1. European Market Infrastructure Regulation (“EMIR”) - recap and update
Will Dibble, Partner CMS Cameron McKenna LLP
Warsaw
Friday 26 September 2014

2. What is EMIR?
EU regulation on OTC derivatives, central counterparties and trade repositories
Effective as of 16 August 2012 in all member states, without the need for any national legislation
“Framework legislation” – detailed implementing rules contained in subordinate legislation (RTS) developed by the European Securities & Markets Authority (ESMA)
ESMA Q&As
‘Derivative’ – a financial instrument as set out in (4) to (10) of Section C of Annex I to MiFID
‘OTC derivative’ – a derivative the execution of which does not take place on an EU regulated market or on a third-country marked considered as equivalent. The Commission shall publish a list of those markets (to be updated periodically) - currently none.
text ‘with EEA relevance’

3. Who is in scope?
Financial counterparties (FCs): broadly, banks, investment firms, insurers/reinsurers, UCITS/UCITS managers, pension schemes, alternative investments funds (AIFs) managed by AIFMs, in each case authorised or registered in accordance with the relevant EU directive
Non-financial counterparties (NFCs): all undertakings established in the EU which are not FCs; NFCs whose OTC derivatives exceed certain “clearing thresholds” are referred to as NFC+
Third country entities (TCEs) outside the EU may also be impacted
Exempt: public bodies, EU central banks, pension funds
Relevant entities: CCPs and their clearing members, FCs, TRs and, where so provided, NFCs and trading venues (Art 1(2) of EMIR)
TCEs – only subject to clearing obligation provided that the contract has a direct, substantial and foreseeable effect within the EU or where necessary or appropriate to prevent the evasion of any provisions of EMIR. However, would not apply if the TCE is established in a jurisdiction determined to be equivalent (as yet – no determinations)
Exempt entities:
public bodies = public sector entities owned by central governments (with the benefit of explicit guarantee arrangements provided by central governments)
non-EU central banks not exempt (ESMA Q&A says treat as NFC)

4. Major EMIR requirements
EMIR imposes four main obligations on EU derivatives market participants:
Obligation to notify competent authority immediately (= on the first day) if over clearing threshold
Mandatory clearing of certain types of OTC derivatives via a central counterparty (CCP)
Implementation of risk mitigation techniques in relation to any OTC derivatives that are not cleared, including arrangements for timely confirmation; portfolio reconciliation, portfolio compression and dispute resolution; daily valuation of outstanding derivative contracts; margining
Mandatory reporting of all derivatives (OTC and ETD) to an authorised trade repository (TR)

5. EMIR - implementation timeline
18 March 2014
First CCP authorised
20 days later
1st Clearing Obligation RTS in force
Mid-December 2014
1st Clearing Obligation RTS published in OJ
July 2015
1st Clearing Obligation Category 1
July 2016
1st Clearing Obligation Category 2
January 2018
1st Clearing Obligation Category 3 Q1 Q2 Q3 Q4
2013
2014
2015
2016
2017
2018
15 March 2013
Confirmations Daily valuation NFC+ reporting
15 September 2013
Portfolio reconciliation
Portfolio compression
Dispute resolution
16 August 2015
End of transitional period
for pension schemes
1 December 2015
Variation margin applies and phase-in of initial margin starts
12 February/ 11 August 2014
Reporting to TRs
Note: Assumes ESMA delivers 1st Clearing Obligation RTS to EC on 18 September 2014 in the form proposed for consultation, Commission endorses RTS without amendment in early November 2014 and Council/Parliament do not object to the RTS and do not extend their objection period.

6. What is already live? 15 March 2013
NFC+ notification (Art. 10 of EMIR): NFCs must immediately notify the competent authority if their (and their non-financial affiliates’) positions in OTC derivatives of the same asset class (excluding hedging positions) exceed/no longer exceed specified clearing thresholds in respect of such class
Timely confirmations (Art. 11(1) of EMIR):
OTC derivatives between in scope counterparties must be confirmed by T+1 for contracts between FCs/NFC+ and T+2 for contracts with an NFC (as of the effective date (i.e. 15 March 2013), phase-in period which expired on 31 August 2014)
FCs must have procedures for monthly reporting of unconfirmed transactions.
Daily valuation (Art. 11(2) of EMIR): FCs and NFC+ must carry out daily mark-to- market or, where market conditions prevent this, mark-to-model valuation
NFC+ notification:
If the rolling average position over 30 working days exceeds the threshold
NFC+ shall re-notify as soon as possible the relevant competent authority and ESMA when their average position over 30 working days no longer exceeds the clearing threshold
Group entities: for each member state in which the group has entities trading OTC derivatives, a notification should be submitted to the competent authority once the group has exceeded the threshold (including the names of all NFC group entities within that member state trading OTC derivatives). The group should also submit a single notification to ESMA listing all of the NFC group entities within the EU which trade OTC derivatives
Timely confirmations:
Concerns unconfirmed transactions that have been outstanding for more than 5 BDs
ESMA Q&A: the report does not need to be provided to the competent authorities that have not asked to receive it
Daily Valuation:
Whenever a price is available for the valuation, such valuation should be considered as mark-to-market.
Mark to model - (1) when quoted prices are not readily and regularly available and those prices available do not represent actual and regularly occurring market transactions on an arm’s length basis (ie, market is inactive), (2) the range of reasonable fair values estimates is significant and the probabilities of the various estimates cannot reasonably be assessed

7. What is already live? (cont.)
15 September 2013
Portfolio reconciliation (Art. 11(1) of EMIR): FCs and NFCs must agree processes for regular portfolio reconciliation with counterparties, in frequencies as follows:
FC/NFC+: each BD (where 500 or more contracts outstanding); weekly (where between 51 and 499 contracts outstanding during the week); quarterly (where 50 or less contracts outstanding during the quarter)
NFC-: quarterly (where more than 100 contracts outstanding during the quarter); annually (where 100 or less contracts outstanding)
Portfolio compression (Art. 11(1) of EMIR): FCs and NFCs must have processes to address portfolio compression opportunities
Dispute resolution (Art. 11(1) of EMIR): FCs and NFCs must agree procedures for identification, recording, monitoring and resolution of disputes and FCs must report on unresolved disputes
Portfolio reconciliation:
ISDA has published a protocol to facilitate amendment of OTC derivative documentation
Key terms of the OTC derivative contract need to be reconciled – at least valuation and then such other details the relevant party deems relevant from time to time (e.g., the effective date, the scheduled maturity date, any payment or settlement dates, the notional value of the contract, the underlying instrument, fixed/floating rates). Key terms does not include details of the calculations or methodologies underlying any term
NFC- can rely on the valuation of their counterparties or on other means (as they are not required to perform mark-to-market or mark-to-model valuation on a daily basis)
Confidentiality waiver
Transactions with TCEs: the EU counterparty required to ensure that the requirements for portfolio reconciliation (and compression and dispute resolution) are met for the relevant portfolio/transactions even though a TCE would not itself be subject to EMIR. However, if a TCE is established in a jurisdiction for which the Commission has adopted an implementing act under Article 13 of EMIR (ie, declaring that the legal, supervisory and enforcement arrangements of a third country are equivalent to the relevant requirements under EMIR), the counterparties could comply with equivalent rules in the third country
First due dates: if annually, before 15 March 2014; if quarterly, before 15 December 2013
Dispute resolution:
Concerning disputes relating to the recognition or valuation of the contract and to the exchange of collateral between counterparties
Counterparties can agree a predefined threshold below which discrepancies do not count as disputes
Procedures shall at least record the length of time for which the dispute remains outstanding, the counterparty and the disputed amount
Specific process to be in place for disputes that are not resolved within five business days
FCs to report to the competent authority disputes relating to an OTC derivative contract, its valuation or the exchange of collateral for an amount/value higher than EUR 15 million and outstanding for at least 15 BDs
Portfolio compression:
Applies to counterparties with 500 or more OTC derivative contracts outstanding with a counterparty which are not centrally cleared
At least twice a year, the possibility to conduct a portfolio compression should be analysed/carried out by a counterparty to reduce their counterparty credit risk
Counterparties must be able to provide (when requested to do so) a reasonable and valid explanation to the relevant competent authority if they conclude a portfolio compression is not appropriate (eg, compression would compromise effectiveness of the firm’s internal risk management or accounting processes; multilateral compression services not available in the relevant markets, for the relevant products, to the relevant participants and compression on a bilateral basis would not be feasible)
General:
Article 11 applies to OTC derivative contracts not cleared by a CCP, irrespective of its status under EMIR - ie, EU counterparty executing OTC derivative contracts cleared by a third-country CCP not recognised under Article 25 would not be required to apply risk mitigation techniques under Article 11

8. What is already live? (cont.)
12 February 2014 / 11 August 2014
Reporting to TRs (Art. 9 of EMIR):
When: Counterparties must report all their contracts (OTC and ETD) to a registered or recognised TR or to ESMA by T+1
Delegation: Counterparties may delegate the reporting to a third party but retain responsibility for the reporting obligation
TRs: Six TRs authorised so far: DTCC, REGIS-TR, CME TR, KDPW, ICE TVEL, UnaVista
What needs to be reported: (1) Common Data, including main characteristics of the trade such as the type of derivative, underling, maturity, notional value, price and settlement data, economic terms and trade identifiers; (2) Counterparty Data, including counterparty classification, beneficiary information and legal entity identifiers of the parties; (3) Collateral and Valuation Data, FCs and NFC+ have to report the daily mark-to-market (or mark-to-model) value as well as the value of collateral posted
T being the date of conclusion/modification/termination of the contract
Avoidance of duplication: under Art 9, both the counterparties and the CCP have an obligation to ensure that the report is made without duplication, but neither the CCP nor the counterparties have the right to impose on the other party a particular reporting mechanism. When reporting to different TRs, CCPs and counterparties should then do so with consistent data, including the same trade ID and the same valuation information to be provided by the CCP to the counterparties

9. What is already live? (cont.)
When did the reporting obligation start:
12 February 2014 for Common Data and Counterparty Data
12 August 2014 for Collateral and Valuation Data
Contracts outstanding on 16 August 2012 and still outstanding on 12 February (the reporting start date) had to be reported within 90 days of the reporting start date and contracts entered into before, on or after 16 August but not outstanding on the reporting start date must be reported within 3 years of the reporting start date
LEI: Counterparties should obtain a global legal entity identifier (LEI) when available for the purpose of reporting Counterparty Data (by registering with a pre-LOU (Local Operating Unit), i.e. GMEI Utility
Reporting valuations:
since the valuation is part of the Counterparty Data, in the case of a derivative not cleared by a CCP, counterparties do not need to agree on the valuation reported
when counterparties delegate reporting, including valuations, they retain responsibility for ensuring that reports submitted on their behalf are accurate and for periodically ensuring that they are in agreement with the values submitted on their behalf

10. What is already live? (cont.)
Segregation and Portability
Following the authorisation of a CCP under EMIR, counterparties (both FCs and NFCs) will have to make a choice between different types of omnibus and individually segregated accounts at the CCP
Each counterparty is required to have notified their clearing broker of its account election with respect to a CCP on which it currently clears or wishes to clear
Counterparties can change elections at any point in time

11. Future stages of the EMIR implementation TCE – TCE transactions
10 April 2014 / 10 October 2014
TCEs may be subject to certain EMIR requirements, namely clearing and risk mitigation, in the following circumstances:
Direct impact
The clearing obligation will apply directly to certain TCEs (= those that would be subject to the clearing obligation if it were established in the EU) when they enter into OTC derivative contracts with FCs/NFCs+
ESMA has issued RTS for directly extending EMIR clearing and risk mitigation obligations to OTC derivatives between two TCEs where:
the contract has a direct, substantial and foreseeable effect within the EU; or
it is necessary to prevent evasion of the EMIR rules

12. Future stages of the EMIR implementation
TCE – TCE transactions (cont.)
A contract will have a direct, substantial and foreseeable effect within the EU where:
at least one TCE benefits from a guarantee of an EU FC and certain quantitative thresholds are met with respect to that guarantee; or
the contract is between EU branches of TCEs where the TCEs would qualify as FCs if they were established in the EU
TCEs are encouraged to tell their counterparties if they have an EU FC guarantor
Effective as of 10 October 2014

13. Future stages of the EMIR implementation
TCE – TCE transactions (cont.)
Quantitative Threshold 1
Guarantee covers:
the entire liability of a TCE resulting from one or more OTC derivative contracts for an aggregated notional amount of at least EUR 8bn (or foreign currency equivalent); or
a part of the liability of a TCE resulting from one or more OTC derivative contracts for an aggregated notional amount of at least EUR 8bn (or foreign currency equivalent) divided by the percentage of the liability covered
Quantitative Threshold 2
Liability covered is at least equal to 5 per cent. of the sum of the EU FC guarantor’s current exposures in OTC derivative contracts
Issues: (i) single guarantee test / multiple guarantee test; (ii) ongoing assessment of the thresholds
Should each guarantee and the contracts which it covers be considered separately OR should all such guarantees and all contracts covered by those guarantees be considered in the aggregate for the purposes of applying the quantitative threshold tests?
Art 2(1) anticipates an ongoing assessment of the thresholds – ie, whether an existing OTC derivatives contract becomes covered by the RTS after it has been entered into – meaning that the clearing obligation (and relevant risk mitigation techniques for uncleared transactions (including margin requirements) may subsequently apply to a transaction after it has been entered into (even if has been entered into on the basis that these requirements will not apply). As a result:
throughout their term, contracts could fall in or out of scope of the RTS (as the thresholds are/are not met)
c’parties will not know if/when contracts will have to be cleared/become subject to relevant risk mitigation techniques for uncleared transactions = pricing and valuation uncertainties
There may be difficulties in ensuring compliance with the RTS if the c’party is not cooperative
IT IS THE TCE WITH AN EU GUARANTEE TOGETHER WITH THE EU FC GUARANTOR THAT SHOULD BE RESPONSIBLE FOR ASSESSING WHETHER THE THRESHOLDS ARE MET AND, IF THEY ARE, THE TCE WITH AN EU GUARNATEE THAT SHOULD ENSURE THAT THE OTC DERIVATIVE CONTRACT COMPLIES WITH ART. 4(1) OF EMIR OR THE RELEVANT RISK MITIGATION TECHNIQUES UNDER ART. 11 OF EMIR

14. Future stages of the EMIR implementation
TCE – TCE transactions (cont.)
Indirect impact
EMIR can indirectly impact TCEs when they enter into derivatives with EU counterparties »»» any such counterparty will only be able to enter into a derivative on terms which enable it to comply with its EMIR obligations
EMIR envisages equivalence assessments by the Commission of non-EU jurisdictions:
for the purpose of determining exemptions from conflicting and/or duplicative clearing, reporting and risk mitigation obligations; and
as part of the recognition process for non-EU CCPs and non-EU TRs

15. Future stages of the EMIR implementation
Margining of uncleared OTC derivatives
Article 11(3) of EMIR
FCs and NFC+s
On 14 April 2014, the ESAs published a consultation paper on margin for uncleared OTC derivatives (comment period closed 14 July 2014), proposing a start date of 1 December 2015 for margining, subject to phase-in of initial margin requirements
ESAs expected to deliver final draft RTS to the Commission by end 2014
In their consultation paper, the ESAs proposed draft RTS for the margining of uncleared OTC derivatives broadly in line with the final policy framework published by the Basel Committee for Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO) in September 2013
In paragraph 15, Art. 11 mandates the ESAs to develop RTS on three main topics:
risk-management procedures for the timely, accurate and appropriately segregated exchange of collateral;
procedures concerning intragroup exemptions; and
the criteria for the identification of practical or legal impediment to the prompt transfer of funds between counterparties

16. Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
Draft RTS – overview
Applicable prospectively
5 Chapters:
Counterparties’ risk management procedures
Margin methods
Eligibility and treatment of collateral
Operational procedures
Procedures concerning intragroup derivative contracts
Draft RTS consider the minimum international standards on margin requirements for non-centrally cleared derivative transactions issued by the Basel Committee for Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO) on September 2013
‘Prospectively’ = margin requirements apply to new transactions entered into after the specified dates

17. Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
Risk management procedures – general
the collection of collateral – Initial Margin (IM)
Collected “to cover potential future exposure to the other counterparty providing the margin in the interval between the last margin collection and the liquidation of positions following a default of the other counterparty”
→ on gross basis (ie, without the possibility of netting IM amounts between each other)
the collection of collateral – Variation Margin (VM)
Collected “to reflect current exposures resulting from actual changes in market price”
→ on net basis
an upfront agreement on a list of eligible collateral

18. Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.) IM
Phased in from 1 December 2015
Must be collected within the BD following the execution of a new derivative contract
The total amount of IM collected from another counterparty must be recalculated and collected, amongst others, when:
a new contract is executed with that counterparty
an existing contract with that counterparty expires
an existing contract triggers a payment (or delivery) other than posting or collecting VM
no IM recalculation has been performed in the last 10 BDs
Other “triggers”:
an existing contract is reclassified by way of reduced time to maturity

19. Phase-in timetable for IM
Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
Phase-in timetable for IM
From 1 December
Trigger level for consolidated groups
2015
€3 trillion
2016
€2.25 trillion
2017
€1.5 trillion
2018
€0.75 trillion
2019 onwards
€8 billion
Applies if agreed in writing
No IM to be collected when at least one of the c’parties belongs to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives for June, July and August of the relevant year (ie, 2015, 2016, 2017, 2018 or of the relevant following year) is below threshold – ie, a c’party is required to collect IM where both c’parties belong to consolidated groups having total gross notional values of uncleared OTC derivatives (including FX forwards, swaps and currency swaps) over the trigger level

20. Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.) VM
Effective as from 1 December 2015
Must be collected at least on a daily basis starting from the BD following the execution of the contract
Based on the current valuation of each derivative contract calculated in accordance with Art. 11(2) of EMIR and Arts. 16 and 17 of RTS

21. Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
Risk management procedures – specific
Counterparties may agree not to collect IM with respect to:
physically settled foreign exchange forwards and swaps
exchange of principal of a currency swap
FCs may agree with their FC or NFC counterparties on a margin threshold of €50m covering all IM to be exchanged between consolidated groups – on the condition that capital be held against a party’s exposure to its counterparty
Counterparties may reduce the amount of IM exchanged by the value of the threshold
… in writing or through other equivalent permanent electronic means
Ie, no exchange of IM where the total IM to be exchanged for all non-centrally cleared OTC derivatives between FC and FC/NFC at group level is equal to or lower than this threshold
In addition:
the group should determine how to allocate the received IM amongst its relevant entities
the group shall monitor, at the consolidated level, whether the threshold is exceeded and maintain records to record its exposures to consolidated counterparties

22. Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
Risk management procedures – specific (cont.)
Counterparties may agree a minimum transfer amount of €500,000 covering all IM and VM and excess collateral (if any)
FCs/NFC+s may agree not to collect IM or VM from NFC-s and/or counterparties exempt from EMIR
Counterparties may agree that IM and VM are not posted by covered bond issuers and cover pools if certain conditions are met, including:
derivative must not terminate in case of default of the covered bond issuer
legal over collateralisation of at least 102%
derivative used only for hedging purposes
That is, where the total collateral amount based on all OTC derivatives between c’parties is equal to or lower than the MTA, they may agree not to exchange collateral. If the total collateral amount owed to the collateral taker exceeds the minimum transfer amount, the collateral taker shall collect the full total collateral amount – without deduction of the MTA
Draft RTS contemplate that FCs/NFC+s would be required to collect IM and VM from all non-EU c’parties
Other conditions applicable to covered bond issuers: derivative c’party ranks at least pari-passu with the covered bond holders

23. Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
Margin methods
Standardised method
Annex IV of the draft RTS
Notional amounts or underlying values of the derivative contracts be multiplied by the relevant percentages – dependant, essentially, upon residual maturity
Margin methods
Initial margin models
May be developed by a counterparty or jointly by the two counterparties or by a third party agent
No industry-wide modelling common approach
Counterparties must notify the relevant competent authorities if they are intending to use an initial margin model
Standardised method:
Applies to derivative contracts in a netting set
“Netting Set” means a group of transactions with a single counterparty that are subject to a legally enforceable bilateral netting arrangement and for which netting is recognised under Part 7 of this Annex and paragraphs 34 to 37 of Unit A. Each transaction that is not subject to a legally enforceable bilateral netting arrangement, which is recognised under Part 7 of this Annex, should be interpreted as its own netting set for the purpose of this Annex
Initial margin models:
Where a model is provided by a third party, the margin collector remains responsible for compliance with the RTS requirements
If initial margin models cease to comply with the RTS requirements, counterparties shall notify the relevant competent authorities and compute the required initial margins using the Standardised Method

24. Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
Initial margin models - requirements:
Calibration of the model
Based on historical data from a period of at least three years
At least 25% of stressed data
Recalibration at least every 6 months
Primary risk factor and underlying classes
IM to be calculated first at underlying class level
Total IM = sum of IM calculated for each underlying class
Assessments of the validity of the model’s risk assessments
Initial validation by independent parties
At least annually
A process for verifying at least annually that the netting agreements considered for IM calculation are legally enforceable
Clear documentation showing all changes to the initial margin model and the tests performed
‘Stressed data’ – data deemed representative of a period of significant financial stress
A derivative contract to be assigned to an underlying class based on its primary risk factor – four classes: (1) interest rates, currency, gold; (2) equity; (3) credit; (4) commodity and other

25. Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
Eligibility and treatment of collateral
Asset classes as listed in the draft RTS – cash; gold; debt securities issued by central governments, central banks, public sector entities, credit institutions, investment firms; corporate bonds; equities; shares or units in UCITS
Requirement for credit quality assessment in relation to certain asset classes using one of the methodologies specified in the draft RTS:
IRB (if authorised)
ECAI
Specific eligibility criteria apply to certain asset classes
Equities must be included in a main index
Shares/units in UCITS must meet criteria set out in the draft RTS
Credit quality assessment:
Internal Rating Based approach = c’parties authorised to use IRB approach may use their internal ratings to assess the credit quality of the collateral (and shall determine the credit quality step of the issuer of the security by applying the methodology under the draft RTS)
External credit assessment institution (credit rating agency)
Only assets whose credit quality has been so assessed are eligible as collateral
The c’parties must have procedures in place in case that the credit quality of the collateral assessed using a credit assessment methodology (ie, assessment issued by a recognised ECAI) no longer meets certain requirements under the draft RTS – these shall, e.g., provide for accepted collateral to be replaced
Specific eligibility criteria: UCITS, corporate bonds etc. (eg, collateral securities not to be issued by the posting c’party or entities which are part of the same group of the posting c’party … ‘wrong way risk’)

26. Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
Eligibility and treatment of collateral (cont.)
Concentration limits for IM and VM
No limits applicable to cash
50%; 10%; 40%
Haircuts
standard methodology in Annex II (0.5% – 24%, depending in particular upon the residual maturity and the type of securities)
own estimates subject to criteria in Annex III
Concentration limits:
Ensure diversification to prevent c’parties becoming overly exposed to specific assets or issuers (=may impair the c’parties’ ability to close their exposure and cause liquidation issues in the event of a c’party default)
Operational constraints to be considered (eg. low margin requirements might mean that c’parties would need to diversify into smaller lots of many different issuers which could be burdensome)
Should certain asset classes be exempt? (e.g. securities issued by the governments or central banks)
50% - govies, local authorities issuers
10% - gold, govies or local authorities issuers not meeting certain requirements
40% - equities or bonds convertible into equities
Haircuts:
Own estimates (1) are to take into account the type of issuer of the security, the external credit assessment of the securities, their residual maturity and modified duration; (2) are to be calculated at least once every three months
C’parties should reassess their data sets whenever market prices are subject to material changes

27. Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
Operational procedures
Exchange of collateral:
a detailed documentation of policy (covering collateral levels, types and eligibility, applicable haircuts) – updated at least annually
processes for escalation with counterparties
counterparties must agree in writing the terms of the operational process for the exchange of collateral (including any segregation arrangements, settlement of margin calls, methods for calculating and valuing collateral etc.)
procedures to periodically verify the liquidity of the eligible collateral
Segregation of IM
No ability to re-hypothecate, re-pledge or otherwise re-use IM
Robust risk management procedures to be in place to ensure the timely exchange of collateral for contract that are not centrally cleared, including the above
Exchange of collateral – further requirements:
C’parties should agree the procedures for notification and adjustment of margin calls
Procedures for measuring and mitigating risks arising from the collateral accepted
Segregation:
Collected collateral as IM shall be segregated from proprietary assets on the books of a third party holder (custodian)
Shall meet the following conditions: (1) IM immediately available to the collecting entity where the posting c’party defaults, (2) the posting entity is sufficiently protected where the collecting entity enters bankruptcy proceedings
Counterparties to obtain legal opinions in all relevant jurisdictions on whether the segregation arrangements meet the above requirements – at least annually
Re-hypothecation:
BCBS-IOSCO permits each jurisdiction to allow, if they deem it necessary, a limited re-use of IM under strict conditions – as a result, this is still an open point (and the consultation paper queries if there are companies in the EU which would require re-use or re-hypothecation of collateral as an essential component of their business models)

28. Future stages of the EMIR implementation
Margining of uncleared OTC derivatives (cont.)
Procedures concerning intragroup derivative contracts
Intragroup risk management procedures must ensure the regular monitoring of the intragroup exposures and the timely settlement of the obligations arising out of the intragroup OTC derivatives
No current or foreseen practical or legal impediment to the prompt transfer of own funds or repayment of liabilities between the counterparties, that is:
sufficient assets available to satisfy transfers or repayments when due (no operational obstacles etc.)
no restrictions under the applicable laws or any relevant contractual relationships (the absence of currency or exchange controls, regulatory restrictions, limitation on the ability to transfer funds etc.)
Describes:
process governing the application for exemption from margining requirements;
the decision making by a competent authority (including periods for communicating decisions etc.)

29. Future stages of the EMIR implementation Clearing obligation
Article 4 of EMIR
Certain OTC derivatives that has been declared subject to the clearing obligation entered into between certain market participants will have to be cleared
Two parties to an OTC derivative contract replace it with two separate contracts with a central counterparty (CCP) which takes each party’s positions under the original contract
Obligation applies to any combination FCs and NFC+s (including a TCE), provided one or more of the parties is established in the EU
NFC is an NFC+ if over 30 working days exceeds any of the clearing thresholds in any derivatives asset class (other than hedging derivatives)
OTC + any derivative which is not executed on an EU regulated market (as defined in MiFID)
The two parties no longer have a contract with each other but instead with the Central Counterparty (CCP) thereby making the CCP the counterparty to each of the original parties.
The aim is to promote financial stability by reducing counterparty credit risk (instead exposed to CCP’s credit risk). As of 21 Sept – 13 CCps authorised under EMIR
Clearing does not apply if one party is an NFC-
NFC = NFC+ IF the rolling average of notional positions in OTC derivatives EXCLUDING HEDGING DERIVS over 30 working days of the NFC and any other non financial entity in that NFC’s group exceeds the clearing threshold
b/c positions within a group are aggregated when determining NFC- or NFC+, a group cannot consist of both NFC+ and NFC-. Either all in group NFC- or all in group NFC+
6. In the event that a threshold is breached, all of the NFC+s OTC derivs (including hedging) must be cleared

30. List of CCPs that have been authorised to offer services and activities in the Union as at 23 September 2014 No
Name of the CCP
Country of establishment
Competent authority (if established in the Union)
Date of authorisation 1.
Nasdaq OMX Clearing AB
Sweden
Finansinpektionen
18 March 2014 2.
European Central Counterparty N.V.
Netherlands
De Nederlandsche Bank (DNB)
1 April 2014 3.
KDPW_CCP
Poland
Komsija Nadzoru Finansowego (KNF)
8 April 2014 4.
Eurex Clearing AG
Germany
Bundesanstalt für Finanzdienstleistungs aufsicht (Bafin)
10 April 2014 5.
Cassa di Compensazione e Garanzia S.p.A. (CCG)
Italy
Banca d’Italia
20 Mary 2014 6.
LCH.Clearnet SA
France
Autorité de Contrôle Prudentiel et de Résolution (ACPR)
22 May 2014 7.
European Commodity Clearing
11 June 2014 8.
LCH.Clearnet Ltd
United Kingdom
Bank of England
12 June 2014 9.
Keler CCP
Hungary
Central Bank of Hungary (MNB)
4 July 2014
10.
CME Clearing Europe Ltd
4 August 2014
11.
CCP Austria Abwicklungsstelle für Börsengeschäfte GmbH (CCP.A)
Austria
Austrian Financial Market Authority (FMA)
14 September 2014
12.
LME Clear Ltd
3 September 2014
13.
BME Clearing
Spain
Comisión Nacional del Mercado de Valores (CNMV)
16 September 2014

31. Future stages of the EMIR implementation Clearing - obligation (cont.)
Hedging derivatives excluded in determining NFC category:
“objectively measurable as reducing risks directly relating to the commercial activities or treasury financing activities of the NFC or of the group”
only needs to constitute a hedge at time of entry into transaction
Exemptions apply for intragroup transactions, OTC derivative contracts associated with covered bond programmes and pension funds until August 2015
Intragroup – otc derivative contract with another counterparty part of the same group provided that both counterparties are included in the same consolidation on a full basis and they are subject to appropriate centralised risk evaluation, measurement and control procedures
Intragroup - both parties must notify respective competent authorities not less than 30 calendar days before the use of the exemption. Competent authorities may object to the use of the exemption before or after 30 day period
Covered bond programmes – no proposed exemption for derivatives entered into in connection with securitisations

32. Future stages of the EMIR implementation Clearing - obligation (cont.)
ESMA is required to draft RTS on the clearing obligation within six months of the authorisation of the CCPs
ESMA published two consultation papers on 11 July 2014 (comment periods closed 18 August 2014 and 18 September 2014)
ESMA was expected to publish first draft RTS by 18 September The EC then has 3 months to determine whether to endorse, endorse with amendments or not endorse the RTS
If endorsed, the RTS will come into force 20 days after publication in the Official Journal (i.e. Jan 2015). However, the consultation papers have indicated a phased-in approach
ESMA has taken a ‘Bottom-up’ approach. The determination of those classes which will be subject to the clearing obligation is based upon the classes which are already cleared by authorised CCPs
ESMA tasked with consulting and proposing (a) which class of derivatives should be subject to the clearing obligation (b) date or dates when the clearing obligation to take effect including any phase-in period and (c) the min remaining maturity
First CCP = Nasdaq OMX (Sweden) on 18 March 2014
Top down approach – ESMA on its own initiative identify classes which should be subject to the clearing obligation but for which no CCP has yet received authorisation
The draft RTS should take into consideration:
Degree of standardisation of the contractual terms and operational processes of the relevant class;
Volume and liquidity of the relevant class (including the margins and financial requirements of the CCP);
Availability of fair, reliable and generally accepted pricing info in the relevant class (including whether would continue to be easily accessible if class became subject to clearing)

33. Future stages of the EMIR implementation Clearing - obligation (cont.)
Consultation No.1
- Interest rate OTC derivative classes – in-scope
Type: Fixed-to-float interest rate swaps, float-to-float swaps (basis swaps), forward rate agreements, overnight index swaps
Central Counterparties: Nasdaq OMX (Sweden), Eurex (Germany), KDPW_CCP (Poland) and LCH.Clearnet Limited (UK)
- Equity and interest rate futures and options classes - out-of scope
interest rate future and option classes cleared by LCH.Clearnet Limited (UK) and Nasdaq OMX (Sweden)
Interest rate OTC derivative classes cleared by KDPW_CCP (Poland) (only authorised for IRS denominated in PLN and not covered )
Equity OTC derivative classes cleared by Nasdaq OMX (Sweden) and LCH.Clearnet Limited (UK)
Consultation no1 – based on share in overall otc market (both in notional terms and market value) – clear that interest rate derivs need to be considered in priority75% of the market value of all otc deriv contracts)
ESMA has proposed not to impose a clearing obligation on interest rate futures and options, equity products or single name
Other contracts in these asset classes could be included in the future as a result of more CCP authorisations or already authorised CCPs expanding their product range or if ESMA decides to utilise the top-down method of identifying contracts which should be mandated for clearing.
Other asset classes (for example OTC commodity derivatives and OTC FX derivatives) will be covered in subsequent consultation papers.

34. Future stages of the EMIR implementation Clearing - obligation (cont.)
Consultation No.2
Credit default swaps – in-scope
Type: untranched index credit default swaps
Central Counterparties: LCH.Clearnet SA (France) (with ICE Clear Europe expected to be authorised by the time the RTS enters into force)
Single name credit default swaps cleared by Nasdaq OMX (Sweden) and LCH.Clearnet SA (France) – out of scope
First consultation paper on CDS clearing – stakeholders indicated they preferred that at least 2 ccps are authorised before imposing clearing obligation. Therefore, critical ICE Clear Europe is authorised. Not authorised by 19 August 2014 [NEED TO CONFRIM BY DATE OF PRESENTATION]
Other asset classes (for example OTC commodity derivatives and OTC FX derivatives) will be covered in subsequent consultation papers.

35. Future stages of the EMIR implementation Clearing - obligation (cont.)
Proposed timetable
Category 1 – Clearing members – 6-month phase-in period after entry into RTS
Entities which are, at the date the relevant RTS comes into force:
clearing members of at least one CCP (such CCP having been authorised to clear the class of derivatives which are subject to the RTS); and
their clearing membership allows it to clear the relevant class of derivatives
Category 2 – Non-clearing members – 18-month phase-in period after entry into RTS
Counterparties not falling in Category 1 or Category 3. This will include (i) FCs not in Category 1 and (ii) AIFs qualifying as NFC+ not included in Category 1
Category 3 – NFC+ – 3-year phase-in period after entry into RTS
NFC+ not included in Category 1 or 2
Where a contract is entered into with counterparties in different categories, the date the clearing obligation will take effect is the later of the two
Category 2 – would include pension schemes unless exemption is extended beyond August 2015.

36. Future stages of the EMIR implementation Clearing - frontloading
Does not apply to contracts if at least one party is a NFC
Frontloading can be split into two different timeframes:
Period A – between the notification of the classes to ESMA and the publication in the OJ of the RTS on the clearing obligation
Period B – between the publication in the OJ of the RTS and the date on which the clearing obligation takes effect
Different minimum remaining maturity (MRM) periods:
Period A – MRM is set at the maximum maturity of the contracts per class minus the length of the implementation period. Therefore, no contracts in Period A will be subject to the frontloading obligation
Period B – MRM is set at 6 months (i.e. those contracts which are close to expiration on the date of application of the clearing obligation are not required to be cleared)
OTC interest rate swaps Contracts with at least six months before expiration on the date of application of clearing obligation
OTC interest rate options Not subject to the clearing obligation, so no frontloading obligation will apply
OTC interest rate futures Not subject to the clearing obligation, so no frontloading obligation will apply
OTC credit derivatives Contracts with at least six months before expiration on the date of application of the clearing obligation
OTC equity derivatives Not subject to the clearing obligation, so no frontloading obligation will apply
To clear, the transaction must have remaining maturity equal or greater than the MRM.
Period A – uncertainty and negative impact of frontloading are most significant in period A. CP’s do not know if notified classes will become subject to obligation and when obligation will take effect. Therefore, wanted to ensure that no contracts were subject to frontloading and hence adapted the MRM to suit/work. E.g Basis swap with maximum maturity of 50 years
, the implementation period for category 1 is 6 month = MRM = 49yrs 6 months.
Period B -The determinant for whether an OTC derivative contract entered into in will be subject to the frontloading obligation is whether, as at the date of the application of the clearing obligation for that OTC derivative contract and for the counterparty in question, there is a certain minimum remaining maturity.
MRM set at a more meaningful level.
Financial counterparties and NFC+ should identify which of the products that have been proposed to be subject to mandatory clearing they use, and identify whether they currently have any contracts which are likely to be subject to the frontloading requirement.
Financial counterparties and NFC+ should ensure that they know which of their OTC derivative counterparties will also be caught by the clearing obligation.
Any counterparties which intend to make use of any of the exemptions should assess whether they are able to meet any of the applicable conditions and ensure they understand the process (if any) for notifying or applying to the relevant competent authority(ies).
For pensions schemes, frontloading will apply but only derivs entered into after expiry of exemption (August 2015) may be subject to mandatory clearing

37. Expected developments
Q3 2014
Commission to report on progress on the transfer by pension scheme arrangements of on-cash collateral as variation margin and whether the exemption from the clearing obligation for pension scheme arrangements will be extended under Art.82(2) EMIR (17 August 2014)
Expiry of compliance schedule for confirmations of uncleared OTC derivatives (31 August 2014), T+1 or T+2 deadline fully applicable
ESMA to deliver first draft clearing obligation RTS to the Commission by 18 September 2014, with other draft RTS to follow by 12 December 2014
ESMA to publish reports under Art.85(3) EMIR by 30 September 2014 (preparatory to Commission’s general report on EMIR)
Commission expected to publish first equivalence assessments under Art.25 EMIR (and possibly also under Art.13 EMIR)
Q4 2014
Expected authorisation of additional EU CCPs and first recognitions of non-EU CCPs, triggering additional consultations on clearing obligations
Possible ESMA Q&A on how obligations apply to TCE-TCE trades before 10 October 2014 (start date under RTS on TCE-TCE trades)
Deadline for comments on the ESMA DP on calculation of counterparty risk by UCITS for cleared OTC derivative transactions (22 October 2014)
Possible amendment of the CRR to extend the transitional capital relief for exposures to qualifying CCPs before 15 December 2014
Expected publication of the first clearing obligation RTS in the OJ in mid-December 2014
ESAs expected to deliver the draft margin RTS to the Commission by the end of Q4 2014
Possible ESMA consultation on guidelines on the definition of spot foreign exchange under MiFID
Q1 2015
Commission to publish annual report on possible systemic risks and cost implications of interoperability arrangements pursuant to Art.85(4) EMIR
ESMA to present annual report on penalties imposed by NCAs pursuant to Art.85(5) EMIR
Q2 2015
Expected publication of the margin RTS in the OJ in early Q2 2015
Additional third country central banks expected to be added to the list of exempted entities in Art.1(4) EMIR (before first clearing obligation effective)
NCAs expected to start accepting applications for the intra-group exemption to the clearing obligation (before first clearing obligation effective)
Q3 2015
Commission to publish general report on EMIR implementation pursuant to Art. 85(1) EMIR by 17 August 2014
2017
ESMA to list pension arrangements specifically exempted from the clearing obligation by NCAs (before first clearing obligation effect for NFC+)
Deadline for reporting to TRs pre-existing contracts that were not outstanding on the reporting start date (12 February 2017)

38. Any questions?