To Clear or not to Clear? Challenges in Derivative Business Processes in Presence of EMIR and MiFIDII/MiFIR Regulation Limassol, January 27 th, 2017
Contents 1 2 3 4 5 Introduction Selected Aspects of Regulatory Requirements Challenges and Opportunities To clear or not to clear? Conclusions 3 4 7 10 11 2
Introduction Clearing of derivatives is impacted by a number of regulations: Basel II/III IFRS EMIR Main Regulatory Challenges in Financial Markets MiFID2/MiFIR MREL 3
Selected Aspects of EMIR Scope of application Financial Counterparties e.g. banks, asset managers, insurance companies Big non financial institutions like corporate if considered NFC+ depending on amount and purpose of trading and traded products CCPs, Trade Repositories Identification of derivatives Over the counter (OTC) derivatives Definition refers to MiFID and MiFIR Delineation of spot trades, financial derivatives, commodities derivatives and specification of characteristics subject to the application of EMIR requirements Clearing Obligation Obligation to clear via authorised central counterparties for certain classes of OTC derivatives Already subject to clearing obligation are e.g.: interest rate swaps; basis, fixed-to-float, FRA, OIS in EUR, USD, GBP, JPY; fixed-to-float, FRA in NOK, PLN, SEK, certain equity derivatives, Index CDS, FX NDF Authorisation of CCPs is related to the products to be cleared Reporting Both parties are obliged to report transaction to an authorised Trade Repository supervised by ESMA Various requirements on contents and formats of reporting in level 2, 3 texts Currently 6 trade repositories are registered by ESMA Risk Mitigation Risk management requirements Obligation on bilateral collateralisation: initial Margin, Variation Margin Timeline: entry into force step by step starting March resp. September 2017 depending on trade volume etc. 4
Selected Aspects of MiFID 2/ MiFIR (related to trading) Scope of application Market Participants e.g. financial institutions, corporates investment firm and a market operator operating Trading Venue 8regulated market (RM), multilateral trading facility (MTF), organised trading facility (OTF) and systematic internaliser (SI) Market Maker, Liquidity Provider Definition of equity(-like) and non-equity products and financial instruments under this regulation Trading Obligation Obligation to trade certain products (equities resp. derivatives) on given types of trading venues Relates to the clearing obligation and definition of financial counterparties under EMIR Depends also on liquidity of the product Exemptions if specified requirements e.g. on the counterparty, type of trade or product are fulfilled ESMA maintains and publishes register of derivatives subject to the trading obligation Transparency Pre trade transparency in terms of quotes and prices Post trade transparency on real trades Differentiation of requirements e.g. between trading venues (RM, MTF, OTF) resp. systematic internaliser or type of product (equity-like resp. non-equity) Reporting Trade reporting in terms of post-trade disclosure by investment firms, including systematic internalisers An approved publication arrangement (APA) may provide the service of publishing trade reports on behalf of investment firms Obligation to report transactions: complete and accurate details of transactions to competent authority An approved reporting mechanism (ARM) my provide the service of reporting details of transactions to competent authorities or to ESMA on behalf of investment firms 5
Selected Aspects of Basel II/III resp. CRR/CRD4 & others Basel II/III resp. CRR/CRD4 Capital Requirements Counterparty Credit Risk: capital requirements and CVA risk charge; selective exemptions for risk mitigation Market Risk: e.g. for interest or equity risk with focus on trading and foreign exchange risk application of standardised or internal models disclosure of key figures like ratios Leverage Ratio Further key figure subject to supervision Determination generally does not take collateral into account only in specific circumstances Review on requirements ongoing Liquidity Risk Liquidity requirements e.g. liquidity reserve Funding of Margin requirements Key figures as LCR or NSFR are introduced successively e.g. with increasing level to be fulfilled by the ratio Remarks and others: Ongoing Basel III/IV consultations and introductions Review of CRR/CRD4 started Additional guidelines e.g. from EBA Notional regulations Regulations for specific types of entities or business e.g. UCITS, Solvency II Accounting requirements 6
Challenges and Opportunities (1/3) MiFID2/MiFIR Regulation forces market participants to formalize business processes and to allocate regulatory costs Reverse: Regulation forces market participants to decompose their business processes, manage them separately (outsource) and trade regulatory costs Regulatory Costs Costs of risk taking Ways to conclude transactions Ways to process and settle transactions Clients (Banks, Non-financial Counterparties, Investment Funds etc.) Basel II/III EMIR 7
Challenges and Opportunities (2/3) Compliance Operations/ IT Business Model Counterparties Interrelation with other regulatory requirements Competition/ unique selling proposition Costs Characteristics: Highly individual to the respective institution and trade Not only costs but also potentially effects on business model (e.g. service to clients) Lack of a comprehensive cost calculation process Changing environment 8
Challenges and Opportunities (3/3) Regulatory requirements put a strain on IT/Operations IT/Operations Regulatory requirements are not always clearly specified and are subject to changes regulatory risk Business Model Not only your own view is crucial how do your competitors react? Regulatory Requirements Competitors and Market Environment 9
To clear or not to clear? Current Status Gap Analysis Development Implementation Identify regulatory requirements for the institution impacting clearing Identify processes, departments, products, volumes segments, client resp. counterparty groups and (IT) systems that are affected by the regulation Consider ongoing or planned projects that have impact on or from or interaction with the regulatory requirements related to clearing Prepare a structured and comprehensive overview Identify gaps following the value chain taking into account regulatory requirements as well as operational aspects Categorization of gaps and action points with regard to type, priority and assumed impact and consequences Analysis of interrelations to other business processes, regulatory requirements, projects Analysis of client portfolio acc. to EMIR requirements (MiFID2/MiFIR) Analysis of client needs Analysis of the business model and definition of target group Development of options to act taking into account relevant key drivers, like clients, products, regulatory aspects, IT systems, Market environment Definition, analysis and evaluation of business cases accompanied with cost estimates and impact analyses; prepa-ration of decision memo Bring about a decision Proof of concept taking into account also detailed requirements e.g. from RTS/ITS Setup a project for implementation based on the developed and decided business to follow Be aware of intermediate changes or enhancements of the regulations Take care of interrelation and possible impact with other projects Develop test concepts and perform testing Approvals Handover to responsible departments 10
Conclusions Knowledge of your clients needs, transparency on processes and costs are key for analysing regulatory impact Just keeping the business as it is and only operationally/technically implement the requirements on a stand alone basis presumably leads to inefficient implementations and under performance Define Target Group who are the types of clients you want to focus your business on? A comprehensive approach is preferable to reflect interacting effects and consequences of requirements, IT/ Operations and business model Interrelation to other regulatory requirements are not negligible Results of a comprehensive approach include effects on the business model and give the opportunity to raise synergies, increase performance or identify new profitable activities. 11
Your Contact Dr. Dirk Schubert Partner, Financial Services T +49 69 958-73626 dschubert@kpmg.com KPMG AG Wirtschaftsprüfungsgesellschaft Am Flughafen 60549 Frankfurt am Main www.kpmg.de/socialmedia www.kpmg.de The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. entity. All rights reserved. The name KPMG and the logo are registered trademarks of KPMG International.