Are you ready for EMIR? October 2013

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2 Are you ready for EMIR? October 2013

3 EMIR Readiness Evaluation 2 Contents EMIR Timelines Mandatory Clearing Choosing a Clearing Broker Selecting a CCP Trade reporting

4 EMIR Timelines 3 15 March 2013 BUSINESS CONDUCT Timely confirms Daily valuation NFC+ notification 7 November 2013 TRADE REPOSITORIES Notification of ESMA approval of TR applications 3 months * 12 February 2014 TRADE REPORTING Reporting for OTC trades: IRS, CDS and all other asset No Timing Announced VARIOUS REQUIREMENTS Margin requirements for uncleared trades Capital requirements for uncleared trades Extra-territorial clearing obligations Extra-territorial risk mitigation obligations Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep 15 Sep 2013 RISK MITIGATION Portfolio reconciliation Portfolio compression Dispute resolution October 2013 March 2014 CCP AUTHORIZATION First CCPs authorised Frontloading period commences April September 2014 CLEARING OBLIGATION ESMA to submit draft RTS on clearing obligation 1-3 After draft RTS CLEARING OBLIGATION First clearing obligations Entry into force Published RTS ESMA schedule Pending announced RTS publication Timing of next regulatory announcement uncertain

5 Mandatory Clearing 4 Clearing Thresholds per Asset Class Asset Class Threshold Credit 1 billion Equity 1 billion Hedging contracts excluded from calculation thresholds Contracts that cover risks or potential change in value of items directly related to its business Interest rate Foreign exchange Commodity Other 3 billion 3 billion 3 billion 3 billion Contracts that cover the indirect impact of fluctuation of interest rates, inflation rates, foreign exchange rates or credit risk Contracts that qualify as hedging contracts pursuant to IFRS NFC+ subject to the relevant EMIR requirement for all classes of OTC derivative contracts and not only for those pertaining to the class of OTC derivatives where the clearing threshold is exceeded

6 Choosing a Clearing Broker 5 Considerations Existing ETD broker may not be suitable Existing global custodian may not be suitable Credentials: commitment to business more important than asset safety and credit rating? Client base & Pipeline Back loading bandwidth Collateral transformation & liquidity swaps Margin modelling and collateral optimisation Currency deadlines Affirmation platforms and trade reporting (Bloomberg VCON, MarkitWire) Fees ticket fee plus capital utilisation charge based on initial margin (maybe maintenance charge and a CCP fee). Watch out for minimum monthly. Back loading and compression fees. You also need a backup provider if you are to achieve portability

7 Selecting a CCP 6 Which CCP? Jurisdiction USA or Europe? Is there a domestic offering? Arbitrage opportunities? Not just the jurisdiction of the CCP extra-territoriality Segregation model Option to switch. CCP interoperability makes it easy to switch clearing location End client clearing Commitment to business Commercial model Capital requirements

8 Selecting a CCP 7 Key Evaluation Criteria Coverage of mandatory asset classes Qualifying CCP Level of hypothetical capital (SIG) Customer protection model (exposure to CCP rather than clearing broker) Margin model, waterfall (access to margin model) Collateral and haircuts, wrong way risk. Exposure to NCMs Product substitution Back loading and compression Thomas Murray currently provide risk assessments on 26 CCPs globally

9 Selecting a CCP 8 Asset Classes CC & G (Italy) CME Clearing Europe Eurex ICE Clear Europe LCH Clearnet Ltd & SA NASDAQ OMX MEFF OTC CDS Available not operating planned on indices.. not live OTC Commodities Metals, energy, ag. OTC Power Client clearing OTS Fixed Income Repoclear OTC FX Forexclear OTC IRS SwapClear ETD ( Futures) ETFs There are no European CCPs clearing FX forwards or swaps. LCH ForexClear covers NDFs. ICE Clear Europe has applied to clear NDFs. Nordic short & long term; Client clearing LCH Equity

10 Trade Reporting 9 Trade Reporting Timelines The time lines have slipped on a number of occasions. ESMA have been short of resources and have not been able to process all the applications within the set dates. In addition our understanding is that all the TR applications were returned as incomplete. This caused a delay. In addition ESMA want to grant all licences at the same time they do not want to give an unfair advantage to any one TR by authorising it in advance of the others. As at 4 October 2013, the timelines were: Product class Dates Comments OTC Derivatives 12 February 2014 All asset classes, cleared and non-cleared Collateral - rates & credits May 2014 Non-cleared products only Collateral - other June 2014 Non-cleared products only ETD derivatives 12 February 2014 ESMA wanted to delay until 2015 but the EU refused. The 12 February 2014 is the earliest date, driven by the earliest TR authorisation date of 7 November If the 7 November slips, then so will 12 February.

11 Mandatory Trade Reporting 10 Reporting Focus All counterparties & asset classes Comprehensive view of EU risk exposure includes financial and non-financial counterparties; non EU entities do not have to report to a TR Both ETC & OTC derivatives: Equity, Commodities, FX, Interest Rates & Credit Reportable transactions Full life cycle required portfolio view Trade confirmations, modifications, terminations, novations, compression and collateral changes Mark to market or mark to model at the portfolio level All transactions dating from 16 August 2012 Records to be maintained for five years Reporting Obligation Two-sided both buy and sell side Cleared contracts executed on an exchange with anonymous counterparties can be reported by the CCP Near-time reporting no later than trade date+1 Counterparty identified with compliant unique identifier (e.g. CICI) & a unique trade identifier (UTI)

12 Trade Repositories 11 Current Applications with ESMA ESMA began accepting applications in mid-march. They missed the June timeframe for notification of approval. Trade Repository Instruments Location Capital Track OTC derivatives U.K. CME All asset classes London DTCC (UK & Netherlands) All asset classes UK entity; European data centre ICE Trade Vault Europe KDPW (National Depository for Securities) Commodities, credit, interest rates, & FX Initially interest rates and credit instruments London Poland RegisTR All asset classes Luxembourg UnaVista All asset classes LSE Group * Nasdaq OMX have announced an EMIR trade reporting service but not a repository ** Harmony TR Connect offered by Traiana provides connectivity to multiple trade repositories.

13 Reporting Options 12 Choosing a Reporting Approach Reporting Choice Asset Manager Counterparty Comments Independent Common Counterparty AM Common Counterparty SD The TR(s) must match common data elements Partial Delegation (PD) Counterparty AM Common (both) Counterparty SD Full Delegation (FD) No responsibility Common (both) Counterparty SD Counterparty AM Will this work for all counterparties? Is the CCP offering this? Do you want to allow all Counterparties control over you CP data? Third Party Agent submits FD or PD Common Counterparty SD Offers control but AM can t delegate the liability Middleware platforms can be used with any of the scenarios

14 Action Steps 13 To Be Completed before Regulatory Deadlines Complete Mandatory Clearing assessment for Franklin Templeton fund complex Finalize member/user documentation with CCPs Finalize Clearing Broker arrangements Notify all FC counterparties of FT s clearing status Choose relevant Trade Repository Complete user agreements with TR(s) Establish means of monitoring transactional volume of contracts by legal entity Establish means of monitoring classification of legal entity for confirmation timeliness Update Alliance Bernstein client documentation Reconcile with AIFMD requirements Ongoing Monitoring under EMIR CCPs NFC derivatives positions against threshold limits by asset class for notification & clearing obligations Asset safety tracking European regulatory environment