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

1. 12th November 2013
OTC Derivatives: Evaluating the impact of New Regulation in Europe

2. EMIR
Regulatory
Update
Brice Henry
Partner
DerivSource Paris Seminar
12 November 2013
© Allen & Overy 2013
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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
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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
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5. EMIR Timeline according to the ESMA
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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. 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. 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. 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. 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
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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
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