Risk mitigation techniques


3.1.  As regards risk mitigation techniques the European Parliament corrected the wording of the provision requiring the obligated parties (also non financial counterparties covered by the clearing obligation) that enter into an OTC derivative contract not cleared by a CCP, to ensure that appropriate procedures and arrangements are in place to measure, monitor and mitigate operational and credit risk. To the existing so far catalogue of the operational and credit risk also market risk has been supplemented.


3.2.  The European Commission proposal placed on financial and non-financial counterparties addressed in point 3.1. above the obligation to have in place standardised processes which are robust, resilient and auditable in order to reconcile portfolios, to manage the associated risk and to identify disputes between parties early and resolve them, and to monitor the value of outstanding contracts. The draft Regulation stipulated for this purpose that the value of outstanding contracts was marked-to-market on a daily basis and that risk management procedures required the timely, accurate and appropriately segregated exchange of collateral.


In this connection, apart from ‘exchange of collateral’, the alternative was proposed by the European Parliament in the form of the ‘capital-backing commensurate with the risk, in accordance with the applicable regulatory capital requirements for financial counterparties’.


3.3.  As part of the provisions on risk mitigation techniques the draft EMIR Regulation  now also require that financial and non-financial counterparties addressed in point 3.1. above offer counterparties the option of segregation of initial margin at the outset of the contract. The important issue of segregation of assets in particular in relation of clearing members vis-á-vis their clients is further elaborated in the current text of draft EMIR – it deserves more detailed and separate analysis and is not touched in this post.


4. Time-schedules and retrospective obligation


4.1.  The pivotal rule was added that OTC derivatives contracts entered into before the date from which the clearing obligation takes effect for that class of derivatives are exempted from the clearing obligation.


4.2.  In that connection it is appropriate to mention that although the Regulation will enter into force on the twentieth day following that of its publication in the Official Journal of the European Union, the obligations of counterparties under Articles 3, 6 and 8 of the Regulation (regarding clearing and reporting obligations and risk mitigation techniques) become effective six months after publication of the regulatory technical standards, implementing technical standards and guidelines related thereto drafted by ESMA and adopted by the Commission.


4.3.  Derivative contracts that have been concluded prior to the date of application of the Regulation's registration of a trade repository for that particular type of contract shall be reported to that trade repository within 120 days of the date of registration of that trade repository by ESMA.


4.4.  ESMA shall be empowered to examine whether a retrospective reporting obligation in respect of OTC derivative contracts can be introduced if the information in question is essential to the supervisory authorities. ESMA shall take the following criteria into account in reaching its decision:

(a) the technical requirements for submission of a report (notably whether transactions have been recorded electronically);

(b) the remaining times to maturity of outstanding transactions.

Before taking a decision, ESMA shall conduct a public consultation with the market participants (for the respective time-schedules relating to the implementation of the new obligations see farther).


4.5. In the connection with the provisions on retrospective impact of the EMIR Regulation it is noteworthy to mention additional guidance in the preamble to the draft Regulation indicating that clearing and reporting obligations should be dealt with in different ways. Whilst a retrospective clearing obligation is hardly feasible on legal grounds, given the need for post-collateralisation, the same is not true of a retrospective reporting obligation. In this case, on the basis of the results of an impact study, and using rules tailored to classes of derivatives, technical requirements and remaining periods to maturity, a retrospective reporting obligation could be laid down.

4.6.  The recitals further explain that the retrospective reporting obligation is needed, to the largest possible extent, for both financial counterparties and non-financial counterparties over the threshold, in order to provide ESMA with comparative data. If such retrospective reporting is not feasible for any classes of OTC derivatives, an appropriate justification should be provided to the respective trade repository.