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EMIR update

    • Financial services and markets regulation - EMIR
    • Financial services


    The FCA has updated its EMIR news page to cover the following topics:

    • Availability of web portal for financial counterparties to make dispute notifications 
    • Availability of web portal for intra-group clearing exemption applications 
    • Result of the FCA’s first EMIR implementation review

    Dispute notifications

    Since 15 September, financial counterparties have been required to report disputes between counterparties which relate to an OTC derivatives contract, its valuation or exchange of collateral where the amount in dispute is EUR 15 million or more and the dispute has been outstanding for at least 15 business days. 

    The FCA requires financial counterparties to report disputes outstanding in a month by the 15th day of the following month through its web portal.  However, it extended this deadline by one week to 22 October for disputes outstanding between 15 September and 30 September to ensure that counterparties had sufficient time to register to use the FCA dispute notification portal. 

    When notifying disputes, financial counterparties need to provide the following information:

    • Name of counterparty and country of establishment, and its legal entity identifier if available 
    • Details of the dispute, including the amount in dispute and the basis on which such amount has been calculated.  The amount should be on a trade-by-trade basis wherever possible but a portfolio basis may be used if the disputed valuation or collateral is calculated at portfolio level 
    • The date on which the dispute was identified and, if and when it is resolved, the date on which it is resolved

    Intra-group clearing exemption

    Under Article 4(2)(a) of EMIR, a UK counterparty which wishes to make use of the intra-group clearing obligation in respect of OTC derivative transactions with another EU entity in its group must notify the FCA.  Under Article 4(2)(b), UK counterparty which wishes to make use of the clearing exemption in respect of a non-EU entity in its group must be authorised by the FCA to do so.

    At this time, exemption notifications can only be made in respect of two UK entities in the same group. 

    Exemption notifications in respect of entities established in another EU member state will not be accepted until an EU regulator notifies ESMA that it has authorised a central counterparty under Article 5 of EMIR.  Applications to apply the exemption in respect of transactions with non-EU group entities will only be accepted once ESMA has made an equivalence decision under Article 13 in respect of the relevant non-EU jurisdiction.

    EMIR implementation review

    The FCA intends to carry out a number of implementation reviews on key obligations under EMIR.  Pre-implementation reviews will be carried out before obligations come into effect to assess readiness and address any areas of concern.  Post-implementation reviews will be conducted shortly afterwards.

    The FCA has now published the results of its first reviews, which focused on risk mitigation techniques and non-financial counterparties.

    The FCA consulted with financial counterparties during July and August to identify challenges for market compliance with the timely confirmation and bilateral risk mitigation requirements for OT derivative contracts.  That review found:

    • Counterparties using electronic platforms for eligible trades found that electronic confirmation helped them comply with the EMIR timely confirmation requirements.  However, at least a certain proportion of confirmations would remain on paper because of the bespoke nature of the trade 
    • Engagement had begun with counterparties on the legal and operational requirements imposed by EMIR in respect of portfolio reconciliation and identification and monitoring of disputes.  Some firms were proactively contacting their counterparties to propose arrangements to facilitate compliance with EMIR 
    • Counterparties are reviewing their internal operational processes to ensure compliance with the timely confirmation and risk mitigation techniques

    Between June and September, the FCA also consulted with non-financial counterparties (NFCs) to understand how NFCs are defining their hedging activity and monitoring their status against the clearing threshold.  These are important questions because since March 15 an NFC which enters into contracts which exceed the clearing threshold must notify its  national regulator.  The review found:

    • NFCs had established clear trading strategies to identify hedging needs, against which trading activity was monitored to identify trades which are not relating to hedging 
    • Where NFCs engage in trades for both hedging and speculative purposes, they flagged non-hedging trades in internal systems so that they could be counted towards the clearing threshold 
    • Some NFCs were unaware that trades entered into by all financial entities in their groups, including non-EU entities, should be included when calculating whether the clearing threshold is exceeded 
    • Even where NFCs were aware that all group transactions must be counted, it could be challenging to perform a group wide threshold calculation, particularly where the UK NBC had relatively small trading activities and needed to include derivatives activity of larger entities based outside the EU

     Other points of interest which were noted during the course of the review included:

    • NFCs had started to be contacted by EU counterparties to update documentation to comply with the risk mitigation requirements but were concerned about the resources needed to do this in time and had not always appreciated that the risk mitigation techniques relating to portfolio reconciliation and dispute resolution also applied to NFCs.  NFCs noted that it was particularly challenging to meet the requirements when dealing with non-EU entities which may not be aware of the EMIR requirements 
    • NFCs had started to consider reporting obligations.  In some cases NFCs were having initial discussions with potential trade repositories.  In other cases, NFCs were exploring the possibility of delegating reporting to their counterparty or a third party service provider but noted that they would be unlikely to delegate reporting of certain intra-group trades and were implementing plans to deal with this.