All counterparties, both financial and non-financial, that enter into derivative contracts are subject to the European Market Infrastructure Regulation (EMIR), which is aimed at reducing the risks associated with the derivatives market, especially OTC derivatives. The Regulation came into force in August 2012 but hasn’t been fully implemented yet. Many of its provisions are completely new in a market, which by its very nature has dealt with non-standardised financial instruments.
EMIR imposes obligations on counterparties in relation to;
- Reporting - All derivative contracts, including exchange traded derivatives must be reported to a trade repository;
- Risk management – All non-centrally cleared trades are subject to risk management procedures, including the exchange of collateral;
- Clearing – Certain derivative contracts (yet to be defined) will need to be cleared by a central counterparty.
The reporting and most of the risk mitigation requirements are in place but the central clearing and collateral exchange obligations have yet to take effect. A number of trade repositories and central counterparties have been authorised by ESMA. EMIR has already had implications on operations but when the clearing and collateral exchange obligations take effect, which could be early in 2015, counterparties operating models will need to be reviewed and may need to be adapted to ensure compliance.
KPMG has significant expertise and depth of knowledge in helping counterparties comply with these obligations. We have been tracking developments in the evolution of EMIR to help our clients understand not just the detail of how these requirements will affect their business but also to help them put in place the solutions needed to deliver compliance. Please get in touch to find out more about how our services can help your business.