Category Regulatory

CONTEXT

Following the 2007-2008 crisis, the G20 meeting in Pittsburgh in 2009 decided to reform banking and financial regulations. European Regulation n ° 648/2012 on OTC derivatives, central counterparties and central repositories (EMIR), published in the official journal of the European Union on 27 July 2012 and entered into force on 16 August 2012, is the declination of the G20 commitments at the Pittsburgh Summit (September 2009) on derivatives markets. It aims to make the latter safer and more transparent. It was supplemented by technical standards, published in the official journal of the European Union on 23 February 2013 and entered into force on 15 March 2013

EMIR is based on the following principles:

• a central clearing obligation for all OTC derivatives, judged by the ESMA to be sufficiently liquid and standardized. As a result, the counterparty risk will be fully transferred to the clearing houses;
• a harmonised legal framework at European level designed to ensure that clearing houses meet strong requirements in terms of capital, organisation and rules of conduct;
• the use of a set of operational and counterparty risk mitigation techniques for uncompensated contracts;
• a reporting obligation to central repositories of all derivatives transactions. (http://www.amf-france.org/Acteurs-et-produits/Produits-derives/Presentation.html)

PERIMETER

EMIR applies to any counterparty, financial (credit institutions, investment firms, insurance companies, management companies,...) or non-financial who carries out a transaction on a derivative product. Exemptions exist for certain categories of actors or transactions, where they take place between two entities belonging to the same group, if certain conditions are verified. The scope of the products covered by EMIR is as follows:

• concerning the obligation to compensate and risk mitigation techniques: any OTC derivative (i.e. any derivative financial instrument within the meaning of the MIFID directive, if its execution does not take place on a regulated market).

• concerning the provisions applicable to central counterparties: any financial instrument. • concerning the Declaration to the central repositories: any derivative contract, both by mutual
traded on a regulated market.

REGULATIONS

EMIR regulation is the result of European Regulation n ° 648/2012, accessible via this link:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:201:0001:0059:FR:PDF

The USA adopted the Dodd-Franck Act on their own

THE CHANGE

Problems related to collateral appear in the 4 principles of EMIR but the innovations to be put in place is mainly on the last 3 points for the players acting in the market of OTC instruments:

A harmonised legal framework at European level to ensure that clearing houses meet strong requirements in terms of capital, organisation, and rules of conduct 3 types of accounts can be opened by clearers for their Customers. They offer different levels of cost of use, collateral and protection.

-Omnibus net accounts (OSA net)
-Omnibus gross (OSA gross)
-Individually segregated account (ISA)

For more information:

http://www.afg.asso.fr/index.php/fr/textes/doc_download/5187-

The use of a set of operational and counterparty risk mitigation techniques for non-compensated contracts: variation margin regulation to be put in place for the 1/03/2017

-Update legal documentation to make it conform to EMIR-deciding on the processing of existing trades
-Be able to reconcile and valorize OTC portfolios on a daily basis--to manage daily margin calls

Initial Margin Regulation comes into force gradually from 1/09/2016.

-How to agree on the calculation of IM
In section 4 the work of groups working on this subject

https://eiopa.europa.eu/Publications/Technical%20Standards/ESAs_2016_23_Final_Draft_RTS_on_Risk_Mitigation_Techniques. PDF

ISDA-led work

https://www2.isda.org/functional-areas/wgmr-implementation/

Segregation of accounts

-Where to open these accounts?

-How to organize feeds?

Collateral Management

-How to develop new methods of collateral management?

-How to best use the collateral available?

-How to avoid concentrations in the collateral held

An obligation to report all derivatives transactions to trade repositories

-From 1 November 2017 the counterparty file sent to the trade repository must describe the nature, the amount of any collateral received or sent for each counterparty.

http://eur-lex.europa.eu/legal-content/FR/TXT/PDF/?uri=CELEX:32017R0104&from=EN