On 15 September 2013, the second set of obligations arising from the introduction of the European Market Infrastructure Regulation "EMIR" came into force.
By that date all financial counterparties ("FCs") and non-financial counterparties ("NFCs") were required to meet their obligations in respect of:
- Portfolio reconciliation;
- Dispute resolution; and
- Portfolio compression.
Each of these obligations is discussed further below:
Portfolio Reconciliation
This obligation required written agreements to be put in place with each counterparty, in order to set out the arrangements under which over-the-counter ("OTC") derivative contracts would be reconciled.
To ensure compliance with this obligation, each party to an OTC derivative contract was required to sign an adherence letter indicating whether it was opting to be appointed a "Portfolio Data Receiving Entity" or a "Portfolio Data Sending Entity".
Portfolio Data Receiving Entity
Where a party chooses to be appointed the Portfolio Data Receiving Entity, and each of its counterparties in OTC derivatives contracts have elected to be appointed Portfolio Data Sending Entities, the Portfolio Data Receiving Entity will simply receive relevant data from each of its counterparties. In such cases, the Portfolio Data Receiving Entity is obliged to carry out a comparison of the data received against its own records. Any discrepancies identified following this review must be notified to the relevant counterparty where it is believed that the discrepancy in the data may be material. Both parties must then attempt to resolve the matter in a timely fashion. Should a Portfolio Data Receiving Entity fail to inform the Portfolio Data Sending Entity of a discrepancy within 5 joint business days, this will be deemed to be an affirmation of the data received from the Portfolio Data Sending Entity.
Portfolio Data Sending Entity
Where an entity elects for categorisation as a Portfolio Data Sending Entity, and its counterparties have also elected to be Portfolio Data Sending Entities, both parties will exchange data and carry out comparisons against their own records. Again, where discrepancies are identified, the parties are obliged to consult with each other to resolve any issues in a timely manner. It can be noted that unlike the exchange of information between a Portfolio Data Receiving Entity and a Portfolio Data Sending Entity, there is no automatic affirmation of the data exchanged after five joint business days where the two parties have elected to be Portfolio Data Sending Entities.
Change to Designation and Frequency of Reporting
Should an entity wish to do so, it may change its designation from a Portfolio Data Receiving Entity to a Portfolio Data Sending Entity. However, in order to do so a written agreement must be entered into with the other party. It can be noted that the other party may withhold its consent to the change in designation where such a change would mean a party would hold different designations with one or more counterparties.
The frequency of data exchange between the parties can be agreed between the parties, provided the minimum frequency outlined in EMIR is honoured.
Dispute Resolution
As of 15 September, FCs and NFCs are required to have detailed procedures in place to:
(i) identify, record and monitor disputes;
(ii) ensure complaints are resolved in a timely manner with a specific process for those disputes not resolved within 5 business days.
This obligation provides for a dispute notice to be sent by one party to another so that both parties can resolve the dispute in a timely manner. Where disputes are not resolved within five joint business days, each party is obliged to escalate the dispute to those senior members of each party in a position to deal with the dispute.
It can be noted that any dispute resolution procedures developed on foot of EMIR do not override any existing provisions in place. Accordingly, any such dispute procedures must be honoured in conjunction with those under EMIR.
Also forming part of this obligation is the requirement for FCs to notify the relevant competent authority of any disputes in respect of OTC derivative contracts amounting to €15 million or more and that remain outstanding for at least 15 business days (the "Notification Obligation").
Portfolio Compression
This obligation required FCs and NFCs with 500 or more outstanding uncleared OTC derivative contracts to have procedures in place to analyse (at least twice a year) the possibility of conducting a portfolio compression exercise. FCs and NFCs must also be capable of providing an explanation to the appropriate competent authority in the event that they conclude that a portfolio compression exercise is not appropriate.
Compliance with EMIR
To aid entities to comply with the provisions of EMIR and the applicable obligations, the International Swaps and Derivatives Association ("ISDA") produced the EMIR Protocol (the "Protocol"). Given the time pressure on many entities leading up to the 15 September 2013 deadline, the Protocol offered the simplest method of ensuring compliance.
However, neither the Notification Obligation nor the obligation to carry out portfolio compression exercises are dealt with by theProtocol. This is due to the fact that each of those obligations amount to a unilateral exercise.
When compiling the Protocol, ISDA took the opportunity to include a confidentiality waiver (the "Waiver"). While this is unconnected to the obligations discussed above, it does relate to the requirement for transaction OTC transactions to be reported to a trade repository in accordance with EMIR. The Waiver means that those parties that opted to adhere to the Protocol in advance of the 15 September 2013 deadline, agreed to the disclosure or retention of information pertaining to OTC transactions with trade repositories, as well as the head office, branches or service providers of other parties in accordance with the provisions of EMIR.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
