FinfraG / EMIR - InCube · portfolio compression exercise in order to reduce their counterparty...
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FinfraG / EMIR
Trade Repository Reporting &
Risk Mitigation Techniques
Gilbert Lüthy, CFA
Zurich, Sept. 23rd 2014
AGENDA
Trade Repository Reporting What are the relevant regulations?
Who has to report?
What has to be reported?
What is the impact on IT infrastructure?
What are the selection criteria for choosing a Trade Repository?
Risk Mitigation Techniques What are the requirements under EMIR?
How does EMIR already impact Swiss Entities?
What are the requirements under FinfraG?
Annex
2
AGENDA
3
Trade Repository Reporting What are the relevant regulations?
Who has to report?
What has to be reported?
What is the impact on IT infrastructure?
What are the selection criteria for choosing a Trade Repository?
Risk Mitigation Techniques What are the requirements under EMIR?
How does EMIR already impact Swiss Entities?
What are the requirements under FinfraG?
Annex
RELEVANT REGULATIONS
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Important Regulations under EMIR regarding Trade Repository Reporting
Source: Extract of REGULATION (EU) No 648/2012 (EMIR)
WHO HAS TO REPORT? (1/6)
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Reporting Obligation under FinfraG (Art. 103 E-FinfraG) For transactions between a financial and a non-financial counterparty, the
financial counterparty has to report. For transactions between two financial counterparties, the financial
counterparty that is not small has to report. Point two above applies analogous to transactions between two non-
financial counterparties.
WHO HAS TO REPORT? (2/6)
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Reporting Obligation under FinfraG (Art. 103 E-FinfraG) For transactions between two small financial or two non-small financial
counterparties, the selling party has to report. The point above applies analogous to transactions between two non-
financial counterparties.
WHO HAS TO REPORT? (3/6)
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Reporting Obligation under FinfraG (Art. 103 E-FinfraG) Exception Rules The Swiss counterparty has to report, when the foreign counterparty is not
reporting to a Trade Repository. Is the transaction centrally cleared, then the reporting is carried out by the
Central Clearing party. To fulfill the reporting obligation the service of a „Third Party“ can be used.
WHO HAS TO REPORT? (4/6)
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Overview of Reporting Obligation under FinfraG
WHO HAS TO REPORT? (5/6)
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Reporting Obligation under FinfraG and EMIR If the Swiss entity is the seller within the transaction, trades are always
reported dually (from the Swiss and the EU counterparty). In case the Swiss entity is the buyer within the transaction, trades are only
reported by the Swiss entity when the cascade logic described in the previous slides indicates a reporting obligation. The EU counterparty however will always report the trade.
WHO HAS TO REPORT? (6/6)
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WHAT HAS TO BE REPORTED?
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Reporting Content The reporting content is structured into 2 sections. The second section is
again divided into 9 sub-sections. On average more than 60 attibutes have to be reported to Trade
Repositories for every derivative transaction. The content of most of the fields has to follow a clearly defined format, e.g.
ISO 8601 for the date format.
Section Content Applicable to Section 1 Parties to the Contract All Contracts
Section Content Applicable to
Section 2a Contract type All Contracts
Section 2b Details on the transaction All Contracts
Section 2c Risk mitigation / reporting All Contracts
Section 2d Clearing All Contracts
Section 2e Interest Rates Interest Rate Derivatives
Section 2f Foreign Exchange Currency Derivatives
Section 2g Commodities Commodity Derivatives
Section 2h Options Contracts that contain an Option
Section 2i Modifications to the Contract All Contracts
COUNTERPARTY DATA
COMMON DATA
REPORTING MODEL
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The Transaction-Position Dual Reporting Model
Messages sent to the Trade Repository distinguish between Messages re. Transactions including various condition data; Messages re. Modifications of Contracts; Messages re. subsequent updates, e.g. Valuation, Collateral; Supplementary Position Messages (lack of clearly formulated
requirement within the ESMA regulations), nonetheless element of dual reporting models established by Trade Repositories.
Source: Derivatives Workflow Guide, V1.1, March 2014, REGIS-TR
IMPACT ON IT INFRASTRUCTURE
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What Requirements does a Reporting Solution have to fulfill? The relevant trades have to be identified for each legal entity. The reporting obligation has to be determined for each entity. The reporting content has to be checked for completeness and converted
into the correct format. A status control for outgoing and incoming messages has to be established.
SAMPLE OF IMPLEMENTATION CHALLENGES
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TECHNICAL IMPLEMENTATION CHALLENGES
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Technical Implementation Challenges Sourcing of all the relevant data
What are the available data sources? Are all relevant fields already stored in the system (all
trades entered in or outstanding on Aug. 16th, 2012 (backloading requirement under EMIR))?
How are missing data elements added?
Data validation and monitoring
Archiving of data
Data transmission to Trade Repository
REPORTING SOLUTIONS
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The complexity in fulfilling the reporting obligation has considerable impact on IT Infrastructure in order to master the data flow correctly.
Standard software solutions, e.g. SAP, offer already sophisticated functionality for Trade Repository Reporting with integrated Status Management for Incoming and Outgoing Messages to Trade Repositories.
TRADE REPOSITORY REPORTING IN SAP
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Source: Trade Repository Reporting (TRR), SAP AG
FUNCTIONALITY OF SAP TRR
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Based on an assessment of Eprox Consulting AG , Sept. 2014
SELECTION OF A TRADE REPOSITORY
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Market Position of Trade Repositories Some Trade Repositories have a Central Securities Depository background
(i.e. DTCC, Regis TR), others have an Exchange background (i.e. CME, Una Vista).
There are Trade Repositories that focus on reporting, others emphasize on operational efficiency of the trading process.
Especially for financial counterparties the strategic positioning of the Trade Repository used for reporting is crucial.
THE REPORTING FLOW
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How do Trade Repositories Process Data?
Trade Repositories identify messages with data of transactions, valuations, collateral and life-cycle events and receive them at the repository separately from the information of the positions.
Supervisory authorities can receive access to transactions and position data on a „Pull“ (e.g. direct access on database) or „Push“-basis (e.g. via predefined reports).
REPORTING FLOW IN AN EUROPEAN CONTEXT
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The Reporting Flow in the Swiss & European Context
Art. 77 E-FinfraG stipulates the Swiss Regulatory Authorities (FINMA, SNB, Electricity Commission) that are allowed to have access to the data of a Trade Repository.
Art. 78 E-FinfraG outlines the preliminary conditions, that have to be fulfilled by foreign supervisory authorities to have access to the data of a Swiss Trade Repository.
EVALUATION OF TRADE REPOSITORIES
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Selection Criteria for choosing a Trade Repository
Basic reporting functionality are covered by almost all Trade Repositories on
a satisfying quality level. With higher trading volume operational efficiency gains may have to be
considered in addition to the standalone reporting functionality. For Swiss entities ‚Data Security‘ aspects will be of higher importance than
for comparable entities domiciled in the EU.
OVERVIEW OF TRADE REPOSITORIES
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AGENDA
Trade Repository Reporting What are the relevant regulations?
Who has to report?
What has to be reported?
What is the impact on IT infrastructure?
What are the selection criteria for choosing a Trade Repository?
Risk Mitigation Techniques What are the requirements under EMIR?
How does EMIR already impact Swiss Entities?
What are the requirements under FinfraG?
Annex
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TIMELY CONFIRMATION
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Timely Confirmation Effective under EMIR as of: March 15th, 2013 Requirements OTC derivative contracts need to be confirmed within two
days (NFC-) respectively one day (NFC+/FC). Until Aug. 31st, 2014 timeframe is extended up to 4 days.
Exchange of confirmations between counterparties within given timeframe.
This Risk Mitigation Technique is part of the current draft of FinfraG. However, the equivalence of the Swiss rules to EMIR depends on the
content of the regulatory technical standards, that will have to be defined by the Swiss authorities following the entry into force of FinfraG.
PORTFOLIO RECON & DISPUTE MGMT
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Portfolio Reconciliation and Dispute Management Effective under EMIR as of: Sept. 15th, 2013 Requirements Arrangements with counterparties for reconciliation and
procedures in regard to dispute management need to be in place prior to enter into OTC derivative contracts.
Portfolios need to be reconciled with counterparties. Reconciliation frequency depends on counterparty classification: Once per year for NFC- ≤ 100 open contracts Once per quarter for NFC- > 100 open contracts Once per quarter for NFC+/FC ≤ 50 open contracts Once per week for NFC+/FC 51 to 499 open contracts Daily for NFC+/FC ≥ 500 open contracts
These Risk Mitigation Techniques are part of the current draft of FinfraG. However, the equivalence of the Swiss rules to EMIR depends on the
content of the regulatory technical standards, that will have to be defined by the Swiss authorities following the entry into force of FinfraG.
PORTFOLIO COMPRESSION
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Portfolio Compression Effective under EMIR as of: Sept. 15th, 2013 Requirements stipulated in Art. 14 of Regulation (EU) No 648/2012) Regulatory Technical Standard of ESMA:
“Financial counterparties and non-financial counterparties with 500 or more OTC derivative contracts outstanding with a counterparty which are not centrally cleared shall have in place procedures to regularly, and at least twice a year, analyse the possibility to conduct a portfolio compression exercise in order to reduce their counterparty credit risk and engage in such a portfolio compression exercise.”
This Risk Mitigation Technique is part of the current draft of FinfraG. However, the equivalence of the Swiss rules to EMIR depends on the
content of the regulatory technical standards, that will have to be defined by the Swiss authorities following the entry into force of FinfraG.
REQUIREMENTS: CURRENT SITUATION
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Current Situation in Switzerland Financial
Counterparty
Small Financial
Counterparty
Non Financial
Counterparty
Small Non
Financial
Counterparty
Implementation of basic
risk mitigation measures
for non
centrally
cleared
trades
Timely
Confirmation
Portfolio
Reconciliation
Dispute Resolution
Portfolio
Compression
as bilaterally
agreed in
(ISDA/CSA)
as bilaterally
agreed in
(ISDA/CSA)
as bilaterally
agreed in
(ISDA/CSA)
as bilaterally
agreed in
(ISDA/CSA)
Extended risk
mitigation measures
Valuation
Collateralisation
as bilaterally
agreed
(ISDA/CSA)
as bilaterally
agreed
(ISDA/CSA)
as bilaterally
agreed
(ISDA/CSA)
as bilaterally
agreed
(ISDA/CSA)
for centrally
cleared
trades
Valuation covered by
CCP services
covered by
CCP services
covered by
CCP services
covered by
CCP services
Collateralisation covered by
CCP services
covered by
CCP services
covered by
CCP services
covered by
CCP services
REQUIREMENTS: EMIR / BCBS IOSCO
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Requirement under EMIR* Financial
Counterparty
Small Financial
Counterparty
Non Financial
Counterparty
Small Non
Financial
Counterparty
Implementation of basic
risk mitigation measures
for non
centrally
cleared
trades
Timely
Confirmation
Portfolio
Reconciliation
Dispute Resolution
Portfolio
Compression
nv
/nv
nv
Extended risk
mitigation measures
Valuation
Collateralisation
for centrally
cleared
trades
Valuation covered by
CCP services
covered by
CCP services
covered by
CCP services
covered by
CCP services
Collateralisation covered by
CCP services
covered by
CCP services
covered by
CCP services
covered by
CCP services
*) As of Dec. 2015 (impact of BCBS IOSCO) situation already expected to be equivalent with EMIR.
REQUIREMENTS: FINFRAG
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Requirement under FinfraG Financial
Counterparty
Small Financial
Counterparty
Non Financial
Counterparty
Small Non
Financial
Counterparty
Implementation of basic
risk mitigation measures
for non
centrally
cleared
trades
Timely
Confirmation
Portfolio
Reconciliation
Dispute Resolution
Portfolio
Compression
nv
/nv
nv
Extended risk
mitigation measures
Valuation *
Collateralisation
for centrally
cleared
trades
Valuation covered by
CCP services
covered by
CCP services
covered by
CCP services
covered by
CCP services
Collateralisation covered by
CCP services
covered by
CCP services
covered by
CCP services
covered by
CCP services
*) In comparison with EMIR and BCBS IOSCO, FinfraG does not foresee a ,,Valuation’’ obligation of open
transactions on behalf of ,,Small Financial Counterparties’’.
AGENDA
Trade Repository Reporting What are the relevant regulations?
Who has to report?
What has to be reported?
What is the impact on IT infrastructure?
What are the selection criteria for choosing a Trade Repository?
Risk Mitigation Techniques What are the requirements under EMIR?
How does EMIR already impact Swiss Entities?
What are the requirements under FinfraG?
Annex
31
ABBREVIATIONS
32
YOUR CONTACTS
Schweiz
Eprox Consulting AG
Hinterbergstrasse 24
6330 Cham
Gilbert Lüthy
Tel. +41 79 340 59 21
E-Mail: [email protected]
www.eprox.ch
Schweiz
Eprox Consulting AG
Hinterbergstrasse 24
6330 Cham
Stefan Völkel
Tel. +41 79 502 74 72
E-Mail: [email protected]
www.eprox.ch