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Amending Investment Management Agreements for EMIR

  • United Kingdom
  • Financial services and markets regulation - Derivatives
  • Financial services and markets regulation - EMIR
  • Financial services and markets regulation - UCITS V
  • Financial institutions


Reporting requirement

The reporting obligations under EMIR come into effect on 12 February 2014. From this date parties that enter into any new over-the-counter (“OTC”) derivatives or exchange traded derivatives, amend the terms of their derivatives transactions or terminate derivatives transactions early will be required to report certain terms to a trade repository. Details of derivatives transactions that were outstanding on 16 August 2012 will also need to be reported, although not all will need to be reported on 12 February 2014.

It is possible to appoint agents to report the details of derivatives transactions on your behalf and, if you have an investment manager, this may include appointing your investment manager to do this on your behalf. In these circumstances it is important that your investment management agreement is amended to reflect these new responsibilities.

Clients that use investment managers to manage their assets and investment managers themselves should also consider amending their investment management agreements to ensure that obligations in respect of the risk mitigation techniques under EMIR are properly allocated between clients and their investment managers. This would include pension schemes, common investment funds for pension schemes and investment funds such as UCITS, NURS, QIS and hedge funds.

Risk mitigation techniques

Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (“EMIR”) imposes various obligations on certain parties who enter into derivatives including central clearing, reporting and risk mitigation techniques.

All parties that enter into OTC derivatives that are not centrally cleared must comply with what are known as the risk mitigation techniques. As the requirement to centrally clear certain types of OTC derivatives is not yet in force, the risk mitigation techniques apply to all parties who enter into OTC derivatives. The extent to which the risk mitigation techniques apply to a particular client will depend on whether that client is categorised as a financial counterparty or a non-financial counterparty under EMIR

The risk mitigation techniques are a range of measures imposed by EMIR which seek to mitigate the counterparty and operational risk that users of non-cleared OTC derivatives are exposed to. These include obligations to:

  • confirm transactions in writing;
  • reconcile the key terms of transactions with the records of counterparties;
  • consider whether transactions with a particular counterparty can be compressed to reduce the number of transactions outstanding and reduce counterparty credit risk;
  • have dispute resolution procedures in place; and
  • have a mark to model policy in place that should be used where marking to market of OTC derivatives is not possible.

The risk mitigation techniques came into force in March and September of 2013 and all users of OTC derivatives should already be compliant with these obligations.

Documenting your arrangements

Pension scheme trustees should note that the transitional exemption that pension schemes benefit from is in respect of the obligation to clear certain types of OTC derivatives only and that pension scheme trustees are obliged to comply with the risk mitigation techniques and the reporting requirements.

Clients and their investment managers should decide which of them is best placed to ensure compliance with the various aspects of each risk mitigation technique. For example, in practice it will be investment managers that enter into OTC derivatives on behalf of their clients and will therefore be best placed to confirm the terms of OTC derivatives with counterparties. On the other hand, clients may want to retain the obligation to make notifications to the Financial Conduct Authority, such as where OTC derivatives are unconfirmed for more than five business days.

Clients and their investment managers should amend their investment management agreements to properly document how the responsibility for complying with the risk mitigation techniques will be allocated between them. Clients should note that compliance is ultimately their legal obligation.

In addition, ISDA Master Agreements should already have been updated to ensure compliance with the risk mitigation techniques. This may be done by adherence to an ISDA Protocol or through bilateral agreements with counterparties. Clients and investment managers should check this has taken place.


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