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FinfraG / EMIR

Trade Repository Reporting &

Risk Mitigation Techniques

Gilbert Lüthy, CFA

Zurich, Sept. 23rd 2014

AGENDA

Trade Repository Reporting What are the relevant regulations?

Who has to report?

What has to be reported?

What is the impact on IT infrastructure?

What are the selection criteria for choosing a Trade Repository?

Risk Mitigation Techniques What are the requirements under EMIR?

How does EMIR already impact Swiss Entities?

What are the requirements under FinfraG?

Annex

2

AGENDA

3


Who has to report?







Annex

RELEVANT REGULATIONS

4

Important Regulations under EMIR regarding Trade Repository Reporting

Source: Extract of REGULATION (EU) No 648/2012 (EMIR)

WHO HAS TO REPORT? (1/6)

5

Reporting Obligation under FinfraG (Art. 103 E-FinfraG) For transactions between a financial and a non-financial counterparty, the

financial counterparty has to report. For transactions between two financial counterparties, the financial

counterparty that is not small has to report. Point two above applies analogous to transactions between two non-

financial counterparties.


6

Reporting Obligation under FinfraG (Art. 103 E-FinfraG) For transactions between two small financial or two non-small financial

counterparties, the selling party has to report. The point above applies analogous to transactions between two non-

financial counterparties.


7

Reporting Obligation under FinfraG (Art. 103 E-FinfraG) Exception Rules The Swiss counterparty has to report, when the foreign counterparty is not

reporting to a Trade Repository. Is the transaction centrally cleared, then the reporting is carried out by the

Central Clearing party. To fulfill the reporting obligation the service of a „Third Party“ can be used.


8

Overview of Reporting Obligation under FinfraG


9

Reporting Obligation under FinfraG and EMIR If the Swiss entity is the seller within the transaction, trades are always

reported dually (from the Swiss and the EU counterparty). In case the Swiss entity is the buyer within the transaction, trades are only

reported by the Swiss entity when the cascade logic described in the previous slides indicates a reporting obligation. The EU counterparty however will always report the trade.


10

WHAT HAS TO BE REPORTED?

11

Reporting Content The reporting content is structured into 2 sections. The second section is

again divided into 9 sub-sections. On average more than 60 attibutes have to be reported to Trade

Repositories for every derivative transaction. The content of most of the fields has to follow a clearly defined format, e.g.

ISO 8601 for the date format.

Section Content Applicable to Section 1 Parties to the Contract All Contracts

Section Content Applicable to

Section 2a Contract type All Contracts

Section 2b Details on the transaction All Contracts

Section 2c Risk mitigation / reporting All Contracts

Section 2d Clearing All Contracts

Section 2e Interest Rates Interest Rate Derivatives

Section 2f Foreign Exchange Currency Derivatives

Section 2g Commodities Commodity Derivatives

Section 2h Options Contracts that contain an Option

Section 2i Modifications to the Contract All Contracts

COUNTERPARTY DATA

COMMON DATA

REPORTING MODEL

12

The Transaction-Position Dual Reporting Model

Messages sent to the Trade Repository distinguish between Messages re. Transactions including various condition data; Messages re. Modifications of Contracts; Messages re. subsequent updates, e.g. Valuation, Collateral; Supplementary Position Messages (lack of clearly formulated

requirement within the ESMA regulations), nonetheless element of dual reporting models established by Trade Repositories.

Source: Derivatives Workflow Guide, V1.1, March 2014, REGIS-TR

IMPACT ON IT INFRASTRUCTURE

13

What Requirements does a Reporting Solution have to fulfill? The relevant trades have to be identified for each legal entity. The reporting obligation has to be determined for each entity. The reporting content has to be checked for completeness and converted

into the correct format. A status control for outgoing and incoming messages has to be established.

SAMPLE OF IMPLEMENTATION CHALLENGES

14

TECHNICAL IMPLEMENTATION CHALLENGES

15

Technical Implementation Challenges Sourcing of all the relevant data

What are the available data sources? Are all relevant fields already stored in the system (all

trades entered in or outstanding on Aug. 16th, 2012 (backloading requirement under EMIR))?

How are missing data elements added?

Data validation and monitoring

Archiving of data

Data transmission to Trade Repository

REPORTING SOLUTIONS

16

The complexity in fulfilling the reporting obligation has considerable impact on IT Infrastructure in order to master the data flow correctly.

Standard software solutions, e.g. SAP, offer already sophisticated functionality for Trade Repository Reporting with integrated Status Management for Incoming and Outgoing Messages to Trade Repositories.

TRADE REPOSITORY REPORTING IN SAP

17

Source: Trade Repository Reporting (TRR), SAP AG

FUNCTIONALITY OF SAP TRR

18

Based on an assessment of Eprox Consulting AG , Sept. 2014

SELECTION OF A TRADE REPOSITORY

19

Market Position of Trade Repositories Some Trade Repositories have a Central Securities Depository background

(i.e. DTCC, Regis TR), others have an Exchange background (i.e. CME, Una Vista).

There are Trade Repositories that focus on reporting, others emphasize on operational efficiency of the trading process.

Especially for financial counterparties the strategic positioning of the Trade Repository used for reporting is crucial.

THE REPORTING FLOW

20

How do Trade Repositories Process Data?

Trade Repositories identify messages with data of transactions, valuations, collateral and life-cycle events and receive them at the repository separately from the information of the positions.

Supervisory authorities can receive access to transactions and position data on a „Pull“ (e.g. direct access on database) or „Push“-basis (e.g. via predefined reports).

REPORTING FLOW IN AN EUROPEAN CONTEXT

21

The Reporting Flow in the Swiss & European Context

Art. 77 E-FinfraG stipulates the Swiss Regulatory Authorities (FINMA, SNB, Electricity Commission) that are allowed to have access to the data of a Trade Repository.

Art. 78 E-FinfraG outlines the preliminary conditions, that have to be fulfilled by foreign supervisory authorities to have access to the data of a Swiss Trade Repository.

EVALUATION OF TRADE REPOSITORIES

22

Selection Criteria for choosing a Trade Repository

Basic reporting functionality are covered by almost all Trade Repositories on

a satisfying quality level. With higher trading volume operational efficiency gains may have to be

considered in addition to the standalone reporting functionality. For Swiss entities ‚Data Security‘ aspects will be of higher importance than

for comparable entities domiciled in the EU.

OVERVIEW OF TRADE REPOSITORIES

23

AGENDA


Who has to report?







Annex

24

TIMELY CONFIRMATION

25

Timely Confirmation Effective under EMIR as of: March 15th, 2013 Requirements OTC derivative contracts need to be confirmed within two

days (NFC-) respectively one day (NFC+/FC). Until Aug. 31st, 2014 timeframe is extended up to 4 days.

Exchange of confirmations between counterparties within given timeframe.

This Risk Mitigation Technique is part of the current draft of FinfraG. However, the equivalence of the Swiss rules to EMIR depends on the

content of the regulatory technical standards, that will have to be defined by the Swiss authorities following the entry into force of FinfraG.

PORTFOLIO RECON & DISPUTE MGMT

26

Portfolio Reconciliation and Dispute Management Effective under EMIR as of: Sept. 15th, 2013 Requirements Arrangements with counterparties for reconciliation and

procedures in regard to dispute management need to be in place prior to enter into OTC derivative contracts.

Portfolios need to be reconciled with counterparties. Reconciliation frequency depends on counterparty classification: Once per year for NFC- ≤ 100 open contracts Once per quarter for NFC- > 100 open contracts Once per quarter for NFC+/FC ≤ 50 open contracts Once per week for NFC+/FC 51 to 499 open contracts Daily for NFC+/FC ≥ 500 open contracts

These Risk Mitigation Techniques are part of the current draft of FinfraG. However, the equivalence of the Swiss rules to EMIR depends on the


PORTFOLIO COMPRESSION

27

Portfolio Compression Effective under EMIR as of: Sept. 15th, 2013 Requirements stipulated in Art. 14 of Regulation (EU) No 648/2012) Regulatory Technical Standard of ESMA:

“Financial counterparties and non-financial counterparties with 500 or more OTC derivative contracts outstanding with a counterparty which are not centrally cleared shall have in place procedures to regularly, and at least twice a year, analyse the possibility to conduct a portfolio compression exercise in order to reduce their counterparty credit risk and engage in such a portfolio compression exercise.”

This Risk Mitigation Technique is part of the current draft of FinfraG. However, the equivalence of the Swiss rules to EMIR depends on the


REQUIREMENTS: CURRENT SITUATION

28

Current Situation in Switzerland Financial

Counterparty

Small Financial

Counterparty

Non Financial

Counterparty

Small Non

Financial

Counterparty

Implementation of basic

risk mitigation measures

for non

centrally

cleared

trades

Timely

Confirmation

Portfolio

Reconciliation

Dispute Resolution

Portfolio

Compression

as bilaterally

agreed in

(ISDA/CSA)

as bilaterally

agreed in

(ISDA/CSA)

as bilaterally

agreed in

(ISDA/CSA)

as bilaterally

agreed in

(ISDA/CSA)

Extended risk

mitigation measures

Valuation

Collateralisation

as bilaterally

agreed

(ISDA/CSA)

as bilaterally

agreed

(ISDA/CSA)

as bilaterally

agreed

(ISDA/CSA)

as bilaterally

agreed

(ISDA/CSA)

for centrally

cleared

trades

Valuation covered by

CCP services

covered by

CCP services

covered by

CCP services

covered by

CCP services

Collateralisation covered by

CCP services

covered by

CCP services

covered by

CCP services

covered by

CCP services

REQUIREMENTS: EMIR / BCBS IOSCO

29

Requirement under EMIR* Financial

Counterparty

Small Financial

Counterparty

Non Financial

Counterparty

Small Non

Financial

Counterparty



for non

centrally

cleared

trades

Timely

Confirmation

Portfolio

Reconciliation

Dispute Resolution

Portfolio

Compression

nv

/nv

nv

Extended risk

mitigation measures

Valuation

Collateralisation

for centrally

cleared

trades


CCP services

covered by

CCP services

covered by

CCP services

covered by

CCP services


CCP services

covered by

CCP services

covered by

CCP services

covered by

CCP services

*) As of Dec. 2015 (impact of BCBS IOSCO) situation already expected to be equivalent with EMIR.

REQUIREMENTS: FINFRAG

30

Requirement under FinfraG Financial

Counterparty

Small Financial

Counterparty

Non Financial

Counterparty

Small Non

Financial

Counterparty



for non

centrally

cleared

trades

Timely

Confirmation

Portfolio

Reconciliation

Dispute Resolution

Portfolio

Compression

nv

/nv

nv

Extended risk

mitigation measures

Valuation *

Collateralisation

for centrally

cleared

trades


CCP services

covered by

CCP services

covered by

CCP services

covered by

CCP services


CCP services

covered by

CCP services

covered by

CCP services

covered by

CCP services

*) In comparison with EMIR and BCBS IOSCO, FinfraG does not foresee a ,,Valuation’’ obligation of open

transactions on behalf of ,,Small Financial Counterparties’’.

AGENDA


Who has to report?







Annex

31

ABBREVIATIONS

32

YOUR CONTACTS

Schweiz

Eprox Consulting AG

Hinterbergstrasse 24

6330 Cham

Gilbert Lüthy

Tel. +41 79 340 59 21

E-Mail: [email protected]

www.eprox.ch

Schweiz

Eprox Consulting AG

Hinterbergstrasse 24

6330 Cham

Stefan Völkel

Tel. +41 79 502 74 72

E-Mail: [email protected]

www.eprox.ch

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