Derivative Regulation under EMIR

EMIR (European Regulation (EU) No 648/2012 on OTC Derivatives, Central Counterparties and Trade Repositories)

As a result of EMIR rules that came into force on September 15, 2013, financial institutions based in the European Economic Area (EEA) are now commonly asking their corporate counterparties to put in place new documentation prior to entering into any new OTC derivatives transactions. Accordingly, ensuring that appropriate contractual provisions are entered into ahead of time can be important in order to avoid delaying the execution of transactions in the future. We set out a high-level summary of these rules, and the documentation commonly used to satisfy them, below.

We would be happy to discuss these requirements with you further. If you have not already been asked to do so by your EAA counterparties, you may wish to consider taking steps to prepare for compliance with these requirements, for example by adhering to the ISDA EMIR Protocols described below. Please feel free to contact any of your regular contacts at the firm or any of our partners and counsel listed on our website to find out more about this.

EMIR Obligations and Timeframe

EMIR imposes a number of new obligations on companies incorporated in the EEA that transact in derivatives. These include an obligation to clear certain classes of derivatives through central counterparties, to report all derivatives contracts to trade repositories, and to apply risk mitigation techniques to non-centrally cleared OTC derivatives. Some of these requirements are already in force. Others are expected to be “phased-in” over the next few years.

• Limited risk mitigation requirements have been in force since March 2013 – these principally include requirements to confirm the terms of derivatives transactions within certain timeframes. Certain notification requirements have also been in force since March 2013.
• More extensive risk mitigation requirements came into force on September 15, 2013. These include requirements for parties to put procedures in place (i) to conduct portfolio reconciliation exercises, and (ii) to resolve disputes with counterparties. Although less likely, counterparties may also be required to consider engaging in portfolio compression exercises.
• While EMIR’s reporting requirements are not expected to come into force until February 2014 at the earliest, they are broader than the equivalent Dodd-Frank requirements. Notably, both parties to transactions are required to submit reports, and a different set of data fields will need to be completed. There is also no exemption for inter-affiliate trades. While EMIR requires data reports from both counterparties, end-users may be able to contract with dealer counterparties to file reports on their behalf.
• EMIR’s mandatory clearing requirements are not expected to come into force until mid-2014 at the earliest.

These requirements will apply both to EEA-incorporated financial institutions and non-financial end-users that enter into derivatives contracts in the course of their business. They will also have an impact on non-EEA entities (including end-users) that transact with EEA counterparties.

ISDA EMIR Protocols

The International Swaps and Derivatives Association (ISDA) has recently produced a number of Protocols and other pro forma documents which are intended to assist counterparties in amending their over-the-counter (OTC) derivative trade documentation to comply with EMIR requirements. These include:

• The 2013 NFC Representation Protocol, pursuant to which adhering parties make representations as to their status under EMIR.
• The 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol which amends trade documentation between adhering parties to reflect EMIR’s portfolio reconciliation and dispute resolution requirements and to include a disclosure waiver to help ensure parties can meet their reporting and record keeping requirements under EMIR without breaching applicable confidentiality restrictions.
• The recently released ISDA DF Protocol Extension: EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure which allows parties to agree bilaterally to use their existing arrangements under the ISDA March 2013 Dodd-Frank Protocol to help them meet their portfolio reconciliation and dispute resolution requirements under EMIR, as an alternative to adhering to the 2013 EMIR Portfolio Reconciliation Protocol.
• A pro forma Amendment Agreement to the ISDA Master Agreement which is intended to enable counterparties to incorporate wording into their ISDA Master Agreement reflecting obligations in relation to the timely delivery and return of confirmations.

The 2013 NFC Representation and the EMIR-related Protocols, which are adhered to on a unilateral basis, operate to modify the ISDA Master Agreements between any two adhering counterparties. While adherence to these documents is not the only way of complying with EMIR’s requirements, it is likely that they will come to represent “market practice”. As a practical matter, your external counterparties may require that you adhere to these documents as a precondition to entering into further OTC derivatives transactions.

While these Protocols are generally straightforward, they will still require adhering parties to make certain determinations regarding (i) their status under EMIR and (ii) the mechanisms they would like to adopt to comply with EMIR’s portfolio reconciliation and dispute resolution requirements. We would be happy to discuss the Protocols with you further if you are considering this approach.