EMIR – you haven’t heard the last of it!


Over two years after the introduction of the obligation imposed by EU Regulation 648/2012 to report derivative products, it is time to look at it again and ensure we comply. Now the project is up and running, perhaps it would be a good idea to carry out a review to reassure the company's Audit Committee. As time has gone by, some problems have come to light, and some solutions have been found to ensure we stay compliant given the penalties laid down by most countries.

EMIR, ancient history?

Most treasury departments have complied with the EMIR rules since 12 February 2014, the date on which it started. However, it is rather doubtful that all of them are really fully compliant with EC Regulation 648/2012 on OTC (“Over-The-Counter”) type derivative products. Especially as this Regulation is expected to evolve, and will not necessarily become simpler in the process. It might well be worthwhile reviewing the procedures in place to ensure compliance with EMIR and thus to reassure supervisory bodies such as the Treasury Committee, the Audit Committee and the Board of Directors. With people busy working on other things, there might be a tendency to laxness. The apparent absence of risk could encourage negligence. However, as defined in the regulation, penalties have to be applied by the local competent authority in case of infringements of the EMIR requirements. In most countries, the authorities are not only beginning to ask questions to the regulated entities about EMIR compliance but they are also asking evidence of this compliance. Being fined by the authority is not a good thing. On the other hand, the damage to your reputation and the lack of professionalism might leave their mark.

In our view, proactive treasurers should review their procedures and internal controls, or have them reviewed, to waymark the EMIR trail.

Indeed, a common misunderstanding in terms of compliance is related to the delegation of EMIR procedures. It must be clear that the delegation of the operations does not entail the delegation of their responsibility.

Even in case of delegation, you have to get the proper evidence that your entity is in line with the EMIR requirements.

For example, have all products dealt before the start date been reported (backloading)? Can you demonstrate that you are an "NFC" (i.e. Non-Financial Counterparty minus) and that the collateralisation thresholds have not been breached? Can you demonstrate that reconciliations are carried out regularly and the products are confirmed electronically and reported to ESMA? Group membership will certainly have changed. Are the new entities covered? What do you report to top management about EMIR? And more. In our view, these are no more than the questions you need to be able to answer if you want to sleep soundly.

With compliance projects of this type, time always produces a few surprises and problems that need to be addressed and sorted. For example, are the reconciliations, the control reports and the performance monitoring figures effective? We cannot stress too much the need for prudence and forethought, especially for companies reporting on behalf of their subsidiaries, or those with large volumes, that might have to demonstrate their compliance to supervisory bodies such as BaFin, FSA, CSSF, etc….

The challenges for corporate treasurers raised by EMIR

Amongst the several problems generally encountered in implementing EMIR, the following may be mentioned:

  • Portfolio reconciliation (regardless of frequency) often poses problems because it requires the matching up of spreadsheets which are all different from one bank to another, and which furthermore change over time. An automation system such as TRIOPTIMA could prove to be very useful.

  • Reports and dashboards provided by the trade repositories are often, it has to be acknowledged, non-existent or sketchy. You therefore have to find the information elsewhere or build your own report. Here again, a TRIOPTIMA type solution could also help treasurers who have not subcontracted this function to a third party.

  • Absence of documentation, procedures, policies and internal controls to ensure compliance should be noted. This also includes the legal and other services level agreement (SLAs) documentation being updated to integrate the latest EMIR requirements (risk mitigations techniques, reporting, etc.). Often, the things that are done are not properly documented, and therefore cannot be demonstrated to management or to an external supervisory authority.

  • Performance indicators (part of the report or dashboard) are also woefully lacking. However, they would be useful in many ways. These indicators are not only useful to demonstrate your compliance but also in order to track the reporting issues you may have with specific counterparties and/or products.

  • Reports to subsidiaries on behalf of which you report are often non-existent through lack of time.

  • By contrast, electronic confirmations within the deadlines allowed were already in existence in most cases, for example via MT 300 SWIFT

  • This entire EMIR reporting has a heavy cost in systems terms, in time, and in human resources, a cost that is often overlooked or not known to management.

  • This is therefore also important to consider how you may leverage from the EMIR regulatory requirements to facilitate and support other business / compliance processes. For example,

  • Regular reconciliations make accounting closing easier. The ideal would be to be able to use these reconciliations for external audit reports at the company's year end. Unfortunately, for reasons of standards and accounting requirements, this does not yet seem to be on the agenda (but could still be explored)

  • EMIR reporting is also an excellent image of your daily transactional business and provide you with value added analytical information in terms of counterparty and products

As we understand it, an exercise that seems simple on the face of it is in fact complicated and tricky if you want to be fully compliant. Especially as the EMIR standard will, or is threatening to, evolve into a second version, which will certainly be more complicated. Simplification in these matters is not a speciality of the European authorities. Even though the European Association of Corporate Treasurers (i.e. EACT) has kept up the lobbying that it started five years ago, it is not optimistic about its chances of success in achieving simplification.

At a time when some people still wonder what ESMA does with the enormous amount of information that it gathers, we can state that amazingly it has been able to produce interesting consolidated figures and achieve reconciliation of information between Trade Repository. We should bear in mind that even though ESMA is clearly understaffed, it is trying to consolidate the data and sooner or later will make good use of it, as will the national supervisors. Fines will be levied, and take some rather too laid-back treasurers by surprise – those treasurers who neglected to review their internal procedures. I would recommend the assistance of a specialist external firm to prepare a report to submit to the Audit Committee. Having carried out this exercise in my company, with the firm of Deloitte, I think I can say that this is a “best practice”, to be recommended to all treasurers in multinational corporations.

Future of EMIR, position of Corporate Treasurers

The European Association of Corporate Treasurers (EACT) summarized in June 2016, in a letter to European Parliament ECON Committee, its views concerning EMIR review.

First of all, the “hedging exemption” is vital for European Non-Financial Companies, and it should not be removed. Treasurers have strong concerns regarding ESMA’s recommendation that the clearing thresholds, determining whether a non-financial counterparty is obliged to centrally clear or collateralize bilaterally, should be set irrespective of the hedging or non-hedging nature of the transactions. Eventually, the cross asset class clearing threshold should be eliminated too. The excess in one asset class is currently tainting the whole classes’ portfolio.

The NFC’s represent only 2 percent of notional volume of outstanding OTC derivative transactions. It means that it raises doubts on the potential systemic nature of any individual NFC. Hedging transactions represent less systemic risk than non-hedging transactions, because the mark-to-market of hedging transactions will offset at NFC level by an underlying exposure related to their core activity. Conversely, hedging transactions remove financial risk from the real economy. Imposing initial and variation margin requirements on large NFC’s below the clearing thresholds, as suggested by ESMA, would force NFC’s to mobilize billion of EUR for meeting these requirements, thereby reducing funds available for investments into the real economy.

On the reporting obligations side, EACT has also recommended a one-sided reporting instead of the current double-sided reporting which involves that both counterparty agrees on the common data and remain responsible on all transactions data (being delegated or not for reporting purposes).

EU should adopt the one-side reporting as already adopted in the US under Dodd-Frank and to be adopted by Switzerland under FinfraG. The dual-sided reporting regime has led to huge reconciliation issues and tends to be costly and burdensome for both party involved in the transactions. Furthermore, exempting non-financials’ intragroup transactions from the reporting requirement should be decided.

These kinds of fundamentals changes in the regulation will be probably difficult to be acknowledged by the authority. Nevertheless, we do believe these proposed changes would be helpful to the different stakeholders of the value chain. Supervisors and NFC will benefit from a decrease of the number of double reporting and reporting of transactions with low systemic significance.

François Masquelier, Chairman of ATEL