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EMIR Risk Mitigation- FCA hammer to fall

A brief reminder that the FCA’s deadline for compliance with EMIR risk-mitigation regulations expires on 30th April 2014. Firms must be in a position to demonstrate compliance after this date or face a possible fine and public disclosure of the penalty. The regulator updated its EMIR website page in February stating that it expects firms to adhere to the regulations in “the shortest timeframe possible” and to “have a detailed and realistic plan to achieve compliance” by Wednesday’s deadline. The risk mitigation requirements apply to operational elements of non-cleared OTC derivatives and have been in fully in place since the 1st September 2013:

  • Portfolio Compression: FC and NFC counterparties that have >500 mutual trades must assess portfolio compression
  • Portfolio Reconcilation: Key terms of each trade must be reconciled with respective counterparties to isolate any discrepancies, frequency varies according to party classification and number of shared trades
  • Dispute Resolution:  Requirements for detailed procedures to identify and resolve disputes over 5 business days old. FC must report all disputes > EUR 15mln. Notional that are unresolved by 15 business days

The remaining two risk mitigation techniques came into force earlier than the above, on 15th March 2013:

  • Timely Confirmation: the confirmation, preferably electronic, of all OTC derivative terms. Variable by product phase-in, to be T+1 for FCs\NFC+s and T+2 for NFC
  • Daily Valuation: FCs and NFC+s daily mark to market (or mark to model) valuations and to exchange appropriately segregated collateral

While there will be very few firms who do not already have a large part of the above elements in place, the other side of the compliance coin is the ability to provide evidence thereof on request. Perhaps, in line with its flexible, supervisory approach, the FCA has given no formal guidance as to what will constitute satisfactory evidence. However, the following elements are likely minima:

  • Formal agreements, whether bilateral or by protocol adherence,  with each counterparty  for each of the above requirements
  • Fully documented procedures relating to the implementation of each requirement
  • Defined and assigned roles and responsibilities for each requirement.
  • Relevant training undergone, ongoing and planned.
  • An audit\ gap analysis of existing processes’ compliance with EMIR and completed remediation
  • An internal compliance QA process

Risk mitigation, along with trade reporting and clearing obligations, is one of the three pillars of the EMIR project. It is the first for which an explicit compliance deadline is imminent. The FCA’s approach is holistic, risk-based, and collaborative; however, firms would be wrong to underestimate its capacity and willingness to enforce.

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