EMIR Now Occupies the Treasury Agenda

At the same time the European Securities and Markets
Authority (ESMA) announced two weeks ago that the reporting obligation,
originally due to take effect this month, would now be postponed until February
2014 at the earliest. So mixed signals from different sources is leading to
much confusion. But what does this all mean for you as a corporate treasurers?

Contractual adjustments

All of these
contractual adjustments are necessary from the financial institution’s (FI)
viewpoint of view because each is a ‘financial counterparty’ and must comply
with the full range of EMIR regulations.

From 15 September 2013
the following resolution came into force for financial counterparties:

“Financial Counterparties must report any disputes between counterparties
about an over-the-counter [OTC] derivative contract, its valuation or the
exchange of collateral for an amount or a higher value than €15 million and
outstanding for at least 15 business days.”

For you as a
corporate this implies that your contract needs to be adjusted, as your current
contract with your financial counterparty probably does not specify how to act
in case of a dispute. This contract probably also provides your company with
confidentiality; your financial counterparty is currently not allowed to share
transaction information with others.

The new EMIR regulation
addresses exactly these points; hence financial counterparties need to
confirm/agree the necessary contractual adjustments with you. Without such
confirmation, they run the risk of non- compliance with the regulation or
breaching the confidentiality regulations of the contract with you.

To make things even more confusing, financial counterparties request (and without offering much explanation) that you confirm the adjustments to your current contract, provide confirmation of your current
status (according to the EMIR definition) and offer an additional reporting
service, all within one single letter.

1. Bilateral
   contract: Describes how corporates need to have a dispute
   resolution in place, how often the derivative portfolio needs to be reconciled
   and with whom the information may be shared by the financial counterparty.
2. Confirmation of Non-Financial Counterparty [NFC]
   status: A harmless requirement if you are an end-user and use
   derivatives only for hedging purposes; you will be a so-called ‘NFC’.
   Confirmation provides the financial counterparty with the basic information to
   determine the frequency and scope of services to be offered.
3. Services offered: As a result of being your
   counterparty in these transactions the financial counterparty has all the
   information it needs to report the trades which you have conducted to a trade
   repository (another EMIR novelty). However if you also have intercompany
   derivatives – for example foreign exchange (FX) forwards) you still need to
   report these transactions yourself!

In the same letter the
financial counterparty refers to an International Swaps and Derivatives (ISDA)
contract, which deals with the same items but in a standardised manner. More
importantly, if you adhere to this ISDA contract, it will be binding for all
financial counterparties included under it (assuming they all adhere to ISDA
rules), thus implying that you only have to monitor a single contract.

Postponement of reporting date

As readers might
recall, initially ESMA intended for the EMIR reporting obligation to be
introduced in August 2012. This deadline proved overly ambitious, as technical
standards still needed to be designed at the time and authorised trade
repositories were (and still are) not lacking. So even if you want to comply to
the reporting requirement, at present derivative transactions cannot be
reported because no trade repositories have yet been approved. Furthermore
legal entity identifiers (LEIs) – a unique counterparty identifier needed for
proper reporting – cannot yet be requested with the local chamber of commerce.

ESMA’s intention is to approve multiple trade repositories in one
fell swoop, thus avoiding the first mover(s) gaining a temporary monopoly. That
implies that for as long as there continue to be no approved trade
repositories, ESMA will have to keep putting off the introduction of the
reporting obligation. Earlier this month ESMA admitted that it does not expect
to approve and register trade repositories before mid-November 2013.

Assuming that this does actually happen in November, you will have 90 days to
choose and contract a trade repository because once the first have been
approved and registered corporates will have to start reporting all their
derivative trades. It might come as no surprise to learn that a virtual queue
is expected to build up during this 90-day period. Corporates need to prepare
themselves, get familiar with the reporting standards, know the implications
for their internal (reporting) processes and get acquainted with what trade
repositories have to offer.

Conclusion

The EMIR regulation is quickly becoming a reality, even if the foundations on
which it will be built are still under development. For the first time,
corporates must confront the implications of EMIR through the contractual
adjustment presented by their financial counterparty. A first small step maybe,
but bigger steps will follow shortly.

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