emir & sftr the journey continues - deloitte the bilateral model each market participant has a...

EMIR & SFTR – the journey continuesLink’n’Learn – 13 April 2017

2© 2017. Deloitte Touche Tohmatsu Limited

Agenda

1

2

3

4

EMIR

SFTR

Data Mutualisation

Questions


Agenda

1

2

3

4

EMIR

SFTR

Data Mutualisation

Questions

Introduction

The Clearing Obligation

Margin requirements

Reporting


The big picture

EMIR

• In September 2009 G-20 Leaders agreed that ‘All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements’.

• EMIR provides the framework for implementing the bulk of these requirements in the EU and will be complemented by changes to theMarkets in Financial Instruments Directive (MiFID II / MiFIR) and changes to the Capital Requirements Directive (CRD IV)

• EMIR introduces sweeping requirements aimed at reducing counterparty risk, improving transparency and mitigating systemic risk. The requirements will, in some shape or form, affect all participants in OTC derivative markets

• Some relief from the clearing and margining requirements has been granted to non-financial firms, pension funds and intra-group transactions, although strict conditions apply

All standardised

OTC derivatives

will be clearedthrough central

counterparties(CCPs)

Harmonisedframework for

theprovision of

clearing services

within Europe

Non-clearedderivatives will

besubject to

strengthened risk

managementrequirements

All OTC andexchange

tradedderivatives will

bereported to

TradeRepositories

(TRs)


EMIR is organized around three main pillars…

• All OTC and ETD contracts should be reported to trade repositories on T+1

• Collateral and valuation reporting

EMIR introduced the following risk mitigation techniques to reduce the operational risk of bilateral (non-centrally cleared) OTC derivative transactions:

• Timely confirmation:

• Portfolio compression

• Portfolio reconciliation:

• Dispute resolution:

• Daily valuation: Counterparties must evaluate their contracts on a daily basis using a market-to-market method. Where this method cannot be used, a mark-to-model approach must be applied and the method must be calibrated and validated;

Reporting

Risk Mitigations Techniques

(transactions not cleared by

CCP )

EMIR

1

2

• Standardized derivative contracts (IRS / CDS* ) should be cleared through central counterparties in order to reduce the risk in the financial systemClearing

Obligations

3

Required starting from

• February 12th 2014

• Phase-in as from June 21st

2016

• March / September 2013

• August 11th 2014

• September 1st 2016 (to be confirmed)

• Exchange of Collateral : Risk management procedures that require the timely, accurate and appropriately segregated exchange of collateral :

• Daily exchange of Variation Margin (VM)

• Exchange two-way Initial Margin (IM) to cover future exposure from a counterparty default

• Phase –in as from January 2017

* As of March 2016


Addressing the OTC derivatives markets

Why EMIR?

A

F

B C

D

E

• Each market participant has a legal relationship with and (gross) exposure to the CCP only. Counterparty will be required to post:• Initial margin – protect against losses suffered under the contract • Variable margin – protect against market fluctuations

In the bilateral model each market participant has a legalrelationship with, and separate (gross) exposure to each ofthe other participants, creating a tangled web of exposures.

EMIR is a regulatory response to the risks emerging from the interconnectedness in the OTC derivative markets

Problem Solution

Weaknesses exhibited during the crisis Regulatory response

Counterparty credit riskPossible systemic implications that a default can have due to the interconnected web of market participants

Lack of transparency Regulators did not have sufficient oversight of the global positions to detect the accumulations of pocket of risk within the financial system

Weak risk management for bespoke transactions, led to realised losses in times of market stress

• All standardised derivatives should be centrally cleared• Non centrally cleared derivatives should be bilaterally

collateralised and subject to higher capital requirements • All OTC derivatives should be reported to a Trade

Repository • All standardised and sufficient liquid OTC derivatives should

be traded on an exchange or electronic platforms


Agenda

1

2

3

4

EMIR

SFTR

Data Mutualisation

Questions

Introduction


Margin requirements

Reporting


IRS clearing starting date & Categories of counterparties (EURIBOR, LIBOR)

• The clearing obligation is phased-in based on the category of the counterparty

• In case of a trade between 2 counterparties belonging to different categories, the date from which the clearing obligation takes effect for that contract shall be the longer of the two

• In case of intragroup transactions where 1 entity of the group is inside the Union and the other entity is in a third country, the clearing obligation will take effect on* • 21 December 2018 if no equivalence decision is reached with the relevant third country• In case of an equivalence decision, the later of

• 60 days after the date of entry into force of the equivalence decision• The date when the clearing obligation takes effect as below

Implementation timeline for RTS 2015/2205

Entry into force of the

RTS

Cat. 1 CO applies

Cat. 2 CO applies

Cat. 4 CO applies

Cat. 3 CO applies

21/12/2015 21/6/2016 21/12/2016 21/12/2018 21/06/2019

Category’s name Clearing into effect Frontloading

21/6/2016Cat. #1

Clearing members Yes

Cat. #2FC & AIF that are NFC+ with volume > cap threshold of EUR 8 bn in average aggregate

notional amount on non-centrally cleared derivatives for the 3 months prior to the rule coming

into force

21/12/2016 Yes

21/6/2019Cat. #3

FC & AIF that are NFC+ with volume < cap threshold of EUR 8 bn in average aggregate


into force

No

21/12/2018Cat. #4

NFC+ No

Counterparty Category Classification

* Subject to conditions


Frontloading for IRS | EMIR requirements (EURIBOR, LIBOR)

• EMIR imposes an obligation to clear a posteriori some contracts concluded before the date on which the clearing obligation takes effects• The frontloading application depends on (1) the categories of both counterparties1, (2) the derivative type and (3) the dates of the contract as described

below:

Cat 1 21 June 201621 February 2016

Basis swap, IRS, FRA and OIS entered into this period and with remaining maturity > 6 months

Contracts entered into and novated during this period and Basis swap and IRS with remaining maturity > 50 years

FRA and OIS with remaining maturity > 3 years

Frontloading scope

ClearingTimeline

Cat 221 May 2016

Frontloading scope

ClearingTimeline

Cat. 3

RTS entry into force Clearing obligation

Contracts outstanding between FC with remaining maturity on clearing obligation dateBasis swap and IRS with remaining maturity > 50 years

FRA and OIS with remaining maturity > 3 years

Frontloading scope

ClearingTimeline

Cat. 4


Frontloading scope

ClearingTimeline

No frontloading

Basis swap, IRS, FRA and OIS entered into this period and with remaining maturity > 6 monthsContracts entered into and novated during this period and

Basis swap and IRS with remaining maturity > 50 yearsFRA and OIS with remaining maturity > 3 years


Clearing obligationRTS entry into force

1. Where a contract is concluded between two counterparties included in different categories of counterparties, the date from which the clearing obligation takes effect for that contract shall be the later date. (RTS- IRS clearing obligation Art. 3.1.)

21 December 2015

21 December 2015

21 December 2015

21 December 2015

Frontloading start date


Exception to

exception

for 3rd

country

intragroup

21 June 2019


IRS clearing starting date & Categories of counterparties (NIBOR,WIBOR,STIBOR)

• The clearing obligation is phased-in based on the category of the counterparty

• In case of a trade between 2 counterparties belonging to different categories, the date from which the clearing obligation takes effect for that contract shall be the longer of the two

• In case of intragroup transactions where 1 entity of the group is inside the Union and the other entity is in a third country, the clearing obligation will take effect on* • 9 July 2019 if no equivalence decision is reached with the relevant third country• In case of an equivalence decision, the later of


Implementation timeline for RTS 2016/1178


RTS

Cat. 1 CO applies

Cat. 2 CO applies

Cat. 3 CO applies

Cat. 4 CO applies

9/8/2016 9/2/2017 9/7/2017 21/6/2019 9/7/2019


9/2/2017Cat. #1




into force

9/7/2017 Yes

21/6/2019Cat. #3

FC & AIF that are NFC+ with volume < cap threshold of EUR 8 bn in average aggregate


into force

No

9/7/2019Cat. #4

NFC+ No




Frontloading for IRS | EMIR requirements (NIBOR,WIBOR,STIBOR)

• EMIR imposes an obligation to clear a posteriori some contracts concluded before the date on which the clearing obligation takes effects• The frontloading application depends on (1) the categories of both counterparties1, (2) the derivative type and (3) the dates of the contract as described

below:

Cat. 1 9 October 2016

IRS and FRA entered into this period and with remaining maturity > 6 months

Contracts entered into and novated during this period and IRS with remaining maturity > 15 yearsFRA with remaining maturity > 3 years

Frontloading scope

ClearingTimeline

Cat. 2 9 October 2016

Frontloading scope

ClearingTimeline

Cat. 3


Contracts outstanding between FC with remaining maturity on clearing obligation dateIRS with remaining maturity > 15 yearsFRA with remaining maturity > 3 years

Frontloading scope

ClearingTimeline

Cat. 4


Frontloading scope

ClearingTimeline

No frontloading

IRS and FRA entered into this period and with remaining maturity > 6 monthsContracts entered into and novated during this period and

IRS with remaining maturity > 15 yearsFRA with remaining maturity > 3 years



1. Where a contract is concluded between two counterparties included in different categories of counterparties, the date from which the clearing obligation takes effect for that contract shall be the later date.(RTS- IRS clearing obligation Art. 3.1)

9 August 2016

9 August 2016

9 August 2016

9 August 2016



9 February 2017

9 August 2017

21 June 2019

9 August 2019

Exception to

exception

for 3rd

country

intragroup


CDS clearing starting date & Categories of counterparties


21/09/2016Cat. #1



notional amount on non-centrally cleared derivatives for January, February and March 2016

09/02/2017 Yes

21/06/2019Cat. #3

FC & AIF that are NFC+ with volume < cap threshold of EUR 8 bn in average aggregate notional

amount on non-centrally cleared derivatives for January, February and March 2016

No

09/05/2019Cat. #4

NFC+ No


• The clearing obligation is phased-in based on the category of the counterparty.

• In case of a trade between 2 counterparties belonging to different categories, the date from which the clearing obligation takes effect for that contract shall be the longer of the two.

• In case of intragroup transactions where 1 entity of the group is inside the Union and the other entity is in a third country, the clearing obligation will take effect on* • 09 May 2019 if no equivalence decision is reached with the relevant third country• In case of an equivalence decision, the later of


Implementation timeline for Delegated Regulation 2016/592


RTS

Cat. 1 CO applies

Cat. 2 CO applies

Cat. 3 CO applies

Cat. 4 CO applies

09/05/2016 09/02/2017 09/08/2017 21/06/2019 09/05/2019



Frontloading for CDS | EMIR requirements

• EMIR imposes an obligation to clear a posteriori some contracts concluded before the date on which the clearing obligation takes effects.• The frontloading application depends on (1) the categories of both counterparties*, (2) the derivative type and (3) the dates of the contract as described below:

* Where a contract is concluded between two counterparties included in different categories of counterparties, the date from which the clearing obligation takes effect for that contract shall be the later date (RTS- CDS clearing obligation Art. 3.1.)

Cat. 2 vs Cat. 1 09 February 201709 October 2016

Contracts entered into or novated with remaining maturity > 6 monthsContracts entered into and novated during this period and

remaining maturity > 5 years and 3 months

Frontloading scope

ClearingTimeline

Cat. 2 vs Cat. 209 August 201709 October 2016

Frontloading scope

ClearingTimeline

Cat. 2 vs Cat. 3


21 June 2019

Contracts outstanding between FC with remaining maturity on clearing obligation dateremaining maturity > 5 years and 3 months

Frontloading scope

ClearingTimeline

Cat. 2 vs Cat. 4


09 May 2019

Frontloading scope

ClearingTimeline

No frontloading

Contracts entered into or novated with remaining maturity > 6 monthsContracts entered into and novated during this period and

remaining maturity > 5 years and 3 months



09 May 2016

09 May 2016

09 May 2016

09 May 2016



Exception to

exception

for 3rd

country

intragroup


Agenda

1

2

3

4

EMIR

SFTR

Data Mutualisation

Questions

Introduction


Margin requirements

Reporting


The derivative lifecycle pre and post new rules

Valuation of trade

Contract between counterparties

Trade between counterparties

Trade Confirmation

Margin call

Valuation of collateral

Pre

-tra

de

Tra

de

Post-

trade

CompressionDispute

resolutionReconciliation

CSA Details

Pre-Existing

New through margin requirements

Additions applying to new trades - also new for UCITS, AIFM and those already collecting margin for OTC trades:

• Minimum standards for trade agreements • Mandatory collection of margin with maximum intervals and a cap on minimum transfer amounts• The calculation for the amount of margin to be collected will be regulated• Collateral collected type and haircuts subject to regulatory requirements

T+1


Who, what and when?

The margin requirements

Entry into force (04 Jan 2017) 01 Mar 2017 01 Sep 2017 01 Sep 2018 01 Sep 2019 01 Sep 2020

• Variation Margin to be exchanged if both counterparties are in category 1

• Initial Margin to be exchanged if both counterparties are in category 1

• Variation Margin to be exchanged between all counterparties and all products (including swaps)

• Initial Margin to be exchanged if both counterparties are category 2 or higher




01 Jan 2018: End

of exception for

VM on FX forwards

Tod

ay

04 Jul 2017: End

of transition for

Intragroup

exposures

Feb 2020: End of

for single-stock

equity or index

options

• Counterparties may agree that no initial margin is collected for certain physically settled Foreign Exchange (FX) contracts (FX forwards, FX swaps, currency swap)

• Counterparties may agree that no collateral is collected when amount due from last calculation is lower than Minimum Transfer Amount agreed. The amount shall not > €500K

• Intra-group transactions subject to certain conditions (which include regulatory approval)

• Covered bonds issuers or pool under certain conditions

Category 1 ANA ≥ €3 trillion

Category 2 ANA ≥ €2,25 trillion



Category 5 ANA ≥ €8 billion

ExemptionsAverage Notional Amount (ANA) at group level

Transitions

• Collection of variable margin for FX forwards shall apply the date of entry into application of MiFID 2 (January 2018) or at the latest December 2018

• Transactions between entities belonging to the same group will become in scope as of July 2017


Initial and Variation margin introduction

Margin requirements

Initial Margin (IM) Variation Margin (VM)

What

Governance

Exceptions

Re-use

Collateral

Minimum Transfer

Amount

• Buffer to protect against variations in the

exposure, during the period between 2

different margin calls

• A guarantee to protect against exposure

incurred by trading in derivatives based on the

latest known market price of the underlying

• 2 different methods allowed

• Strict documentation and governance

requirements

• Must follow mark-to-market or mark-to-model

Strict documentation and governance

requirements

• Intragroup transactions*

• Certain physically settled FX transactions

• Amount to collect is less than € 50 Mio

• Must be segregated

• Must be calculated and collected regularly

• Limits on what is accepted

• Sum of the minimum transfer amount per

counterparty at group level of IM+VM cannot

exceed € 500,000

• Intragroup transactions*

• If at least one counterparty is NFC- and below

de-minimis thresholds

• No restrictions on re-use for cash and non-

cash collateral under EMIR

• Must be calculated and collected daily

• Deadline for collateral collection

• Limits on what is accepted

• Sum of the minimum transfer amount per

counterparty at group level of IM+VM cannot

exceed € 500,000

• Re-use of collateral collected as IM is not

allowed

* Subject to regulatory approval


Much more than just exchanging margin

The margin requirements in a nutshell

Operations

• Daily calculation of exposures and collateral value

• Timely exchange of collateral

• Collateral quality monitoring

GOVERNANCE

• Clear procedures and policies for

collateral management operational

processes are required

• Procedures and policies need to be

reviewed regularly, at least annually

• Escalation procedures

SEGREGATION

• Bankruptcy remote accounts or third

party custody for non-cash IM

• IM Cash cannot be held by the

collateral provider

• Availability of unused collateral


Agenda

1

2

3

4

EMIR

SFTR

Data Mutualisation

Questions

Introduction


Margin requirements

Reporting


EMIR reporting

Where are we and what is coming?

16 Aug 2012 12 Feb 2014 31 Oct 2015 1 Nov 2017 12 Feb 2019

EMIR entry into force Reporting start date Level 2 validations EMIR revised standards New backloading deadline

To

day

Daily reporting for all new and open transactions starts

ESMA has imposed stricter quality controls on the data

The number of fields to report and data quality checks expand

Backloading of all transactions entered into between 16 August 2012 and closed before 12 Feb 2014

Reporting start date

Level 2 validations

EMIR revised standards

New backloading deadline

12 Feb 2014

31 Oct 2015

1 Nov 2017

12 Feb 2019


Key Requirements Reporting

What is EMIR ?

Contract Type

Details on the transaction

Details on the transaction

Risk mitig. / Reporting

Clearing

Counterparty data

Common data

Interest Rates

FX

Options

Common data specific to each type

of products

Commodities

• Information pertaining to the derivative transactions executed between the twocounterparties

• Common data reported must be agreed between both party

• 59 data fields split in 5 sections

• The derivative product are identified by a unique product ID, which reflect the classand type of derivative

• Reporting log for the modification of data

• Information related to the counterparties to the contract• Reported separately by each counterparty or their appointed 3rd party• 26 data fields• The counterparties and the other entities (such as broking entity, CCP, clearing member, reporting entity) areidentified based on a unique code (i.e. LEI)

&

&

• Specific information and fields are different from the class of derivatives beingreported


From 85 to 129 fields as of November 1st, 2017

EMIR revised standards

New andchanged

fields

Interest ratederivatives

(time period, multiplier,…)

Options (maturity of

the underlying, strike price annotation)

Commodity Derivatives

(duration, delivery capacity,…)

Credit derivatives(seniority,

series, index factor…)

Extended use of LEI

Clarification of assignment of

fields (UTI, buyer/seller, notional,…)

New

Changed

Non exhaustive, source: Deloitte analysis


Agenda

1

2

3

4

EMIR

SFTR

Data Mutualisation

Questions


Transparency towards investors

Undertakings for collective instruments will be required to disclose the use of SFT’s and total return swaps to their investors

Transparency for SFT’s

Securities Finance Transactions Regulation

Concern from the G20 leaders on high-risk activities moving from regulated banking entities into unregulated “shadow banking” entities. Measures are introduced around 3 main pillars

Context & Scope

Transparency on reuse

Reuse of collateral will be subject to conditions

1Transaction reporting

Counterparties will have to report SFT’s in an EMIR style report to trade repositories

2 3


Expected timeline

Securities Finance Transactions Regulation

UCITS and

AIFMs to

disclose their

use of SFTs and

total return

swaps in the

periodic reports

Nov

2015

SFTR

adopted

by EU

council

13th Jan

2017

Today

* Expected dates as entry into force of level 2 Delegated Act expected in Q3 2017

Reporting requirements*

2016 2017 2018 2019

UCITS and

AIFMs to

disclose their

use of SFTs and

total return

swaps in the

pre-contractual

documents

13th July

2017

Counterparties

to comply with

requirements on

re-use of

collateral

13th July

2016Q3

2018

Investment firms

and credit

institutions

Q4

2018

Central securities

depositories and

central

counterparties

Q1

2019

Insurance/

reinsurance

undertakings,

UCITS/UCITS

managers,

AIFs/AIFMs and

institutions for

occupational

retirement provision

Q2

2019

Non-financial

counterparties

Disclosure requirementsRe-use requirements

Regulation Implementation Period


Agenda

1

2

3

4

EMIR

SFTR

Data Mutualisation

Questions


MiFID I

SFTR

MiFIR

2008

2018

2018

Listed equity Investment firms National Competent Authority (NCA)

1

3

4

All Financial instruments admitted on trading venue (or with underlying on

trading venue)

NCA / Approved Reporting Mechanism / (TR)

Investment firms / Trading Venues

Trade Repository (TR) All counterparties of the transactions :

Investment firms, UCITS, AIF, Insurance,

CCP

All Repo and securities lending /

borrowing transactions / buy-

sell back

TRADE

TRADE

SHADOW BANKING

Who ?What ? Where ?

Trade Repository (TR) FinfraG All counterparty but single sided

EMIR

EMIR Level 2 OTC and Listed Derivatives

All counterparties of the transactions : Investment

firms, UCITS, AIF, Insurance, CCP

Trade Repository (TR) 2

POST TRADE

OTC and Listed Derivatives

2014

2015

2017

MAR National Competent

Authority (NCA)

Reporting of new instruments admitted on

trading venues

Investment firms / Trading Venues

By 2018, virtually all transactions will need to be reported

Data mutualisation: a short recap


Counterparty Data

Collateral Data

Common Data

#16

#10

#59

#85

Counterparty Data

#16

Collateral Data

#19

Common Data

#94

Report / Buyer Details

#24

Transmission & Transaction

Details #16

Instruments Details

#16

Trade / Algo Details # 9

# 65

Counterparty Data

# 18

TransactionData

# 99

Margin Data

# 20

# 153

EMIR EMIR Rewrite MiFIRSFTR

New fields aligned with MiFIR

MiFIR

# 48

Reporting of new admission / termination

on trading venues (MAR)

Daily reporting of activities on trading

venues (MiFIR)

MAR

# 48

#129

Re-use data# 16

Data mutualisation: the potential

Streamlined data sourcing will enable consistency of data and data management


Agenda

1

2

3

4

EMIR

SFTR

Data Mutualisation

Questions


Questions


Laurent ColletPartner +352 451 452 [email protected]

Strategy & Corporate Finance Strategy & Corporate Finance

Kevin Demeyer

Senior Manager

+352 451 453 808 [email protected]

Your EMIR and SFTR Contacts


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emir & sftr the journey continues - deloitte the bilateral model each market participant has a...

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