intragroup exemption margin fca video

emir intragroup exemption fca

 

Financial counterparties and alternative investment funds (AIFs) which are not clearing members and which have a lower level of activity in OTC derivatives (to be measured against a quantitative threshold) will likely benefit from extended deadlines for mandatory clearing.

 

 

Where an existing contract is subsequently cleared by a CCP, it mustn't be reported under EMIR to the trade repository as a modification of the existing contract, but the original contract should be flagged as terminated and the new contract resulting from clearing should be reported.

 

This is the essence of ESMA's recent draft amendments with respect to EMIR reporting of derivatives subject to clearing.

 

It will be also expressly stipulated by the law that when a contract is concluded in a trading venue and cleared on the day of execution, only its cleared form will be reported.

 

Hedging-emir-review

 

Clearing thresholds' calculations are quite complicated - partially on account of requirement to classify all OTC derivatives transactions as hedging or non-hedging (which fatigue applies even to the smallest counterparties).

 

There is a chance, in the foreseeable future the companies' procedures setting the company's position versus clearing threshold may become simpler, but this novelty unnecessarily would mean less regulatory burden.

 

 

Financial counterparties may find it difficult to establish whether they qualify as such under EMIR. Maybe the uniform European Register of Financial Counterparties would help somewhat.

 

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Why do firms choose omnibus client accounts ignoring better protections offered by the individual form of segregation?

 

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Expiring EMIR exemption will make as from 15 March 2016 CCP collateral more costly for non-financial counterparties.

 

 

The implementation of the central clearing obligation is expected to decrease the total gross notional outstanding for non-centrally cleared derivative activities (which is estimated about EUR 146 trillion) to about EUR 74.9 trillion (or by 49%).

 

It means 51% of these transactions will be cleared centrally and - after the implementation of the margin requirements - about 49% of the OTC derivatives market will be captured by the EMIR collateral requirement.

 

 

1 November 2015 marks the end of the period where trade repositories verified the completeness and accuracy of EMIR trade reports submitted by market participants using relatively less elaborate checks.

 

The first level validation, which is already in place since 1 December 2014, consisted in determining by trade repositories, which fields are mandatory in all circumstances and under what conditions fields can be left blank or include the Not Available (NA) value.

 

In turn, the second level validation, which will be mandatory as from the end of October 2015, will refer to the verification that the values reported in the fields comply in terms of content and format with the rules set out in the technical standards.

 

 

New rules on initial and variation margin prepared by financial regulators would pose a serious threat to derivatives' OTC market liquidity.

 

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Mandatory clearing on OTC derivative contracts along with the frontloading requirement deserve particular interest in the following months. 

 

IRS-OTC-CCP

Actions to be scheduled cover:

- analysing portfolios to identify contracts potentially subject to this requirement (taking account of their counterparties' statuses),

- carrying out the necessary calculations associated with the use of thresholds, 

- examinations whether the intragroup exemption from mandatory clearing could be applied under circumstances and whether its use is adequate to the company's business model,

- communications between counterparties whether they are subject to the mandatory clearing and the to the frontloading requirement,

- providing appropriate representations,

- amendments to the documentation of OTC derivatives contracts, 

- pricing models' adaptations, pricing recalculations to include the price of the frontloading in the contracts,

- implementing necessary arrangements for the frontloading to take place,

- making relevant changes to systems, controls and internal procedures to reflect these determinations and representations.

 

If the above analyses show the counterparty is within the scope of application of mandatory clearing, and, potentially, of the frontloading requirement, it will be necessary to arrange for the necessary clearing relationships.

 

The above process will have the iterative character, first come the IRS derivatives but the potential scope is much more extensive.

 

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