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On 5 August, ESMA published an updated version of its EMIR Q&A document.  The document constitutes a material update of the previously published version, including answers to a number of new questions and additional clarification with respect to previously published answers.  Guidance is provided on a number of issues, including confirmation:

  • that typically the counterparty to an OTC derivative transaction with a fund will be the fund itself and not the fund manager.  This has consequences with respect to issues such as reporting, portfolio reconciliation and portfolio compression;
  • that back-to-back OTC derivative contracts are not subject to the EMIR risk mitigation technique requirements;
  • regarding the full ambit of the types of trades that are regarded as OTC derivative classes and therefore subject to the provisions of EMIR;
  • that time begins to run from the date of execution of a trade (irrespective of the method of execution) for the purposes of complying with timely confirmation requirements;
  • regarding the elements that must exist within a firm’s risk management systems if portfolio or macro hedges are to be regarded as “objectively measurable in reducing risks”;
  • that the following risk mitigation techniques apply to NFCs-:
    • timely confirmations
    • portfolio reconciliation
    • portfolio compression
    • dispute resolution;
  • regarding the correct process for establishing the EMIR counterparty classification of entities established in third countries – it seems that if it is not possible to verify the classification of such a party, it should be assumed to be an NFC+;
  • around key terms to be included in any portfolio reconciliation and deadlines to be applied in performing the reconciliation;
  • that counterparties can agree that discrepancies below a specified threshold will not constitute ‘disputes’ for the purposes of EMIR’s dispute resolution procedures;
  • regarding the nature of individual client segregation under Article 39(3) of EMIR;
  • concerning the classification of certain financial products for reporting purposes;
  • concerning the correct procedure for completing certain EMIR reporting fields;
  • that intra-group transactions are subject to the reporting requirement, but that intra-entity transactions (e.g. between two trading desks within the same legal entity) are not; and
  • that the reporting obligation does not apply to non-European subsidiaries of an EU undertaking.
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