EMIR: Risk Mitigation

As we know, certain risk mitigation techniques relating to OTC derivative trades not cleared by a CCP came into force on 15 September 2013, namely:

Dispute resolution: a firm must tell the FCA about any disputes between counterparties relating to an OTC, its valuation or the exchange of collateral for an amount or a higher value than €15m and outstanding for at least 15 business days – see link for access to the FCA’s EMIR Portal (which requires pre-registration). Further details can be found in Article 15 of Commission Delegated Regulation (EU) No 149/2013.

Portfolio reconciliations: uncleared OTC trades are subject to reconciliation procedures. The frequency will range from daily (500+ outstanding) to quarterly (50 or less). Details can be found in Article 13 of Commission Delegated Regulation (EU) No 149/2013.

Portfolio compression: all counterparties with 500+ uncleared OTC derivatives with one counterparty are required to have procedures in place to regularly review, at least twice a year, and to consider the possibility of portfolio compression. Details can be found in Article 14 of Commission Delegated Regulation (EU) No 149/2013.

For counterparties that have ISDA agreements in place, ISDA provides a solution to the reconciliation procedures and disputes procedures requirements as it offers a ‘protocol’ (at a cost of $500) which has the effect of amending the standard/master ISDA agreement used by counterparties to be compliant with these two EMIR obligations.

With the above implementation date in mind the FCA has recently published the following statement which will be of importance to those firms that are not already in compliance with the above requirements:

“In line with our supervisory approach, the FCA expected firms which were unable to comply with risk mitigation requirements for non-cleared trades relating to portfolio reconciliation, dispute resolution and compression to have a detailed and realistic plan to achieve compliance within the shortest time-frame possible. The FCA expects that such plans will be completed and implemented by 30 April 2014 and that firms will be able to demonstrate compliance after that date. Please refer to our statement of FCA supervisory priorities in relation to EMIR, which is available at http://www.fca.org.uk/firms/markets/international-markets/emir/fca-supervisory-priorities“.

The FCA has a dedicated helpline for any EMIR related queries: emir@fca.org.uk.

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