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ISDA Readies the EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol


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Introduction

ISDA is currently putting the finishing touches to its “EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol” (the Protocol), the final version of which is likely to be published later this month.  The Protocol will enable parties to amend ISDA Master Agreements (and certain other agreements) in order to reflect the portfolio reconciliation and dispute resolution provisions of EMIR, due to come into force on 15 September 2013.  It also includes certain confidentiality waivers relating to reporting and record keeping obligations under EMIR.

In its pre-publication form, the Protocol is split into two parts:

  • Part I: Portfolio Reconciliation and Dispute Resolution
  • Part II: Confidentiality Waiver.

Part I is further broken down into two scenarios:

  • One-way delivery of Portfolio Data, and
  • Exchange of Portfolio Data.

Accordingly, parties are required to confirm whether, for the purposes of the Protocol, they are adhering as either:

  • a Portfolio Data Receiving Entity, or
  • a Portfolio Data Sending Entity

a status which may be amended with the consent of the other party.  In addition, affiliates and third parties can be appointed in order to comply with a party’s Protocol obligations.  Whether firms choose to comply directly or via an affiliate/third party, a breach of Part I or any inaccuracy of a representation pursuant to Part II will not constitute an event of default or similar event with respect to any underlying transaction.

Portfolio Reconciliation

Delivery of Reconciliation Data

Each Portfolio Data Sending Entity (which can be both parties) is required to send Portfolio Data relating to all transactions which are subject to the EMIR risk mitigation regulatory technical standards (the “Risk Mitigation RTS”) on each “Data Delivery Date”.  The Data Delivery Date is to be agreed between the parties or, in the absence of agreement, is the Joint Business Day immediately prior to the date on which a Portfolio Reconciliation is to take place.  In addition, the parties should agree the date and time to which the data being delivery relates – in the absence of any agreement it should be prepared as of the close of business on the Local Business Day immediately preceding the Data Delivery Date.

Performance of the Reconciliation

The Portfolio Data Receiving Entity (in a one-way scenario) or both parties (in an Exchange scenario) must perform a portfolio reconciliation on each “PR Due Date”.  This date is to be agreed between the parties, subject to a fallback position (the “PR Fallback Date”) pursuant to which a reconciliation must be performed with at least with the frequency dictated by the Risk Mitigation RTS (which may be daily, weekly, quarterly or annually depending on the respective EMIR classification of the parties and the number of trades between the two).  In addition, one party can effectively change the frequency of reconciliations by way of notification to the other party if it believes that this is necessary in order to comply with the Risk Mitigation RTS.

Only “Key Terms” are subject to the reconciliation process, defined as “the valuation of such Relevant Transaction and such other details the relevant party deems relevant from time to time”.  A non-exhaustive list of potential Key Terms is referred to and includes:

  • effective date;
  • scheduled maturity date;
  • payment or settlement dates;
  • notional value;
  • transaction currency;
  • underlying instrument;
  • position of the counterparties;
  • business day convention; and
  • any relevant fixed or floating rates.

However, the calculations or methodologies underlying any term are not regarded as “Key Terms”.

As soon as reasonably practicable after the portfolio reconciliation is performed, the Portfolio Data Sending Entity should be notified of any discrepancies.  In a one-way scenario, the Portfolio Data Receiving Entity will be taken to have affirmed the Portfolio Data if it does not notify any discrepancies by 4 pm local time in the place of business of the Portfolio Data Sending Entity on the fifth Joint Business Day after later of (a) the relevant PR Due Date, or (b) receipt of the relevant Portfolio Data.  In an exchange scenario, where both parties have been appointed as Portfolio Data Receiving Entities, the parties must agree a reconciliation methodology which complies with the Risk Mitigation RTS.

Dispute Resolution

Either party can identify a dispute by sending a “Dispute Notice” to the other party.  The parties must try and resolve the dispute in good faith.  This may involve them using an “Agreed Process” such as those detailed in the ISDA Master Agreement or the Credit Support Annex (where suitable) or agreeing an alternative resolution method.  After five Joint Business Days, the matter is to be escalated internally to “appropriately senior members of staff” of the respective parties.  Each party agrees that it will have internal procedures and processes in place to record and monitor any dispute for as long as it remains outstanding.

Confidentiality Waiver

In acceding to the Protocol, each party consents to the disclosure of information:

  • to the extent required or permitted under EMIR and any applicable supporting law, rule or regulation which mandate reporting and/or retention of transaction and similar information (“Reporting Requirements”); and
  • to and between the other party’s head office, branches or affiliates, or any persons or entities who provide services to such other party or its head office, branches or affiliates, in each case, in connection with Reporting Requirements.

Note that ISDA is at pains to make clear that the consent to disclosure language in the Protocol may not be sufficient to fully address all applicable legal requirements in this area.

Conclusion

The Protocol represents a good place to start in planning EMIR compliance with respect to portfolio reconciliation and dispute resolution.  Its contents are largely uncontroversial and, to that extent, firms should accede to its terms.  However, by virtue of being a ‘one size fits all’ solution, the Protocol is inevitably a high-level document which potentially leaves a lot to be agreed between the parties including:

  • the set of “Key Terms”;
  • the level of detail to be provided with respect to Key Terms;
  • the format in which reconciliation data will be provided;
  • the date on which reconciliation data is to be provided;
  • the date and time to which reconciliation data relates;
  • the date on which a reconciliation is to be conducted;
  • where both parties have been appointed as Portfolio Data Receiving Entities, a reconciliation methodology which complies with the Risk Mitigation RTS; and
  • an agreed dispute resolution method.

Whether this lack of detail means that the ‘out of the box’ Protocol fails to qualify as the “robust, resilient and auditable” procedure required by EMIR Article 11(a)(b), the “detailed” procedure demanded by the Risk Mitigation RTS, or the “rigorous and robust” procedure required by the BCBS[1], remains unclear.  Either way, a degree of bilateral negotiation between buy-side and sell-side seems unavoidable and firms may wish to plan accordingly, using the Protocol as a base upon which to build.

[1] See the BCBS second consultation on Margin requirements for non-centrally cleared derivatives

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