable, more efficient payment transactions, because cash flows are aggregated by the clearing broker
(the effect is diluted by breaking down onto many clearing brokers)
Introduction of the necessary infrastructure and establishment of the necessary connectivity (e. g. using of
the clearing brokers as intermediaries)
New contractual relationships (e. g. with clearing brokers)
If applicable, adjustment of available contractual agreements (e. g. with collateral management service
providers, custodians, counterparties, asset managers)
If applicable, adjustment of SLAs (e. g. cut-off times)
Portfolio Management and Front Office Applications
•
Processes: consideration of security standards; IT: connection to the electronic trading desks; consideration
of the clearing broker and CCP in the order masks
Middle Office
•
Processes: settlement, cut-off times; IT: business status concept
Accounting
•
Processes: identification of different types of derivatives (clearing eligible vs. non-clearing eligible) and
booking of the margin; IT: adjustment of the booking logic
Risk Management and Controlling, Compliance
•
Processes: Monitoring of counterparty limits; IT: implementation of risk management requirements
Reporting:
•
Status message to the transaction register
Interfaces
•
Adjustments between the systems along whole process chain
EMIR Status Update • Regulatory Requirements & Implementation
PwC
13 November 2013
4

7. Section 1 – Executive Summary
EMIR hot topics from various perspectives: legal, regulatory, business and
operations (selected items)
• Documenting and negotiating client clearing agreements
• document structures with clearing brokers
• SLAs with clearing brokers, collateral managers and custodians
• compensation agreements with execution brokers
• Effective and efficient collateral management
• Future setup and partners
• Processes: administration, accounting and controlling of collateral workflow
• Cash vs. security collateral
• availability of eligible assets
• need for same day settlement of initial margin
• Funds vs. direct investments
• different legal requirements will lead to a variety of processes
• embedding of pooling setups
• Buffer at CCP: true excess
• Handling of margin calls on holidays
• Dealing with/meeting the buy-side conflicting investment rules
• Extraterritoriality
• Accounting approach
EMIR Status Update • Regulatory Requirements & Implementation
PwC
13 November 2013
5

8. Section 2
Risk Mitigation Requirements

9. Section 2 – Risk Mitigation Requirements
Risk mitigation actions have been mandatory since 15/9/2013 and are
mostly in place
• Portfolio reconciliation
 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
 due date will differ from counterparty to counterparty and should be until mid of December 2013
 TriResolve has been established as a certain market standard
• Dispute resolution
 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
• Portfolio compression
 applies to FCs and NFCs with over 500 uncleared OTC derivative contracts outstanding to a single
counterparty
 obligation to analyze 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
EMIR Status Update • Regulatory Requirements & Implementation
PwC
13 November 2013
7

10. Section 3
Trade Repository

11. Section 3 – Trade Repository
Meeting the reporting deadline as of 12/2/2014 is a challenging task due to
incomplete specifications and technical bottlenecks
• The European Securities and Markets Authority (ESMA) has approved on 7/11/2013 the registrations of the
first four trade repositories (TRs) under the European Market Infrastructure Regulation (EMIR). The
following entities are registered as TRs for the European Union (EU):
 DTCC Derivatives Repository Ltd. (DDRL), based in the United Kingdom
 Krajowy Depozyt Papierów Wartosciowych S.A. (KDPW), based in Poland
 Regis-TR S.A., based in Luxembourg
 UnaVista Ltd, based in the United Kingdom
• The registrations will take effect on 14 November 2013, with the reporting obligation beginning on 12
February 2014, i.e. 90 working days after the official registration date
• The registered TRs cover all derivative asset classes –commodities, credit, foreign exchange, equity,
interest rates and others – irrespective of whether the contracts are traded on or off exchange
• Request for delay of ETD reporting obligation issued by ESMA has been rejected by EU Commission on
7/11/2013; ETD will remain subject of reporting as of 12/4/2014
 BVI will start new initiative towards BaFin to avoid ETD reporting obligation for KVG
• Past transactions could be affected for reporting within different periods:
 Made before 16/8/2012 – no reporting required
 Made on or after 16/8/2012 and still open – reporting by 12/5/2014 (three month after reporting start)
 Made on or after 16/8/2012 and closed by 12/2/2014 – reporting by 12/2/2017 (due within three years)
EMIR Status Update • Regulatory Requirements & Implementation
PwC
13 November 2013
9

12. Section 4
Clearing

13. Section 4 – Clearing
Setting up the clearing infrastructure, clearing processes and the legal
documentation has turned out to last longer than expected
Make clearing arrangements
Either become a CCP member firm, a client of a CCP member firm, or have indirect clearing arrangements (client to client)
Select two clearing brokers
Give both of them a share of the trades
Select as many CCP as necessary to cover your products
As of today, most CCPs cover only either IRS or CDS
Initiate the onboarding with MarkitWire
MarkitWire is the market standard covering both IRS and CDS with different CB and CCP
The focus of the clearing broker onboarding is on processes, interfaces and cut-off times
The relevant clearing brokers provide a detailed project plan and dedicated resources for the onboarding
Key impacts (selected items)
Increases costs of trading, ties up capital in margin and default fund requirements
(indirectly passed on to end clients) and clearing fees
Cost
Operations
X
X
Firms lose the ability to set margin (or even to waive margin)
X
Requires new systems and internal processes to coordinate reporting, accounting
to CCP or CCP member firm systems
New EU collateral standards restrict the types of assets which can be held as CCP
collateral and forbid re-hypothecation (repledging) of collateral
EMIR Status Update • Regulatory Requirements & Implementation
PwC
Strategy
X
X
X
13 November 2013
11

14. Your contact
Thomas Heinatz
Senior Manager
Friedrich-Ebert-Anlage 37
60327 Frankfurt am Main, Germany
Phone:
Mobile:
Email:
+49 69 9585 3621
+49 171 7636083
thomas.heinatz@de.pwc.com