I have recently been to a seminar on EMIR Reporting requirements. The room was full, with companies trying to understand the impact that the new regulation would have on their business. Managers from different multinationals and sectors were confronting their experience and showing how they got prepared for the rules imposed by EMIR.
What came to evidence is that many non-financial corporations are still poorly of the new regulation, despite some major banks have started a wide communication process to their business customers.
Here you can find a brief description of EMIR purpose, main requirements and application.
After the financial crisis, both the US and the EU put in place specific measures to prevent and mitigate risks in the OTC (Over-The-Counter) derivative markets. Those actions culminated in the Dodd-Frank Act in the US and in the EMIR (European Market Infrastructure Regulation) in Europe, which entered into force on August 16th, 2012.
The main requirements under EMIR are:
- Central Clearing of OTC derivatives contracts
- Application of risk mitigation techniques for OTC derivatives not subject to Central Clearing
- Reporting of derivative contracts to authorized Trade Repositories (TR)
A framework to enhance the safety of central clearing counterparties (CCPs) and for Trade Repositories (TR).
Who has to comply with EMIR?
While the Dodd-Frank Act mainly impacted financial institutions, under EMIR even non-financial institutions are required to comply with the norms in case they enter into derivatives contracts. The table here below shows the main obligations for non-financial institutions.
The reporting requirements became effective on February 14th, 2014. Multinationals, both in Europe and in Italy, had prepared well in advance for this deadline and they have recently contributed to raise questions and ask for clarifications to the European Security and Market Authority (ESMA). The framework, even though not yet completed, has become much clearer.
How to be compliant with reporting requirements?
Contracts to be reported are both OTC and exchange-traded derivatives transactions entered into by EU counterparties. Reporting has to be sent to a trade repository that is either registered with ESMA or recognized by ESMA if outside the EU by day T+4. This timing is expected to be progressively shortened.
As for the content, it mainly includes:
A section related to counterparty information. This consists of 26 fields containing among others: counterparty master data and ID, disclosure of extra-UE counterparties, date of reporting, clearing counterparty information, threshold data, contract valuation, collateral, currency. Many data come in form of codes. For instance, each counterparty needs to have a LEI (Legal Entity Identifier) code. This section is mandatory for both counterparties
A section related to contract information. This contains: contract type, transaction details, risk mitigation information, clearing data, interest rates, options data, commodity data and information on report changes. One counterparty can report this section on behalf of themselves and the other counterparty
ESMA gives companies the choice to delegate reporting to third parties. As a consequence, some major banks started informing their business customers of the new rules and offering reporting services.
EMIR reporting: how to get prepared?
EMIR could be a unique opportunity to:
- set and/or review the company risk policies and define its risk appetite
- better understand derivatives purposes for your company
- review processes and improve their efficiency.
Here are some important steps you would need to consider:
- Risk management model definition;
- EMIR compliance definition for your company;
- EMIR reporting blue print and model, including the eventual outsourcing;
- Risk management process and control definition
- Third party evaluation and selection (CCPs, etc.).
Common mistakes to avoid
SMEs may think they can’t afford EMIR regulation compliance and may be tempted to give up on risk hedging.
That would be a big mistake: exchange rate, interest rate and commodity risk may be relevant also for SMEs. Most of them, in fact, are now generating a significant portion of their revenues abroad in currencies which are subject to high volatility. In addition, they subscribe loans with banks who generally offer IRS contracts attached to them. Last but not least, most of Italian SMEs conduct their business in the traditional sectors of our economy, with intense usage of raw materials whose prices are subject to relevant ups and downs.
So, while EMIR may increase your admin expenses, it’s also true that avoiding appropriate risk management could result in much larger costs for your business.