The rules for derivatives within the scope of the European Market Infrastructure Regulation (abbreviated to EMIR) present huge challenges for banks and companies. The objective the EMIR legislation is to regulate OTC and derivatives trading on the stock exchange.
The regulations can divided into the following four categories:
- Trading platform requirement for clearing derivatives
- Reporting to a centralized trade repository
- Centralized clearing of standardized OTC derivatives
- Fulfilling of risk management requirements
The ordinance came into force on 16 August 2012. However, the implementation of the respective requirements has not yet been finalised, therefore, in the future, institutions that are affected can once again expect to face considerable costs for the implementation of the requirements.
Trading platform requirement for derivatives clearing
For future compliance with MiFID II/MiFIR, a trading platform requirement will be in place for derivatives clearing. Institutions have to consider in which areas of the future market structures these instruments can and must be traded. Accordingly, institutions must prepare to become the client of an appropriate trading platform. For example, Bloomberg (MTF) or 360T (planned as MTF or OTF) could serve as trading platforms. SKS is here to assist you connect to a trading platform and transfer trading to asset management systems.
Reporting to a central information system
Since February 2014, all financial institutions - as well as companies - have been obliged to communicate details of trades in OTC as well as in exchange-traded derivative contracts to a central information system (trade repository). However, access to the trade repository, timely and full reporting of derivative contracts as well as the proper processing of responses are all linked to the appropriate technical specification. Regulatory reporting under ESMA 2015/1645 will yet increase the scope of affected derivatives. For this purpose, ESMA defined certain data formats, like for example: LEI für Partner IDs, MIC for trading centres as well as standardised Instrument IDs, indices and homogenuous date- and time-formats (UTC).
Institutions and companies that are affected by EMIR are facing new challenges:
- Consolidation and preparation of the relevant data, frequently, from heterogeneous systems
- The provision of additional data that was previously not available (e.g. legal entity identifiers, unique trader identifiers, unique product identifiers)
- Extensive adjustments to procedures and systems for targeted and efficient communication with the selected trade repository
We are able to help!
Based on the SKS Group's many years of experience in the technical and system environments concerned, we can provide you with support in the areas of procedures and data technology for access to a trade repository.
Central clearing of standardised OTC derivatives
Within the scope of central clearing, financial institutions and companies that are affected by EMIR are obliged to clear all standardised OTC derivatives through central counterparties (CCP). In this case, the central counterparty will be the buyer vis-à-vis the seller and the seller vis-à-vis the buyer and will, therefore, function as a counterparty for both parties. In this function, the CCP will ensure, in particular, that collateral is posted by both parties.
The biggest challenge for financial institutions and the companies concerned is accessing or linking up to a CCP. This is accomplished either directly as a "direct clearing member“ (DCM) of the CCP, or as a "client“ through a DCM.
3 categories with introductory/waiting periods have been defined for clearing
On the basis of tried and tested selection procedures, we can help you to select and access an appropriate DCM so that, in the future, too, transactions with standardised OTC derivatives can be executed.
Risk minimisation requirements
Another challenge, under the EMIR, is posed by the mandatory risk mitigation techniques for non-centrally cleared derivatives. Institutions have to have adequate "procedures and safeguards" in place to be able to measure, monitor and mitigate operational and counterparty risks. These include:
- daily mark-to-market valuations
- timely confirmation of new transactions
- regular portfolio reconciliation with the counterparties
- having an appropriate dispute resolution procedure
- portfolio compression
- exchange of collateral
Depending on the type and volume of derivative transactions, the institutions that are affected will have to make far-reaching adjustments to their processes and systems in order to ensure proper fulfilment of the requirements. The SKS Group, an adept, experienced and reliable partner would be delighted to assist you in this regard.
The SKS Group can support you in matters relating to EMIR with the following services:
- Technical analyses and conceptualizations
- Procedural redesign and restructuring
- Implementation of approach to technical solutions including an intragroup test solution option
Please contact us!
We will help you to implement the EMIR requirements efficiently and cost-effectively. Please contact us so that you, too, can benefit from our extensive expertise and long-standing experience.