1. Setting the EMIR scene
ABBL conference
November, 2014

2. Risk mitigation for non-cleared trades Reporting to an authorised TR
Following the introduction of EMIR in August 2012, two requirements came into force and have been implemented
From 15 March 2013, all counterparties dealing with non-centrally cleared transactions shall:
timely confirm the deals
perform a daily valuation of the contracts
From 15 September 2013, all counterparties dealing with non-centrally cleared transactions shall:
reconcile the outstanding derivative positions
resolve any dispute coming from non reconciled positions
perform a compression exercise
Risk mitigation for non-cleared trades
Portfolio reconciliation, portfolio compression and dispute resolution
Timely confirmation and marking to market
Reporting obligation starts
Daily reporting
TR authorization
Back loading (1st waiver)
03/13
09/13
11/13
02/14
05/14
08/14
TR application begins
07 November 2013
4 TRs approved by ESMA:
Regis TR
DTCC
Unavista
KDPW
28 November 2013
2 TRs approved by ESMA:
ICE TVEL
CME
Reporting of all OTC and ETD transactions
Last day for back loading all the contracts still open on starting reporting date (i.e. 12 Feb)
Daily collateral and valuation reporting
Reporting to an authorised TR
Source: EMIR, Deloitte Analysis

3. Reporting & other compliance costs
As a result of this reform the cost of dealing with derivatives has increased making OTC derivative transactions more expensive
Reporting & other compliance costs
Margin requirements
Regulatory capital
charge + +
Incremental cost arising from the implementation of:
Reporting requirement
Risk mitigation requirements.
According to Deloitte analysis based on “ESMA Impact Assessment of EMIR implementing measures”, in total we estimate the regulatory and other compliance cost to be about EUR 0.50 per EUR 1 mio of notional.
Source: EMIR, Deloitte Analysis

4. Implementation actions
Requirements
Implementation actions
Risk Mitigation Techniques, except for margin, have been implemented quite easily
Implementation status
For OTC derivative transactions entered into by FCs, NFCs (regardless NFC+ or –) that are not centrally cleared, specific risk management provisions have been introduced to mitigate the exposure to operational and counterparty credit risk:
Timely confirmation
Portfolio reconciliation
Dispute resolution
Portfolio compression
Daily valuation
Margin (estimated starting date: Q3 2015)
These requirements will, as well, indirectly impact the counterparties established in a non-EU/EEA country (i.e. third country entities).
Timely confirmation
Apply the negative confirmation principle
Electronic solution, which supports confirmation, affirmation and matching processes
Portfolio reconciliation and dispute resolution
Adhere to the ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol – amending the master agreements relating to OTC derivatives (ISDA Master Agreement). This required the definition of the role covered in the process: portfolio data receiving entity or sending entity;
Alternatively, execute the bilateral agreement in circumstances where the counterparties do not wish to adhere to the ISDA PR/DR Protocol
Operational process:
Automated solution, like triResolve
Manual bilateral reconciliation, exchanging the file between the counterparties
Daily valuation
Verification that all OTC derivatives are daily valuated
In case of market conditions that prevent marking-to-market, implementation of marking-to-model
In all the cases a new or enhanced processes have been implemented, with required a proper documentation and sound description into the respective procedures.
FSA started compliance review
Source: EMIR, Deloitte Analysis

5. Challenges & Implementation actions
Requirements
Challenges & Implementation actions
EMIR Reporting: the first complete practical experience from a reporting point of view…
Implementation status
Responsibility falls on both counterparties
Third Country Entities are indirectly impacted to the extent they trade with entities established in the EU who are directly impacted by EMIR.
Delegation of the reporting to a third party or other counterparty is possible
Timing: by the end of the day following the execution, the contract and all its characteristics are reported;
Daily reporting by FCs and NFC+s:
Fields on the contract valuation (at position level), as maintained and valued by the CCP;
Changes in market-to-market or market-to-model valuations on reported bilateral transactions;
Information on collateral to be reported on a portfolio or on a single transaction basis.
85 fields must be reported to the TR
Record keeping following termination of the contract
Counterparty ID is provided by the Legal Entity Identifier (LEI) and transaction ID is provided by the UTI; each counterparty (whether EU/EEA or non EU/EEA domiciled) to a derivatives contract, other than natural persons, must obtain an LEI.
Adhere to the ISDA 2013 Reporting Protocol or execute a bilateral consent addressing disclosure limitations of the relevant information
Definition of the reporting model
Delegation is contemplated as model and it has been chosen by several players, especially in case of small volume of derivatives; in this case contract shall be put in place between the delegating and the delegated entity (e.g. ISDA/FOA EMIR reporting Delegation Agreement)
Data gathering from different systems and validation of the common data with the other counterparty
Data mapping according to ESMA data fields
New data element:
LEI: a pre-legal entity identifier can be issued by any of the endorsed pre-local operating units (LOU) of the global legal entity identifier system (GLEIS). As of today there are 21 pre-LOU in operations (e.g. in Luxembourg LuxCSD)
UTI and its hierarchy for generating it
Reporting in place on a best effort basis
TRs are reaching a better stability
Source: EMIR, Deloitte Analysis

6. … and the reporting journey is still ongoing and more challenges are coming…
Data should be reconciled between TRs if counterparties report to different TRs
TRs should apply validation rules to ensure that reporting is performed according to the EMIR regime
TRs check the LEIs valid UTIs validity before submit the trades to Inter-TR Reconciliation
Implement the arrangements to respect the “validation rules”
TRs to check the accuracy of data
Inter-TR Reconciliation & Data quality
Publication of a Consultation Paper by ESMA, aiming at
addressing shortcomings evidenced during the practical reporting;
introducing improvements to better fulfil the reporting objectives;
providing clarification on some data fields and/or their description
The principal proposed changes:
Introduction of new fields: from 59 to 74 fields globally
15 fields will be amended (e.g. format of the information, type of code to report, etc.)
UTI: introduction of a clear rule in the absence of agreement between the 2 parties
Collateral: more information to report such as IM, VM, respectively the posted and received amount and the currency
Action type: introduction of 2 specific action types for “correction” and “position component”
Clear indication of position or trade report
Clarifications in relation to MtM methods and meaning of “notional”
Changes in the reporting
FX financial instruments (e.g. FX forward with a settlement date up to 7 days and FX forwards concluded for commercial purposes: in or out?
Market Consultation (open until 09 May 2014) asked by EC
For the moment, the majority of counterparties are reporting to TRs the FX transactions
Scope
Source: EMIR, Deloitte Analysis

7. In addition, new collateral requirements are approaching…
Buy-side
Custodian bank
Clearing Members/ CCP
Account
segregation
framework
Accurate, timely, and appropriately segregation of exchanged collateral
Set up individual segregation or omnibus account
Adjust its framework offering both ways to match clients needs and CCP requirements
Introduce control mechanisms aiming at:
reconcile the collateral position deposited in the respective account
verify that the placed and received collateral is in line with the eligibility criteria (from the CCP or with the other counterpart)
verify the accuracy of the haircuts application, especially in case of bilateral exchanges
Propose to clients account structures: omnibus or individual segregations.
CMs distinguish their own assets in separate accounts at the CCP from the clients assets
Have enough high liquidity to exchange collateral (particularly during a period of financial stress)
Apply risk-sensitive haircuts models
Define list of eligible collateral and methods to calculate collateral requirements and apply haircuts
Eligibility &
Haircuts
Re-use &
re-hypothecation
IM: Restriction in the re-use, re-pledge and re-hypothecation;
VM: possible for cash and non-cash collateral
Protection
mechanism
Dispute mechanism to timely regulate any discrepancy of collateral amount to be exchanged
Default waterfall:
Received collateral;
Defaulter’s default funds;
CCP’s own capital;
Default fund of non-defaulting CMs

8. Collateral Organisation Collateral Operations
…which will bring to a re-thinking of your collateral management operating model
Collateral Organisation
Define strategic collateral model (including products strategy)
Assess collateral services solutions
Evaluate financial impacts 1
Collateral Operations
Manage both cleared and collateral process
Connectivity to market infrastructure (T2S / CSD)
Selection of brokers
Daily valuation and reporting
Margin requirements 2
Collateral Management
Collateral needs
Anticipate and manage liquidity needs
Collateral optimization
Collateral transformation 3
Collateral Safety
Review depositary bank responsibility and compliance
Set up services level agreements and segregation of accounts
Rules on collateral eligibility and haircuts calculation
Limits on re-use/ re-hypothecation 4

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