Marc Marly, Head of Compliance Practice at Alpha FMC, shares with us his expertise on the topic of EMIR, in an ever-changing regulatory environment. We notably discussed the impact of the regulation and its requirements but also the challenges it means for most financial players.
The EMIR regulation was adopted in 2012. What were its main goals?
The main goal of the EMIR regulation was to increase transparency in derivatives markets to enable European regulators to better spot risky exposures.
EMIR mainly applies to financial and non-financial companies authorized in the EU (ex: banks, funds, insurance companies, etc.). It led to several requirements on derivatives trading including clearing, reporting, risk mitigation and collateral management.
The main operational requirement is for the financial players to daily report derivatives to trade repositories. These repositories are accessible to the European regulators enabling them to closely monitor derivatives expositions.
Have those goals changed over the years? If so, how and why?
Since the implementation of EMIR, the EU Commission initiated a detailed review. While no material changes were considered, it was recognized that some aspects of the regulation needed amendments. This led to EMIR Refit, which was effective on 17 June 2019. This amendment notably introduces the concept of small financial counterparties that will be exempt from clearing. It also lays down specific requirements on accessibility and affordability of clearing services, counterparty classification and reporting requirements.
How has EMIR impacted the market? What have been the main challenges for the different actors?
The impact on the market was quite significant given that previously unregulated asset classes were suddenly covered by a regulatory framework.
The main challenges for the different actors were:The mandatory central clearing of certain types of Over-the-Counter "OTC" derivatives The collection of margins for uncleared OTC derivatives between certain types of counterparty The daily reporting of all eligible OTC derivatives to trade repositories The Risk Mitigation requirements for OTC derivatives.
As a consequence, lot of financial players have been in the obligation to implement significant changes to their existing operating model, especially in their Middle Office activities, pricing, collateral management and reporting functions.
Furthermore, an automatic reconciliation is done by the trade repositories between the trades reported by the financial players and their counterparties. The reconciliation breaks are monitored by the regulators as they might reveal reporting issues. To avoid this situation, the financial players need to properly align with their counterparties on the reporting methodology. This often results in a significant challenge as each party could use different reporting approaches, tools and methodologies.
How can Alpha FMC support companies when it comes to their reporting methodology?
Alpha has 15 years of experience in supporting the industry, and, as such, assisted many clients in improving their Front, Middle and Back Office operations as well as their reporting obligations for regulations such as EMIR, SFTR, CSDR, FATCA, AEOI.
At Alpha, we have developed an in-depth expertise on the implementation of reporting framework fully compliant to EMIR. We use a structured and robust approach to improve the reporting methodology. We first perform a gap analysis on the EMIR reporting comparing it to the regulatory expectations and the market Best Practices. Based on this review, we propose a targeted action plan to improve the reporting service. It includes recommendations on data mining, IT tools, controls and reporting generation. We then support the full implementation of the targeted actions.
Taking into account that EMIR is ongoingly refined, Alpha has an effective regulatory watch in place to timely inform its clients of major updates.
What are your main pieces of advice and best practices in order for companies to comply with the EMIR regulation?
It goes without saying, but the ultimate objective should always be the full compliance to EMIR through timely reporting, proper risk mitigation and clearing.
The cost of non-compliance can be very high. As an example, in October 2017, Merrill Lynch International was fined £34.5 million by the FCA for failures in reporting derivative transactions under EMIR.
Companies need therefore to carefully assess the impact of EMIR on their operating model and consider the changes that are needed on their main functions as Front Office, Operations, IT, Reporting, Compliance and Risk Management. This includes the review of the IT infrastructure and whether it is capable of performing automated trade execution, processing and margin calls, with the associated reporting.
Based on this review, companies need to address the identified gaps. These could consist in changing the operating model, improving operational and IT processes. The use of third-party providers, whether as a software vendor or service provider is also an option to be considered.
All these changes need to be properly and exhaustively managed in different procedures and policies. Finance actors also need to review the contractual agreements in place with their counterparties and collateral managers to meet EMIR requirements.
Publié le 20 janvier 2020