emir - société générale · pdf filepage 4 / 83 foreword the...
TRANSCRIPT
EMIR Questions & Answers
Version: December 2014
Please see page 13 for important information and disclaimers
Page 1 / 83
Page 2 / 83
Page 3 / 83
Page 4 / 83
FOREWORD
The European Market Infrastructure Regulation, EMIR, is one of the outputs of the G20 resolutions taken in Pittsburgh in September 2009 regarding the derivative markets. It intends to increase transparency, reduce operational risk and minimise counterparty risks through a series of new rules. Societe Generale Corporate & Investment Banking is at the forefront of the implementation of these rules. EMIR brings in major changes to the way the derivative markets operate in Europe. It therefore significantly impacts banks’ operating models and, as a consequence, their Clients, whoever they may be; asset managers, hedge funds, insurance companies, corporates and other market players. These changes are already under way. Some have already been adopted, others are still subject to the adoption and publication of Regulatory Technical Standards by the European Securities and Markets Authority. Since the first edition of this guide in December 2013, EMIR implementation has continued, e.g. regarding the future clearing obligation. To adapt its business model to the new market environment where the share of cleared OTC derivatives will grow, Societe Generale has acquired the remaining 50% of Newedge it did not own yet. Societe Generale now has a fully integrated global markets offer, combining the client focus of an agency broker with the strength of a 150 year old financial institution. Societe Generale Corporate & Investment Banking has developed strong expertise in EMIR. We are glad to provide you with the following comprehensive guide, organized as a Q&A, on EMIR impacts. It is intended to assist you with your new regulatory obligations when dealing in derivatives in Europe. Produced by our range of specialists, it will help you navigate through the new rules, answering the main questions you may have and supporting you in adapting to this new regulation. If you need more information, do not hesitate to contact your Sales people who will mobilize our team of experts. Together we will succeed in adapting to EMIR and building a more secure environment for derivative transactions.
Dan Fields Head of Global Markets Societe Generale Corporate & Investment Banking
Page 5 / 83
Page 6 / 83
CONTENTS
FOREWORD ........................................................................................................................................... 4
INDEX BY KEY TOPICS ......................................................................................................................... 8
DISCLAIMER ........................................................................................................................................ 13
ABOUT THIS DOCUMENT ................................................................................................................... 14
1. WHAT IS EMIR? SOME GENERAL QUESTIONS ....................................................................... 16
1.1. A GENERAL PRESENTATION OF EMIR......................................................................................... 17 1.2. THE SCOPE OF EMIR ................................................................................................................ 25 1.3. LEGAL DOCUMENTATION............................................................................................................ 29
2. RISK MITIGATION TECHNIQUES (NON-CLEARED TRADES) ..................................................... 32
2.1. CONFIRMATIONS ....................................................................................................................... 33 2.1.1. Scope .............................................................................................................................. 33 2.1.2. Societe Generale solutions & actions ......................................................................... 33 2.1.3. Questions on the nature of confirmations .................................................................. 36
2.2. MARK-TO-MARKET (“MTM”) OBLIGATION ................................................................................. 37 2.3. PORTFOLIO RECONCILIATION AND DISPUTE RESOLUTION ............................................................. 37 2.4. PORTFOLIO COMPRESSION ........................................................................................................ 43
3. REPORTING OBLIGATION.............................................................................................................. 44
3.1. REPORTING GENERAL PRINCIPLES ............................................................................................. 45 3.2. REPORTING OBLIGATION IMPLEMENTATION: ............................................................................... 49 3.3. REPORTING DELEGATION SERVICE ............................................................................................. 50 3.4. INTERNATIONAL IDENTIFIERS ..................................................................................................... 50
4. CLEARING OBLIGATION ................................................................................................................ 60
4.1. CLEARING OBLIGATION .............................................................................................................. 61 4.2. FRONTLOADING ......................................................................................................................... 65 4.3. INTRAGROUP TRANSACTIONS ..................................................................................................... 65 4.4. CLEARING THRESHOLDS FOR NFCS .......................................................................................... 67 4.5. COLLATERAL ON CCPS ............................................................................................................. 69
5. COLLATERAL OBLIGATION .......................................................................................................... 73
GLOSSARY .......................................................................................................................................... 79
Page 7 / 83
Page 8 / 83
INDEX BY KEY TOPICS
BACKLOADING
See Reporting
CLEARING
Clearable derivatives …………………………………………………………………. Q.75 & 77
Clearing thresholds ……………………………………………………………. Q.87 to 92
Entities impacted by …………………………………………………………………. Q.74 & 76
Frontloading …………………………………………………………………………… Q.80
Phase-in period …………………………………………………………………………… Q.74
Intragroup …………………………………………………………… Q.81 to 86
Collateral on CCPs ……………………………………………… Q.93 to 100
Client clearing offer ……………………………………………… Q.78 & 79
COLLATERAL
Acceptable assets …………………………………………………………………… Q.101
Frequency ……………………………………………………………………………… Q.101
Initial & variation margins ………………………………………………………… Q102
CONFIRMATION
Delays ………………………………………………………………………………. Q.19 & 25
Means available for ………………………………………………………… Q.20 to 24
Nature of ………………………………………………………………………… Q.26 to 28
Scope ……………………………………………………………………………………. Q.19
Timelines ………………………………………………………………………………... Q.19
Tranches ………………………………………………………………………………... Q.27
Page 9 / 83
Types of ………………………………………………………………………………….. Q.20
DOCUMENTATION
FBF, DRV, EFET and other derivative agreements ……………………………………… Q.13
ISDA Protocols …………………………….……………………………………………… Q.12
ISDA NFC Representation Protocol ………………………………………… Q.14 to 16
ISDA Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol …. Q.12, 32 & 39
Clearing documentation………………………………………………………….... Q17
CSA documentation (margin requirements for uncleared trades)………………. Q18
Consent…………………………………………………………………………… Q12 & 47
EMIR
Definition of …………………………………………………………………………………. Q.1
Impact on entities ………………………………………………………………………….. Q.2 to 6
Objectives of ……………………………………………………………………………….. Q.1
Registration …………………………………………………………………………………. Q.8
Scope (asset classes) …………………………………………………………………. Q.10
Scope (entities) …………………………………………………………… Q.2 to 6 & 9
Timeline …………………………………………………………………………………….. Q.7
EXEMPTION
Central Bank, Pension Funds, NFCs
Scope of EMIR ……………………………………………………………………………. Q.9
FRONTLOADING
See Clearing
Page 10 / 83
IDENTIFIER
LEI …………………………………………………………………………………. Q.59 to 64
UPI …………………………………………………………………………………. Q.73
UTI …………………………………………………………………………………. Q.50 & 65 to 72
LISTED DERIVATIVES
Listed derivatives ………………………………………………………………………….. Q.10
MATCHING
See Confirmation
MARK-TO-MARKET (“MTM”)
Valuation ……………………………………………………………………………. Q.29
NON-EEA ENTITIES
See EMIR Scope (entities)
PORTFOLIO COMPRESSION
Definition of ……………………………………………………………………………….. Q.41
Documentation ………………………………………………………………………….. Q.43
Obligation to perform ……………………………………………………………………. Q.42
PORTFOLIO RECONCILIATION
Contacts at Societe Generale …………………………………………………………. Q.37
Disputes ………………………………………………………………………… Q.31, 39 & 40
Page 11 / 83
Frequency …………………………………………………………………………………… Q.36
Data, Key term to reconcile
…………………………………………………………………… Q.35
Obligation to perform …………………………………………………………………… Q.30
Procedures for ………………………………………………………………… Q.31 to 34
Registration of …………………………………………………………………………… Q.32
Societe Generale handling ……………………………………………………….. Q.36 & 38
REPORTING
See also Identifiers
Backloading …………………………………………………………… Q.48 & 50
Data …………………………………………………………… Q 46, 47 & 55
Delegation service ………………………………………………………………… Q.58
Timeline ……………………………………………………………………………… Q.44 & 48
Trade Repositories …………………………………………………………. Q.51 to 55
Scope (entities) ………………………………………………………… Q.45
Valuation & Collateral reporting …………………………………………… Q.49
SOCIETE GENERALE
Classification under EMIR ………………………………………………………………… Q.11
Delegation service (reporting) …………………………………………………… Q.58
Matching and confirmation tools ………………………………………………… Q.20
Repository readiness ……………………………………………………… Q.56 & 57
Portfolio reconciliation ……………………………………………………… Q.36 à 38
Newedge/ client clearing ………………………………………………. Q.78 & 79
Page 12 / 83
TRADE REPOSITORIES
See also Reporting and Societe Generale
Selection of ………………………………………………………………………………….. Q.52
Technical aspects ………………………………………………………………………… Q.55
VALUATIONS
See also Mark-to-Market
Page 13 / 83
DISCLAIMER
Societe Generale Corporate & Investment Banking (SG CIB) is a marketing name for corporate and investment banking businesses of Societe Generale (SG) and its subsidiaries worldwide. This document is for informational purposes only and does not constitute an offer, or the solicitation of an offer, or a recommendation, to buy or sell any securities, futures, derivatives or other financial instruments, services or products. The information herein has been obtained from sources believed to be reliable, but neither SG nor any of its affiliates make any representation or warranty as to its accuracy or completeness. This material is for institutional and corporate clients only. The information contained herein does not have regard to specific investment, financial situations or the specific needs of any specific entity or person. Clients should make their own appraisal of the risks and appropriateness of investing in, or trading the types of products described herein given their own investment objectives, experience, financial and operational resources and other relevant circumstances. The information contained herein may not be relied upon as investment, accounting, legal, regulatory or tax advice or an investment recommendation.
“NEWEDGE ” refers to NEWEDGE Group SA and all of its worldwide branches and subsidiaries. NEWEDGE Group SA is a wholly owned subsidiary of Societe Generale. NEWEDGE Group SA and its foreign branches are authorized by the Authorite de Controle Prudential et de Resolution (ACPR) and Authorite des Marches Financiers (AMF) in France. NEWEDGE UK Financial Limited is authorized and regulated by the Financial Conduct Authority (FCA) in the U.K. NEWEDGE USA is a member of FINRA and SIPC (SIPC only pertains to securities-related transactions and positions). NEWEDGE Canada Inc. is a member of the CIPF. Not all products or services are available from all NEWEDGE organizations or personnel. NEWEDGE USA, LLC and SG Americas Securities LLC (“SGAS”), a wholly owned subsidiary of Societe Generale and a U.S regulated broker dealer, are separate legal entities and separately registered broker-dealers and FINRA members. NEWEDGE USA is also registered with the CFTC as a futures commission merchant and swap dealer. Any NEWEDGE USA prime brokerage and clearing services described herein are offered in the U.S. by NEWEDGE USA, LLC.
Notice to French clients: This material is issued in France by or through Societe Generale which is authorized and supervised by the Autorite de Controle Prudentiel et de Résolution (ACPR) and regulated by the Autorite des Marches Financiers (AMF). Notice to UK clients: This document is issued in the U.K. by the London Branch of Societe Generale. Societe Generale is a French credit institution (bank) authorised by the Autorité de Contrôle Prudentiel et de Résolution (ACPR,the French Prudential Control and Resolution Authority) and the Prudential Regulation Authority and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority, and regulation by the Financial Conduct Authority are available from us on request. Notice to US clients: Capital markets and investment banking activities and securities services in the United States are offered through SG Americas Securities LLC (SGAS), a broker-dealer registered with the U.S. Securities and Exchange Commission and member of NYSE, FINRA and SIPC. Any US person wishing to discuss this document or effect transactions in any security discussed herein should do so with or through SG Americas Securities LLC, 245 Park Avenue, New York, NY 10167 (212) 278-6000. Notice to Canadian clients: This document is for information purposes only and is intended for use by Permitted Clients, as defined under National Instrument 31-103, Accredited Investors, as defined under National Instrument 45-106, Accredited Counterparties as defined under the Derivatives Act (Quebec) and “Qualifies Parties” as defined under the ASC and BCSC Orders. Additional information is available upon request. This document may not be reproduced, distributed, or published by any other person without the prior consent of SG.
© 2014 Société Générale Group (“SG”) and its affiliates. All rights reserved.
Page 14 / 83
ABOUT THIS DOCUMENT
OBJECTIVES:
This document aims to provide standard answers to questions of our clients on EMIR.
It is built in a form of questions and answers. Hence there may be some redundancies in the
content.
The content of some sections is subject to change as some implementing regulations must still
be adopted.
SUPPORTING DOCUMENTATION:
The following websites are excellent sources of information:
European Commission – English
European Commission Q&A session – 10 July 2014
http://ec.europa.eu/internal_market/financial-markets/docs/derivatives/emir-faqs_en.pdf
ESMA – English
EMIR homepage
http://www.esma.europa.eu/page/European-Market-Infrastructure-Regulation-EMIR
Q&A for implementation of EMIR
Latest updated version of the Q&A dated 10 July 2014
http://www.esma.europa.eu/system/files/2014-815.pdf
Q&A for Non-Financial Counterparties & dedicated webpage
http://www.esma.europa.eu/page/Non-Financial-Counterparties-0
Esma public register page
http://www.esma.europa.eu/page/Registries-and-Databases
Autorité des marchés financiers (AMF)
http://www.amf-france.org/en_US/Reglementation/Textes-europeens/Marches/EMIR.html?
Financial Conduct Authority- FCA (former FSA) – English
http://www.fca.org.uk/firms/markets/international-markets/emir
Page 15 / 83
The International Swaps and Derivatives Association (ISDA) – English
http://www2.isda.org/
The Association of Corporate Treasurers (UK) – English
http://www.treasurers.org/node/9406
You can also refer directly to the regulation and its supporting regulatory technical standards:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:201:0001:0059:EN:PDF
http://www.esma.europa.eu/system/files/2012-600_0.pdf
Should you have further queries, you can contact AMF, ESMA or the European Commission directly at the following adresses :
AMF : [email protected]
ESMA : [email protected]
European commission : [email protected]
LEGEND:
Be careful with the answer: the regulatory treatment may not be entirely finalised
FYI For your information
This question or paragraph is not relevant for non-EEA counterparties
Page 16 / 83
1. WHAT IS EMIR? Some General
Questions
1.1. A GENERAL PRESENTATION OF EMIR
1.2. THE SCOPE OF EMIR
1.3. LEGAL DOCUMENTATION
Page 17 / 83
1.1. A general presentation of EMIR
1. What is EMIR?
Official name: Regulation (EU) No 648/2012 of the European Parliament and of the Council of
4 July 2012 on OTC derivatives, central counterparties and trade repositories.
In the aftermath of the global financial crisis in 2008, the G20 countries committed in Pittsburgh in 2009 to address the risks related to derivative markets. In fulfilment of this commitment, the EU adopted in 2012 the European Market Infrastructure Regulation (EMIR), which imposes central clearing, reporting of standard OTC derivative contracts to Trade Repositories (TR) and risk mitigation measures, including collateral obligations, for non-cleared trades. The regulation also sets a framework for the organization and supervision of central clearing counterparties (CCP). EMIR was adopted on 4 July 2012 and entered into force on 16 August 2012, but its main obligations are subject to the adoption of Regulatory Technical Standards (RTS), some of which are yet to be drafted. It is directly applicable in all the EU Member States.
EMIR has 3 main objectives:
- Mitigate counterparty risks and reduce systemic exposure to derivatives;
- Reduce operational risks;
- Increase market transparency.
EMIR is the European equivalent of the Dodd-Frank Act (except for business conduct and execution rules).The main obligations under EMIR are:
- Clearing of standard OTC derivatives; - Risk mitigation techniques for non-centrally cleared OTC derivatives; - Special collateral requirements for non centrally cleared OTC derivatives; - Reporting of OTC and listed derivatives to trade repositories.
Depending on your legal status, you may be subject to none, one, several or all of the above obligations.
EMIR categorises counterparties to OTC derivative transactions as either "financial counterparties" (FC) or as "non-financial counterparties" (NFC). The distinction is relevant among others in relation to the obligation to clear derivatives through an authorized or recognised central counterparty (“CCP”) set out per Article 4 of EMIR (the clearing obligation) and the risk-mitigation techniques for OTC derivative contracts not cleared by a CCP set out per Article 11 of EMIR.
EMIR also sets a number of exemptions to certain EMIR requirements for some entities.
FYI : Exemptions are presented in question 9
Page 18 / 83
The mandatory obligations:
Technique Counterparties When does it begin?
Timely confirmations* FC, NFC-, NFC+ 15 March 2013
Daily mark to market valuation FC and NFC+ 15 March 2013
Portfolio reconciliation* FC, NFC-, NFC+ 15 September 2013
Portfolio compression* FC, NFC-, NFC+ 15 September 2013
Dispute resolution* FC, NFC-, NFC+ 15 September 2013
Reporting
Collateral and Valuation Reporting
FC,NFC-,NFC+
FC, NFC+
12 February 2014
12 August 2014
Clearing FC, NFC+
June 2015 at the earliest for clearing members counterparties;
February 2016 or June 2016 for other financial counterparties and some AIFs (based on their category);
February 2018 for NFC+
Initial variation and margin requirements
Apply to contracts where both parties are FC or NFC+. If current ESMA proposal does not change, some third country NFC- may however fall in the scope (this is challenged by the industry)
Rules to be aligned with final rules from BCBS and IOSCO published in September 2013. Draft rules published in 2014. Final RTS expected by end 2014, for entry into force in December 2015
Capital against uncollateralised risk
FC In force (Art. 11.4 EMIR).
* Stricter rules apply to FC and NFC+
FC: Financial Counterparties
NFC+: Non Financial Counterparties above any of the clearing thresholds
NFC-: Non Financial Counterparties under all the clearing thresholds
FYI : thresholds are presented in paragraph 4.4 or questions 87 to 92
Page 19 / 83
2. Which are the entities impacted by EMIR?
All entities from the European Economic Area (EEA)1 (see details of EMIR application in the EEA in
the Glossary under “EEA”), with the exception of individuals trading OTC derivatives for private purposes, are impacted by EMIR. This also includes the branches of EEA entities located outside of the EEA.
In addition, any non-EEA entity trading with an EEA entity or its branches will be impacted by EMIR.
Non-EEA subsidiaries of EEA entities can fall into EMIR scope if some conditions are fulfilled. For example, a non-European subsidiary of a European financial entity could be subject to EMIR if it benefits from a guarantee from its European parent company.
DEFINITION OF AN ENTITY
EMIR applies to a wide range of firms and it categorises such firms as follows:
- A financial counterparty (“FC”), which is an investment firm, credit institution(bank), insurer, reinsurer, registered UCITS fund, pension fund or an alternative investment fund managed by an alternative investment manager (as defined by the applicable EU legislation authorizing or regulating those entities).
- A non-financial counterparty (“NFC”), which is an entity established in the EEA, other than a FC, that is party to a derivative.
- Non-EEA entities should consider the business activities covered by each of the definitions above when categorising themselves for the purpose of EMIR.
EMIR treats NFCs differently depending on whether their positions with respect to OTC derivatives (other than those relating to hedging) exceed or fall below certain clearing thresholds.
- An NFC that exceeds one of the clearing thresholds (on average for more than 30 days) is treated the same as an FC under EMIR. We refer to this type of entity as an NFC+.
- An NFC that does not exceed any of the clearing thresholds is subject to more lenient treatment than an NFC+ or FC. We refer to this type of entity as an NFC-.
Refer to Q. 87 for the details on the Clearing thresholds for NFCs.
The European Economic Area comprises the 28 Member States of the European Union, plus Iceland, Norway and Liechtenstein. Refer to EEA entry in the Glossary for a detailed list.
1 We are referring to EEA (the 28 EU Member States + Norway, Iceland, and Lichtenstein) as notwithstanding the fact that
Norway, Iceland and Lichtenstein have not yet adopted EMIR, this should in principle be the case in a relatively short period of time.
Page 20 / 83
3. How does EMIR apply to funds?
Funds are directly impacted by EMIR if they are established within the EEA or established outside of the EEA but regulated under AIFMD (Alternative Investment Fund Managers Directive)
2. However,
funds established outside of the EEA and not directly subject to EMIR may be indirectly impacted when dealing with EEA entities.
Funds regulated under UCITS or AIFM Directives that are established in the EEA are classified as financial counterparties under EMIR while other EEA funds (e.g. securitization schemes, dedicated funds)should be regarded as non financial counterparties (unless they fit into another financial counterparties category : eg pension funds).
In the cases where EMIR is not directly applicable, the equivalence regime should be investigated on a case by case basis if the fund is dealing with an EEA entity subject to EMIR. As a general rule, funds that do not enter into the AIFMD fund definition (e.g. dedicated funds, securitization funds) would be considered as non financial counterparty equivalent while other funds would be considered as financial counterparty equivalent.
It is reminded that these are just general guidelines and that each counterparty should determine its own status under EMIR or any applicable regulation pertaining to funds.
4. How does EMIR impact a firm ?
It is possible to identify 3 broad strands of EMIR ’s impact:
- Legal impact: being categorised under EMIR as a non financial counterparty or a financial counterparty creates a certain number of obligations. Moreover, OTC derivative contracts may have to be (re)documented;
- Operational impact: risk mitigation measures must be carried out and trades must be reported;
- Financial impact: clearing becomes mandatory for certain asset classes, certain counterparty types or over a certain clearing threshold, and collateral must be exchanged for non-cleared trades.
Non-EEA entities will only be subject to EMIR when they enter into transactions with an EEA entity or its branches.
FYI : From 10 October 20143, Non-EU entities where at least one of them is guaranteed by a financial
counterparty established in the EU with a total gross notional amount of OTC derivatives of EUR 8bn or more and amouting to 5% or more of the total gross notional of their guarantor may also be subject to EMIR clearing and risk mitigation obligations.
Two EU branches of non-EU financial counterparties may be subject to clearing and risk mitigation obligations when these two non-EU financial counterparties enter into an OTC derivative contract through their EU branch.
If you are a Financial Counterparty (FC) or NFC + : you are subject to all obligations
2 Non EEA AIF can be subject to EMIR if its asset manager is established within the EEA and regulated as an AIFM.
3 Anti-evasion rules apply from 10 April 2014 (entry into force of the RTS)
Page 21 / 83
Type of entity Obligations
FC
Risk mitigation techniques, including daily MTM valuation
Reporting obligation
Clearing obligation
Collateral management
If you are a Non-Financial Counterparty (NFC), your obligations under EMIR will depend on whether or not your non hedging OTC derivative positions in designated categories of transaction exceed a limit referred to as the "clearing threshold", defined in the ESMA Technical Standards on the basis of your rolling average position over 30 working days.
FYI : thresholds are presented in paragraph 4.4 or questions 87 to 92
1. Risk Mitigation Techniques
These measures applies to all EEA counterparties even if the trade is concluded with non-EEA counterparties, and to non-EEA entities for trades conducted with an EEA counterparty.
These techniques include :
- The timely confirmation of the terms of the OTC derivative contract; - Portfolio reconciliation and compression techniques; - Dispute resolution mechanisms. - MTM
The timely confirmation was the first provision of EMIR to come into force, on 15 March 2013. As of today, these time-limits have been reduced to D+1 for FC and NFC+ and D+2 for NFC-.
The other obligations, namely portfolio reconciliation, portfolio compression and dispute resolution became effective on 15 September 2013.
Who EMIR Status Products Timeline
Page 22 / 83
Both counterparties
FC, NFC+
(All obligations)
FC, NFC+ and NFC- (timely confirmation, portfolio reconciliation and compression, dispute resolution)
Non cleared OTC derivatives
15 March 2013 for timely confirmation & daily MTM calculation
15 September 2013 for Portfolio reconciliation, portfolio compression and dispute resolution
2. The Reporting Obligation
This obligation applies to all EEA entities active in OTC and listed derivatives markets. Under EMIR, the two counterparties to a trade must submit a report to a Trade Repository authorised by ESMA. Reporting started on 12 February 2014 for all asset classes.
In case of a transaction between an EEA counterparty and a non-EEA counterparty, only the EEA counterparty is obliged to report the transaction. All EEA entities must report their entire portfolio including trades with non-EEA counterparties and private individuals.
Societe Generale has chosen DTCC Derivatives Repository Ltd. (DDRL) as its trade repository. SG has developed a reporting delegation service for counterparties who trade with us transactions covered by EMIR and which are subject to the reporting obligation (does not apply to non-EEA entities).
Who EMIR Status Products Timeline
Both counterparties (if both are EEA entities*) have to report trade information
FC, NFC+ and NFC-
All OTC and listed derivatives
12 February 2014
Both counterparties (if both are EEA entities*) have to report Collateral & valuation
FC, NFC+
All OTC and listed derivatives
12 August 2014
*Only EEA counterparty shall report if the other is a non-EEA entity
3. The Clearing Obligation
This obligation shall apply to all FC and NFC+ counterparties (after the 3 year phase-in period) entering into an OTC derivative contract that has been declared eligible to central clearing by ESMA, excluding transactions carried out by NFCs below the clearing thresholds, by certain public bodies or entities within the EU, or transactions qualifying as intragroup transactions and pension funds for a period of 3 years.
The clearing obligation shall also apply to non-EEA counterparties where they trade with an EEA entity, if they would be a FC or NFC+ equivalent based on their business activities and size of their derivative portfolio.
Who EMIR Status Products Timeline
Both counterparties
FC
OTC derivatives deemed clearable by
CCP and deemed eligible by ESMA
From June 2015 (for CCP Clearing Members) to
February or June 2016 (for non-clearing members) and to February2018 for NFC+
Page 23 / 83
Both counterparties
NFC+
OTC derivatives deemed eligible by
ESMA or clearable by CCP
After a phase-in period of 3 years* after entry into force
of the RTS
* This phase-in period is the result of a political agreement between the European Commission and the European Parliament in February 2013. A period of 3 years is proposed by ESMA. That should bring the clearing obligation for a majority of NFC+ to end 2017 or early 2018
For more details please refer to our clearing section inchapter 4
4. Collateral Management
EU rules on collateral management have been subject to consultation of the industry and have yet to be adopted. Collateral management requirements are expected to come into force between 2015 and 2019 (in line with IOSCO guidelines).
Who EMIR Status Products Timeline
Both counterparties
FC, NFC+ Non cleared OTC
derivatives 2015 – 2019
The term "financial counterparty" comprises investment firms authorised under MiFID; authorised credit institutions; authorised insurance, assurance and reinsurance undertakings; UCITs funds and their related management companies; institutions for occupation retirement provision and alternative investment funds managed by investment managers authorised or registered under AIFMD (all as defined in the relevant European directives).
The term "non-financial counterparty" comprises any undertaking that is not a Financial Counterparty (excluding individuals trading derivatives for their own private purposes)
5. What are the impacts of EMIR on non-EEA branches of an EEA entity?
Non-EEA branches of an EEA entity are subject to EMIR, since they are considered EEA entities.
However, local regulations on data privacy and banking secrecy may have an impact on the
implementation of some EMIR requirements in certain jurisdictions.
6. What are the impacts of EMIR on non-EEA entities?
Non-EEA counterparties: Any non-EEA customers dealing with an EEA counterparty (and their branches outside of EEA, i.e. SG NY Branch) will be indirectly impacted by the EMIR Regulation.
For FC/NFC+ clients : The most important obligation will be Mandatory Clearing. At this stage, final rules on clearing have not been published yet by the regulator. If the product is deemed mandatory clearable, Societe Generale will not be authorised to trade it bilaterally or on a non-authorised CCP. Mandatory clearing implementation is expected to start mid-2015 for major clearing member financial institutions.
For all clients, Societe Generale has had to comply with Timely Confirmations since March 2013 and has had to meet the Portfolio Reconciliation obligation, since 15 September 2013. So indirectly, non-EEA counterparties are impacted by our new confirmation and reconciliation processes. On these two points, DFA and EMIR obligations are quite similar and this is reflected
Page 24 / 83
internally, as we will have one unique process for both regulations. Further equivalences are expected to be agreed by the European Commission with other jurisdictions.
Thirdly, the Reporting obligation does not apply to our non-EEA clients but Societe Generale reports our trades with non-EEA counterparties to a central Trade Repository, named DDRL (since 12 February 2014). This may lead to confidentiality issues most of which should be resolved with our clients’ consent.
Finally, Collateral Management rules (Initial & variation margins) have yet to be adopted by the EU and shall not apply before the end of 2015.
Given certain extraterritorial provisions championed by regulators on both sides of the Atlantic, cross-border discussions are currently in progress between CFTC and ESMA and will hopefully bring more clarity on DFA versus EMIR compliance.
Negotiations are being held between European Regulators and a number of non-EEA Regulators in order to conclude equivalence and mutual recognition agreements, which should over time reduce duplication and conflicts of rules.
N.B : certain deals fall simultaneously under the jurisdiction of ESMA and Member States’ Domestic Regulators (for EMIR) and of the CFTC, the SEC (e.g. Title VII of the Dodd-Frank Act) or even other jurisdictions (e.g. in Asia).
8. Is there any registration required and if so, when will it take place?
Unlike the Dodd-Frank regulation, no registration of counterparties is required (except for intermediaries such as CCPs and trade repositories which need to be recognised by ESMA).
7. What is the EMIR timeline?
Page 25 / 83
NOTIFICATION TO ESMA
EEA Non-Financial Counterparties (NFC) have to notify ESMA and their national competent authority if they are NFC+ (i.e. above one of the clearing thresholds).
You will find more information in the Note “Notification from non-financial counterparty to ESMA of exceeding the clearing threshold” published on ESMA’s website:
http://www.esma.europa.eu/page/European-Market-Infrastructure-Regulation-EMIR
Your national regulator’s website might provide templates for such notifications.
NOTIFICATION OF COUNTERPARTY STATUS TO SOCIETE GENERALE
In order to ensure the correct application of the rules, Societe Generale will request client’s representation regarding its EMIR status, either by protocol or by returning the information on an ad hoc basis.
If you are non-EEA based and are a derivative counterparty to Societe Generale, we will contact you to collect your status.
ABOUT CENTRAL COUNTERPARTIES (CCPs) AND TRADE REPOSITORIES (TRs)
In order to be compliant with the clearing and reporting obligations under EMIR, you should make sure that the CCPs and TRs you selected are respectively authorised by and registered with ESMA.
1.2. The scope of EMIR
9. Which entities are exempted under EMIR?
Preliminary remark : The exemptions apply only to entities from EEA countries or from countries which were recognized as equivalent by the Commission.
EMIR defines a list of exempted entities from some obligations:
Out of scope: the European Central Bank, national central banks of EU Member States, the Bank of International Settlements, public bodies of EU Member States in charge of the management of the public debt.
Partial exemption (not from reporting) (see table below): multilateral development banks, public sector entities owned by central governments and which benefit from explicit guarantee arrangements by the central governments, the European Financial Stability Facility, the European Stability Mechanism.
Temporary exemption for clearing: EU Pension funds for 3 years (renewable twice, one by 2 years , and one by 1 year) and for the clearing obligation only.
Under conditions for clearing and collateral : o Intragroup transactions ( between fully consolidated entities) o For NFC : below all asset classes clearing thresholds for non-hedging trades
(hedging trades do not enter into the calculation of the thresholds) o For NFC+ : 3 years phase-in period for clearing from the entry into force of
RTS.
Page 26 / 83
Clearing obligation
Collateral obligation
Risk mitigation techniques O.
Reporting Obligation
LE
GA
L E
XE
MP
TIO
N T
YP
ES
FU
LL
EX
EM
PT
ION
FR
OM
EM
IR (
1)
ie to C
lea
rin
g/C
olla
tera
l &
Re
po
rtin
g O
blig
ations
European System of Central Banks (ESCB) Members
NO NO NO NO
Other member states' bodies performing similar functions
NO NO NO NO
Other union public bodies charged with or intervening in the management of public debt
NO NO NO NO
The Bank for International Settlements (BIS)
NO NO NO NO
PA
RT
IAL
EX
EM
PT
ION
Multilateral development banks
NO NO NO YES
Public sector entities where they are owned by central governments that have explicit guarantee arrangements provided by central governments
NO NO NO YES
The European Financial Stability Facility (EFSF) and the European Stability Mechanism
NO NO NO YES
TE
MP
OR
AR
Y
EX
EM
PT
ION
Institution for occupational retirement provisions registered in accordance with Directive 2003/41/EC
NO YES YES YES
EX
EM
PT
ION
S U
ND
ER
CO
ND
ITIO
NS
(2)
CO
RP
OR
AT
ES
WITH hedging positions only (= NFC-)
NO NO
YES with softer requirements (except for the MtM)
YES
below the threshold (= NFC-)
NO NO
YES with softer requirements (except for the MtM)
YES
Above the threshold (= NFC+)
YES YES YES like
Financials YES
Intr
ag
rou
ps
Intragroups being two entities fully consolidated under IFRS rules
NO
NO (sometimes only partial exemption) and under different conditions than those of clearing
YES YES
(1) The Commission shall be empowered to adopt delegated acts in accordance with Article 82 of EMIR to amend the list set out in paragraph 4 of this Article
(2) Counterparties from third countries subject to equivalent regulation. (art.13.3 EMIR level 1)
FYI For non-EEA entities the exemption can be applied only if the country has an equivalence granted by the European Commission
Page 27 / 83
10. Which asset classes are covered by EMIR?
EMIR applies to all derivatives identified in Annex 1 Section C (4) to (10) of The Markets in Financial Instruments Directive (“MiFID”). This is an extensive list that includes options, futures, swaps, forward rate contracts and any other derivatives related to:
Securities, currencies, interest rates/yields, other derivatives, financial indices or financial measures which may be settled physically or in cash;
Commodities that must be settled in cash or may be settled in cash at the option of one of the parties;
Commodities that can be physically settled provided that they are traded on a regulated market and/or an MTF;
Commodities that can be physically settled, not mentioned in MiFID Section C(6), not being for commercial purposes, which have characteristics of other derivatives;
Instruments for the transfer of credit risk;
Financial contract for differences related to MiFID instruments, currencies, interest rates or other financial indices;
Options, futures, swaps, forward rate contracts and any other derivatives related to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics (cash settlement option) and assets, rights, obligations, indices and measures not otherwise mentioned.
Therefore spot FX are excluded from the scope of EMIR. Moreover, Societe Generale considers FX Forward J-2 and FX overnight products to be exempted from the EMIR regulation as well as they are considered as FX spot transactions from a regulatory point of view.
That being said, since MIFID is a directive,there may be national divergences on the definition and scope of some products : that is the case for instance of FX forwards.
While some regulators consider that beyond D+2 settlement date, an FX product is no longer a spot but a forward, other regulators have adopted a broader definition of what constitutes a spot. ESMA is expected to consult the industry on draft clarification guidelines in September 2014.
There is also some debate on physical delivery commodity forwards.negotiated outside of an MTF. ESMA is also expected to consult the industry on draft clarification guidelines on this subject.
In the meantime, Societe Generale has chosen a cautious approach and has therefore decided to include those products in the scope (notably for reporting and portfolio reconciliation) until ESMA provide due clarification.
ESMA and the European Commission will determine which asset classes will be subject to mandatory clearing, following a prior authorisation from a national competent authority to clear certain asset classes. When a national competent authority notifies ESMA that a CCP is authorised to clear a certain asset class, ESMA will have up to 6 months to decide whether this asset class (or sub-asset class) will be subject to mandatory clearing as well as the timing of implementation of the clearing obligation. ESMA may also determine further asset classes which should be subject to the clearing obligation but for which no CCP has yet been authorised.
N.B: The scope of products eligible for the clearing obligation is still under discussion and will be known only upon specific RTS (draft RTS on IRS and CDS clearing are currently subject to consultation). This scope of products must be part of the CCP product scope.
Page 28 / 83
1) Specific treatment by FCA for FX Forwards dealt for commercial purposes. 2) Only reporting obligations apply. 3) Equity Options are generally out of scope for DFA, except when used to approximate Delta One exposures, in which case they may be
covered. 4) FX Forwards and FX Swaps are exempt under DFA only from execution and clearing requirements. 5) Physically settled commodity Forwards are exempted from DFA under very specific circumstances based on asset class and
counterparty. Case-by-case evaluation is required. 6) For DFA, Equity, Credit and certain Hybrid OTC Derivatives are subject to trade-by-trade determination of CFTC vs SEC jurisdiction
FYI
DIFFERENCES BETWEEN EMIR AND THE DODD-FRANK ACT
There are significant similarities between EMIR and the Dodd-Frank Act in relation to the regulation of OTC derivatives markets, but there are also some significant differences.
Dodd-Frank applies to “swaps” and “security-based swaps”, which broadly include options, contingent forwards, and exchanges linked to economic interests of any kind; but exclude (under the current Treasury proposal) physically settled foreign exchange swaps and forwards (although reporting and business conduct standards still apply to FX swaps and forwards); spot FX; and physically settled commodity or security forwards. Only the spot FX exemption exists under EMIR.
Asset Class Product EMIR DFA
CFTC(6) SEC(6)
OT
C D
eri
va
tive
s
Equity(6)
Swaps Y Y Y
Options Y N(3)
N(3)
Forwards Y N N
Contracts for difference Y Y Y
Rates All Y Y Y
Credit Derivatives Index Y Y N
Single Name Y N Y
FX
NDF Y Y N
Forwards Y(1)
N(4)
N
Options Y Y N
Swaps Y N(4)
N
Commodity derivatives
Agro Y Y N
Metals Y Y N
Energy Y Y N
Physical settlements Y N(5)
N
Other Hybrids Y Y Y
Lis
ted
De
riva
tive
s
Equity Futures & Options Y(2)
N N
Rates Futures & Options Y(2)
N N
FX Futures & Options Y(2)
N N
Commodities Futures & Options Y(2)
N N
Oth
er
EMTN, ETN, ETF, funds Out of Scope N N N
Warrants, certificates Out of Scope N N N
Securities , bonds & repos Out of Scope N N N
Spot trades Out of Scope N N N
Page 29 / 83
11. What is the classification of Societe Generale S.A. under EMIR?
Societe Generale S.A. (including all its branches) is a financial counterparty under Article 2(8) of
EMIR.
For US persons, Societe Generale S.A. is also a Swap Dealer for purposes of DFA, and therefore Societe Generale S.A. needs to comply with both regulations.
1.3. Legal documentation
12. What is the impact of EMIR on ISDA Master Agreements
A certain number of clauses are to be inserted into ISDA Master Agreements: this can be done through adherence to various ISDA Protocols.
The first protocol deals with NFC representations.
Another protocol dedicated to portfolio reconciliation, dispute resolution and disclosure of counterparty data for reporting purposes has been published.
For US entities having already adhered to the ISDA DF2 protocol, they can adhere to the DF2 to EMIR Top Up Agreement, which bridges between the DF and EMIR Protocols.
There is a third Protocol, the Reporting Protocol, by which counterparties can express their consent to the use of their data in the fulfilment by their counterparties of their reporting obligations under DFA, EMIR and any other OTC regulation imposing reporting obligations.
Societe Generale SA has adhered to the three Protocols. We strongly encourage you to adhere in order to avoid both of us having to enter into burdensome contractual re-documentation work. The ISDA protocols except the NFC Representation Protocol are open to non ISDA members and to those who did not enter into an ISDA agreement but into another derivatives agreement.
For new clients, an SG Schedule will integrate the necessary clauses to be inserted in the contractual documentation.
You can find more information on the ISDA website
http://www2.isda.org/functional-areas/protocol-management/protocol/11
ISDA now uses protocols for amendments to the master agreement
http://www2.isda.org/functional-areas/protocol-management/about-isda-protocols/
List of the available protocols
http://www2.isda.org/functional-areas/protocol-management/open-protocols/
Further ISDA protocols may be published.
Page 30 / 83
13. What is the impact of EMIR on other Master Agreements (FBF, DRV, EFET and other derivative agreements)?
FBF (FRENCH MASTER AGREEMENT)
A 2013 version of the FBF Master Agreement was adopted to include, among others, certain EMIR clauses. An EMIR Addendum was also adopted for the AFB 1994, the FBF 2001 and FBF 2007. These contractual documents will be proposed for signature to our counterparties.
A Technical Addendum (“Additif Technique”) on portfolio reconciliation and compression and dispute resolution was also adopted by FBF. It is automatically integrated in the FBF without any signature required. These documents are published on the FBF website (see link hereunder).
http://www.fbf.fr/fr/contexte-reglementaire-et-juridique/codes-et-conventions/_84WC8P&Count=8
OTHER DERIVATIVE MASTER AGREEMENTS
There are other Derivative Master Agreements such as the EFET (European Federation of Energy Traders) Agreement, the Deutsche Rahmenvertrag (DRV), etc. some of which have already been amended to include EMIR clauses.
14. What is the ISDA NFC Representation Protocol?
The International Swaps and Derivatives Association (ISDA) has published the EMIR Non-Financial Counterparty Representation Protocol, which parties may adhere to in order to give certain representations as to their status as non-financial counterparties (NFC) or NFC+.
The Protocol is voluntary. In order to adhere, a party must submit an adherence letter to ISDA and pay a fee of USD 500. ISDA will send the adhering party an email confirmation when it has accepted the adherence letter. In the adherence letter, the party must specify one of three options:
- it can adhere as a party making the NFC Representation (for which see below); - it can adhere as a NFC+ Party making the NFC Representation; - it can adhere to the Protocol as a party that does not make the NFC Representation (that is,
as an FC).
15. What is Societe Generale’s position regarding the ISDA NFC Representation Protocol?
Societe Generale needs to know its clients’ status in order to apply the correct risk mitigation provisions (timely confirmations, portfolio reconciliation). The risk mitigation provisions are stricter for NFC+ than NFC-. Once clearing becomes mandatory from mid-2015 it will not be possible to trade without knowing the status of our counterparties.
This is why Societe Generale has adhered to this protocol and encourages its clients to do the same.
Page 31 / 83
16. Does the misrepresentation or misleading notification by a counterparty of its EMIR classification represent a Termination Event, Additional Termination Event, Event of Default or equivalent under ISDA?
A misrepresentation by a counterparty of its EMIR classification cannot be construed as a Termination Event under the general ISDA. However, this issue is addressed in the ISDA NFC Protocol. In case of a misrepresentation, the Protocol requires the Parties to first negotiate in good faith and then, should the negotiations fail, the affected party may terminate the transaction (not the entire ISDA) and the misrepresenting counterparty will have to pay the replacement costs.
17. Which clearing documentation will have to be signed ?
Clearing is offered for certain products (some IRS, and later CDS and FX) by Societe Generale through its fully owned subsidiary Newedge. As executing broker, Societe Generale and its counterparty will enter into a Cleared Derivatives Execution Agreement (CDEA) whilst Newedge will conclude a clearing contract with the same counterparty electing Newedge for clearing.
Standard clearing documentation was published:
- For executing brokers and their counterparties, the LCH Execution Standard Terms for Client Clearing and the ISDA/FIA Europe Cleared Derivatives Execution Agreement;
- For clearing brokers and their counterparties, the ISDA/FOA Client Cleared OTC Derivatives Addendum.
18. Will margin requirements for non cleared trades have to be documented?
Yes, CSAs, ARGs and other collateral arrangements will most likely have to be re-documented in order to align with the EMIR obligations on initial and variation margins.
New standard contracts are expected to be drafted by industry associations (e.g. ISDA, FBF).
Page 32 / 83
2. RISK MITIGATION TECHNIQUES (non-
cleared trades)
2.1. CONFIRMATIONS
2.2. MTM OBLIGATION
2.3. PORTFOLIO RECONCILIATION AND DISPUTE RESOLUTION
2.4. PORTFOLIO COMPRESSION
Page 33 / 83
2.1. Confirmations
2.1.1. Scope
19. What is the scope of the timely confirmation obligation under EMIR?
All non-cleared OTC derivatives are subject to the confirmation obligation. The timeframe for confirmations is function of the counterparty type, and of the asset class involved. The time-limits for confirmations have become progressively shorter over time.
2.1.2. Societe Generale solutions & actions
20. Which electronic platforms are available for confirmation and matching? Are these matching procedures sufficient from a regulatory standpoint?
FYI For questions relating to Bloomberg and other platforms not available at SG, see Q.21
Whenever possible, Societe Generale encourages the use of electronic means of confirmation. We also propose our internal solution, e-confirmation, which allows the recovery of the confirmation and its validation directly on the dedicated website. For non-electronic confirmations, fax or email will be used.
Societe Generale is currently using many electronic platforms, which span the entire product range, such as : CLS, DS Match, e-confirmation, EFETnet, FXall, GTSS, ICE, MarkitWire, Misys, SNA and SWIFT. All these platforms are used in a straight through fashion (i.e., no manual upload or affirmation required by Middle Office teams).
Page 34 / 83
FX
IRD CDS Equity Commodity Website
Cash* Options**
CLS
http://www.cls-group.com/Pages/default.aspx
DS Match http://www.dtcc.com/products/derivserv/ms/match-confirm.php
e-confirmation
https://econf.sgcib.com/Econf/
EFETnet http://www.efetnet.org/
FXALL http://www.fxall.com/
GTSS
ICE https://www.theice.com/homepage.jhtml
MarkitWire http://www.markitserv.com/ms-en/
Misys http://www.misys.com/
SNA http://www.swift.com/index.page?lang=en
SWIFT From
november From
november
http://www.swift.com/index.page?lang=en
* FX Cash includes spots, forwards, swaps and NDFs (spot transactions and the spot leg of swaps being out of scope).
** FX Options includes all options on foreign exchange (vanilla options, exotics and NDO).
Decommissioning will start by the end of 2014. No new clients’ onboarding.
If none of the external platforms listed above are acceptable to you, Societe Generale also suggests using “eConf”, our in-house electronic solution for confirmation. e-confirmation sends confirmations via an electronic platform but the pairing/matching process remains manual. You can find more information about e-confirmation on our dedicated website:
https://econf.sgcib.com/Econf/
Page 35 / 83
21. Is Societe Generale willing to send confirmations over Bloomberg (or any other platform)? If not, what would be the alternative confirmation method?
Societe Generale does not use the Bloomberg confirmation service.
Societe Generale suggests you check if you are already using another EMIR eligible matching platform such as CLS, FXall, GTSS or MarkitWire in which case we strongly advise you to use them.
If this approach is not acceptable to you, Societe Generale also suggests using “e-Confirmation”, an in-house product. eConfirmation sends confirmations via an electronic platform but the pairing/matching process remains manual.
22. How should confirmations on base metal transactions (SWIFT MT 600) be processed?
Since June 14th 2014, transactions on base metals can be confirmed through the SWIFT electronic
platform.
23. How should confirmations on Forward Start Deals be processed? Should the Trade Date OR the Forward Date be chosen as the confirmation date?
EMIR confirmation deadlines are triggered on trade date, including for forward start deals.
If the deal characteristics (e.g. initial and closing price, date, etc.) have been clearly stated by trade date, confirmations are processed in the same way as for any other deal.
On the other hand, if some elements remain unidentified on trade date, precisions must be given within the confirmation, such as the date, the time and the way these characteristics will be determined (e.g. by whom, on what basis, etc.). When these elements have been determined, a new confirmation should be sent on forward date to cancel and replace former confirmation.
24. If the proposed confirmation deadlines in the Regulatory Technical Standards are exceeded, who (Non-Financial Counterparty and/or Financial Counterparty) must inform whom and when?
Our understanding is that both parties must monitor the timing of confirmations – this topic has also been discussed at industry level in order to agree on an industry-wide solution.
Societe Generale has been working on its processes to become fully compliant with the confirmation requirements. This includes – without being limited to – chasing and escalation processes. Through these new procedures, we should be able to detect delays and will inform you about these. Because both parties must monitor the timing of confirmations, you should also inform us of any breach of deadlines that you detect.
FYI
Financial counterparties have to report on a monthly basis to the competent authority the number of unconfirmed OTC derivative transactions that have been outstanding for more than 5 business days. This report cannot be sent to the client and will be aggregated by ESMA along specific categories. It will thus be on an anonymous basis.
Page 36 / 83
25. To whom must FCs report late confirmations?
Late confirmations are deals that have still not been confirmed 5 days after the regulatory deadline. They are reported to the national competent authority of the entity (for SG, the AMF in France) on a template defined by the Regulator.
For non-EEA entities, there is no obligation to report these details under EMIR, however there may be an obligation to report these details under your local regulations.
2.1.3. Questions on the nature of confirmations
26. Will it be possible to use our Term Sheet as a confirmation, mentioning “Pre-confirmation” as a title for instance?
It is not possible to use a Term Sheet as a confirmation under EMIR.
27. We currently work by tranches: should each deal tranche be subject to an individual confirmation?
All trades must be individually confirmed.
28. What would be considered a confirmation for each asset class (e.g. is it possible to leverage on pre-confirmations for any asset class)?
In addition to the ESMA definition of what constitutes a confirmation, we consider the current efficient practice of exchange of confirmations as deemed compliant (notably for inter-banks transactions on interest rate derivatives) where both parties ensure that the economic terms are the same.
We also consider that a confirmation would meet the definition under the Regulatory Technical Standards (RTS) where the confirmation is delivered through an internet site operated by one of the counterparties.
Negative or passive affirmation may constitute a confirmation where combined with an agreement between the parties providing for confirmations to be issued in this way (e.g. a ‘Master Confirmation Agreement’), and within the timeframe prescribed by the RTS (Under this arrangement, a counterparty (normally the bank) typically issues a confirmation to the other party and the recipient will be bound by the terms of the confirmation unless it objects before a specified deadline.) This should only be adopted in exceptional cases.
We do not consider pre-confirmations as confirmations but do refer to them in the confirmation documents.
Page 37 / 83
2.2. Mark-to-Market (“MTM”) Obligation
29. Who is subject to daily Mark-to-Market valuation obligation?
Only FC and NFC+ have an obligation of daily mark-to-market valuation. If conditions prevent it, the counterparty should have a mark-to-model valuation instead.
2.3. Portfolio reconciliation and dispute resolution
30. Do we have to perform portfolio reconciliation and when does this obligation start?
Yes unless the counterparty is expressly exempted. All EEA counterparties have this obligation but subject to different frequencies pursuant to the type of counterparty (FC, NFC+ or NFC-).
Non-EEA counterparties are requested to comply with portfolio reconciliation for transactions entered into with EEA counterparties. This obligation has been effective since 15 September 2013.
Warning: Some EU regulators may prevent the client from trading when portfolio reconciliation is not agreed between counterparties.
Please refer to Q.31 to 40 for further details.
Page 38 / 83
31. What do firms have to do in order to be compliant with the portfolio reconciliation obligations?
The portfolio reconciliation process follows 3 steps:
A preliminary written agreement between both counterparties on the method of reconciliation (one-way delivery or exchange of portfolio data) and on the date of reconciliation.
FYI: Societe Generale has been contacting each of its clients to agree the reconciliation method
and date. Societe Generale asks them to complete a short form stating these terms if they have not adhered to the ISDA Protocol
The reconciliation itself by choosing one of two authorised methods :
Societe Generale elected to be “Sender” of data and allows its counterparties to chosed whatever solution suits them best.
1. Exchange of portfolio data (in this case, you are deemed to be a “Sender”): thus both counterparties are “sender “ and both are responsible for performing the reconciliation and analysing the reconciliation results. Societe Generale will make its portfolio available in TriOptima, an external platform of reconciliation used by the largest financial institutions. If you are not a member of TriOptima, Societe Generale will send you its portfolio. We will ask you to whether send yours as an Excel file via email or to upload it onto Quickport (a TriOptima service which makes it possible for you to see the results of the reconciliation even though you are not a member of TriOptima).
FYI: The portfolio reconciliation process is detailed in Q.36.
2. One-way delivery of portfolio data (in this case, you are deemed to be a “Receiver”): when one counterparty is receiver : it does not have to send the portfolio but only to respond to data obtained
In that case Societe Generale will send you an email two weeks before the reconciliation date with a link to the web portal of Societe Generale “E-reconciliation”. You will then be able to access your portfolio in CSV format, the main data of your transactions and their valuations. You will have 5 working days to revert back to Societe Generale on any discrepancy you have identified. Tools built into the platform will enable you to get back to us (approve, demand correction, etc.). If you do not advise us of any discrepancy within these five working days, you will be deemed to have agreed with the content of the portfolio and that the reconciliation was effectively done.
It should be possible for Portfolio Data Receiving Entities to pick a specific date for reconciliation if the one suggested by Societe Generale is not convenient, be it on a quarterly or annual basis.
The checking of discrepancies: It can be any discrepancy deemed significant enough by one of the parties. Thus, if a difference seems significant enough, Societe Generale will contact you to analyse it with you, by sharing the parameters used in the valuation. If, after this analysis, it turns out that the difference would be of contentious nature, we will enter into a dispute resolution process with you. The resolution process is an exceptional procedure to resolve disputes.
It breaks down as follows:
Either one or both parties shall notify each other by e-mail or other written means, that they consider the discrepancy to be a dispute. Each party has five business days to involve internally a competent decision maker; The two competent persons identified should then get in touch to find a way to resolve this dispute.
Page 39 / 83
32. With whom should we register as Sender or Receiver?
You should register directly with your counterparties. Most of them should have sent you a communication asking you whether you want to be a Sender or a Receiver.
Societe Generale SA has adhered to the ISDA EMIR Portfolio Reconciliation, Dispute resolution and Disclosure protocol in August 2013.
We kindly advise you to do the same in order to formalise the agreement with your counterparties on portfolio reconciliation. Please note that you do not need to have an ISDA Master Agreement in place to adhere to the Protocol. You can find more information at:
http://www2.isda.org/functional-areas/protocol-management/open-protocols/
33. Should Trade Repositories be informed of our Sender/Receiver status?
No, you do not have to inform your Trade Repository of your Sender/Receiver status.
34. Do we have to report reconciliations?
EMIR does not require counterparties to report their reconciliation performance. However, disputes with FCs that are (i) larger than 15 million Euros and (ii) outstanding for at least 15 business days must be reported by the EEA financial counterparties to their domestic regulator on a monthly basis.
35. Which data must be reconciled?
Current interpretation of the regulation and the RTS is that the valuation data needs to be reconciled, whatever the EMIR status of the counterparties (FC, NFC+ or NFC-). The remaining key trade terms are reported to help identify the transaction. It is important to notify Societe Generale of any discrepancy in these latter terms, in order to ensure that your description of the transaction is aligned with that of your counterparty.
All major financial institutions active in the OTC derivative markets are working with ISDA on a common transaction description template to send to counterparties. You should therefore receive the same list of fields to reconcile from all banks.
Trade ID
Legal Entity Name
Counterparty Legal Entity Name
Current Notional/Quantity
Trade Currency
2nd Notional/Quantity (if applicable)
2nd Notional CCY (if applicable)
Underlying / Product ID
Page 40 / 83
Trade Date
End Date
MTM
MTM Currency MTM Date
Buy/ Sell indicator
36. How does Societe Generale handle portfolio reconciliation with financial and non-financial counterparties?
Reminder : Societe Generale elected to be “Sender” of data and allows its counterparties to choose whatever solution suits them best.
A/ Portfolio Reconciliation Regulatory Framework
EMIR is setting new standards for the reconciliation of collateralised and non-collateralised (non-cleared) OTC derivative transactions.
As a Financial counterparty, Societe Generale must comply with this new regulatory framework. This section describes how Societe Generale will manage portfolio reconciliations in compliance with regulatory obligations.
According to the reconciliation frequencies described in the tables below, Societe Generale will notify counterparties on each risk valuation date and make portfolio data available to them.
B/ Frequency of reconciliation
Reconciliation and delivery statements frequencies are determined by EMIR, based on several criteria:
-The number of deals covered by the contract; -The classification of the counterparty Societe Generale is facing (FC, NFC+, NFC-)
Societe Generale is willing to discuss with clients, on a case-by case basis, the possibility of using a
Page 41 / 83
higher frequency of portfolio reconciliation. We cannot, however, guarantee that we will be able to accommodate your wishes.
A required reconciliation date notice will specify the frequency at which portfolio reconciliations must be carried out by Societe Generale and its counterparties under the regulatory framework. In compliance with EMIR, Societe Generale proposes two solutions for portfolio reconciliation:
1-Exchange of Portfolio Data 2-One-way Delivery of Portfolio Data
Societe Generale allows Portfolio Data Receiving Entities to switch from the one-way delivery to the exchange of portfolio data. The terms under which a switch is carried out are not defined yet.
Both methods are explained in Q.31: Societe Generale will use TriResolve for the Exchange of Portfolio Data and an internal tool e-reconciliation for the One-Way delivery of Portfolio Data.
C/ Detailed Portfolio Reconciliation Process – focus on exchange of portfolio data The bilateral transmission of data is available in 3 formats:
Format 1: You are a TriResolve4 subscriber
For counterparties which are TriResolve members, portfolios are fed directly on the platform through an integrated solution, and reconciliations are performed automatically as scheduled. Reconciliation reports are published online and counterparties can interact on a live basis benefiting from a real-time view of unresolved discrepancies, smart matching for portfolio reconciliation, and discrepancies resolution via exception management workflow.
Format 2: You are not a TriResolve subscriber but want to use the Quickport functionality of TriResolve For counterparties which are not TriResolve members, it is possible to download portfolios directly into TriResolve free of charge. TriResolve QuickPort then delivers a summary of your reconciliation results, indicating where differences exist with Societe Generale. This solution does not grant online access to the TriResolve community. It does not allow a real-time view of unresolved exceptions, smart matching for portfolio reconciliation, and discrepancies resolution via exception management workflow. Please see TriOptima website for more details:
http://www.trioptima.com/services/triResolve/triResolve-QuickPort.html
In parallel, as a Sender entity, Societe Generale will send its portfolio in CSV format to the counterparty at the reconciliation date through a dedicated website. The counterparty will then be able to validate or invalidate the content of the portfolio.
Format 3: You are not a TriResolve subscriber and you do not want to use TriResolve QuickPort If you do not want to use one of the first two options, you thus have to send us your portfolio by email in Excel or CSV format. We will upload your portfolio in TriResolve.
Just as in format 2, as a Sender entity, Societe Generale will send its portfolio in CSV format on the date of reconciliation, through a dedicated website, You will then be able to validate or invalidate the content of the portfolio.
Under this format, you do not have access to TriResolve. You will not receive a summary of the results of the reconciliation and you will not have access to the data online in TriResolve. We will send you by email the discrepancies we will have identified.
4 TriResolve is a tool developed and provided by TriOptima which has become the industry standard
for portfolio reconciliation. For more information please check their website www.trioptima.com
Page 42 / 83
37. Who can we contact with any queries on portfolio reconciliation?
Societe Generale has set up a dedicated mailbox to answer clients’ queries on portfolio reconciliation and dispute resolution: [email protected]
38. Does Societe Generale plan to conduct portfolio reconciliations centrally?
All OTC transactions traded with Societe Generale will be reconciled centrally. Societe Generale will use TriResolve for the Exchange of Portfolio Data and an internal tool for the One-Way delivery of Portfolio Data.
We would strongly encourage our counterparties to use TriOptima to perform the reconciliation.
Should you not use TriOptima, SG has got a dedicated web portal e-reconciliation allowing portfolio reconciliation.
39. Did ISDA publish a Protocol for reconciliations & disputes? What about other Protocols?
What about disruption of trading?
Yes – there is a dedicated EMIR Portfolio Reconciliation & Dispute Resolution Protocol. Societe Generale SA has adhered to it.
Adherence to the Protocol is not mandatory but it allows parties to standardize their contractual terms on portfolio reconciliation. The number of adhering counterparties is increasing rapidly and we encourage our clients to do the same. You can adhere directly on www.isda.org. To do so, you do not need to be a member of ISDA, you can be located outside the European Economic Area and you do not need to have an ISDA Master Agreement with Societe Generale.
For US clients: If you prefer to follow CFTC Dodd-Frank Portfolio Reconciliation rules and have adhered to ISDA DF Protocol 2, this is acceptable to us. In this case, we will request you to sign the ISDA “Top-Up” Agreement.
In order to be compliant with our regulatory obligations, we must establish a Portfolio Written Reconciliation Arrangement as soon as possible to be able to continue trading without any risk of disruption. In that respect, we ask you to fill out and return the standard form attached to our EMIR communication if not already done.
40. Do we have to communicate our procedures for disputes?
You do not have to communicate your procedures for disputes to anyone except if required to do so by your regulator.
Page 43 / 83
2.4. Portfolio Compression
41. What is the purpose of portfolio compression?
The purpose of portfolio compression is to mitigate risk by reducing the outstanding notional of trades and the number of counterparties. This is necessary for institutions to mitigate operational and capital costs as well as to mitigate credit and operational risk exposure.
42. What are our obligations regarding portfolio compression?
Since 15 September 2013 onwards, all EEA counterparties (FC, NFC-, NFC+) with 500 or more OTC derivative contracts outstanding with a single counterparty have been subject to the portfolio compression obligation (Article 14 Technical Standards). Portfolio compression is based on two requirements:
-Implement and maintain procedures to analyse the possibility of conducting a portfolio compression exercise in order to reduce counterparty credit risk and engage in such portfolio compression exercise if warranted. This must be done at least bi-annually.
-Make sure to be able to provide a reasonable and valid explanation to your relevant national competent authorities if concluding that a portfolio compression exercise is not appropriate.
EEA entities were asked to undertake a first compression feasibility exercise before Dec. 31, 2013.
43. Is there any mandatory documentation regarding portfolio compression?
EMIR does not require a formalized agreement with the counterparty entering into compression with Societe Generale.
Page 44 / 83
3. REPORTING OBLIGATION
3.1. REPORTING GENERAL PRINCIPLES
3.2. REPORTING OBLIGATION IMPLEMENTATION
3.3. REPORTING DELEGATION SERVICE
3.4. INTERNATIONAL IDENTIFIERS
Page 45 / 83
3.1. Reporting general principles
44. When does the reporting obligation under EMIR start?
EMIR reporting obligation started on 12 February 2014 for all asset classes (OTC and listed derivatives).
For non-EEA Counterparties, there is no obligation for you to report your trades under EMIR when you face an EEA entity.
Additional reporting obligation with regards to valuation and collateral will apply to EEA FC and NFC+ from August 2014
45. Who has to report under EMIR?
There are several possible scenarios:
Where the counterparties to a transaction are both EEA entities, both must report the transaction to a registered trade repository.
Where one counterparty to a transaction is non-EEA entity, it has no obligation to report – only the EEA counterparty to this transaction would be obliged to report.
Where both counterparties are non-EEA entities, there is no obligation to report the transaction under EMIR but other local regulations may apply.
46. What are the data which have to be reported?
The data to be reported to the Trade Repositories are divided in two categories: the counterparty data and the common data. The counterparty data includes the information relating to each counterparty to the transaction. The common data provides information about the transaction itself. However, each Trade Repository may have its own specific way of presenting the data.
See Q.55 for more details.
47. How is the counterparty identified? Is there a need for consent?
The counterparty data includes the information relating to each counterparty to the transaction, i.e. mainly through its LEI.
If the two counterparties are European and dealing within the EU there is in principle no need of such consent
However,for a trade originating outside of the EU, then consent may be required in order to lift local banking secrecy or confidentiality restrictions. Consent can be granted either through one of the two ISDA protocols (Reporting Protocol or Portfolio reconciliation protocol) or by signing ad hoc SG letter of consent.
Page 46 / 83
48. Is it necessary to report all the deals from 16 August 2012?
Yes:
The reporting start date (RSD) of transaction information depends on the transaction
execution date (historical versus new deals)
Transactions entered into after 16/08/2012 and still outstanding on the RSD must be reported at D+1.
Transactions entered into before 16/08/2012 and not outstanding on that date are not subject to EMIR reporting.
Transaction Execution Date
Outstanding or Not on RSD
2
Common Data & Counterparty Data RSD
2 (Article 1)
3
Valuation & Collateral RSD
2
(Article 3)
Before and outstanding on
16/08/2012
Not outstanding February 12th 2017 N/A
Outstanding* May 13th
2014 August 12th 2014
On or After 16/08/2012
1
Not outstanding February 12th 2017 N/A
Outstanding* February 12th 2014 August 12
th 2014
After 12/02/2014 - February 12th 2014 August 12
th 2014
49. Who will have to report Valuation and Collateral as of August 12th 2014 ?
Only FC and NFC+ are concerned by valuation and collateral reporting. NFC- are exempted.
1. Including transaction executed on 16/08/2012 2. Reporting Start date 3. OJ EU 148/2013
*If transaction has matured before the second RSD (i.e. valuation & collateral RSD), there is no reporting obligation for valuation & collateral
Page 47 / 83
50. What are the processes for the backloading of UTIs?
In this context, backloading is understood as the process of exchanging and agreeing on UTIs for all EMIR-eligible transactions concluded before 12/02/2014 which were outstanding at this date.
Electronic trades will be backloaded using the following market infrastructures:
1. MarkitWire: Rates, Credit and Equity products 2. DSMatch: Credit and rates product
Notice that for all your cleared transactions, your Central Counterparty (CCP) will provide you with all relevant UTIs.
Paper transactions with TriOptima members were backloaded on TriResolve. You should be able to see all UTIs backloaded by SG CIB in the UTI section of their website.
Paper transactions not covered by TriOptima or with non-TriOptima members were backloaded on a bilateral basis
● Societe Generale sent an Excel file to every client containing the UTI of every transaction in scope.
● If you have not received your file as of today, please contact our dedicated team at [email protected].
● Transactions which matured before February 12th, 2014 but were outstanding as of August
16th, 2012 do not require a UTI as per the ESMA Q&A:
TR Question 4 [last update 4 June 2013]
Reporting of outstanding positions following the entry into force of EMIR (Backloading)
(c) Is an agreed Trade-ID also necessary for backloaded trades?
TR Answer 4
(c) To the extent that a backloaded contract is still outstanding at the time of reporting, a Trade-ID needs to be agreed between the two counterparties and reported, together with the other information on that contract.
51. What are trade repositories?
Trade Repositories are entities registered and supervised by ESMA, who maintain centralized databases relating to transactions in financial contracts.
Counterparties and clearing houses must report to a central data repository:
elements of any financial contract between them; any modification or termination of the contract.
These declarations must be made no later than the following day of the conclusion, modification or termination of the contract business day. EMIR covers all financial contracts, whether executed on exchange or OTC. The obligation to declare applies to any counterparty to a financial contract, whether financial or non-financial.
Page 48 / 83
52. Which are the recognised Trade Repositories?
So far, ESMA has authorised six trade repositories for reporting under EMIR: DTCC Derivatives Repository Ltd. (DDRL), based in the United Kingdom;
Krajowy Depozyt Papierów Wartosciowych S.A. (KDPW), based in Poland;
Regis-TR S.A., based in Luxembourg;
UnaVista Ltd, based in the United Kingdom;
ICE Trade Vault Europe Ltd (ICE TVEL), based in the United Kingdom; and
CME Trade Repository Ltd (CME TR), based in the United Kingdom.
You can check also on ESMA’s webpage : http://www.esma.europa.eu/content/List-registered-Trade-Repositories
53. Is the data stored by TRs made public?
Each counterparty should be able to access the transactions it has reported as well as all the transactions it is a party to, but which have been reported by a third party.
There is no obligation under EMIR to make the data publicly available on a real time basis. Therefore, DDRL does not do so but it does publish a report of aggregated position level data.
However, the regulators do have access to detailed trade reports.
54. How should I select my Trade Repository? Are they all able to effectively report any OTC asset?
The choice of a Trade Repository (TR) depends on your products, tools and business organization. Thus Societe Generale cannot advise you on which TR would be the most suitable for your firm.
55. Could you elaborate on the format and technical aspects of the reports?
The format and technical aspects of the reports depend on the Trade Repository you select. This is the case for :
Transfer format (secured ftp, mail, Excel file, CSV file, xml, etc.);
Report format (there is no format specified by ESMA, simply the information which must be included in it);
The reports are divided into 2 tables (for instance, DDRL chose to merge the 2 tables into a single message);
Specific fields have been created for transactions on commodities: specifications should be established by your Trade Repository.
We can however provide you with certain information:
Page 49 / 83
Even though there are MtM valuation & collateral fields (table 1, fields 17-21), NFC below the clearing threshold are not required to fill them;
For a new transaction, the field 26 on table 2, which records the date and time of the confirmation, should be initially set to zero and then updated once confirmations have been exchanged;
In table 2, a reference is made to the UPI : You may want to refer to the ISDA taxonomy for the moment as the issue has not yet been addressed by ESMA;
UPIs for listed derivatives contain information about price, date and so on. Consequently, the fields in table 2 supposed to record these values can be left empty;
In table 2, field 1, the product ID must be given twice whenever the ISDA taxonomy is not used (see EMIR Regulation p.189).
3.2. Reporting obligation implementation:
56. What is the status of Societe Generale’s implementation of the reporting obligation?
In order to ensure compliance with EMIR reporting obligations, Societe Generale has engaged in the following steps:
- Implementation of a reporting solution for Societe Generale on all asset classes compliant with EMIR – started in 2012;
- Participation in industry’s Working Groups to align our reports to market’s best practices; - Contribution to DDRL’s Working Groups to help define the industry solution design.
57. How will Societe Generale proceed if we do not use DDRL as our Trading Repository?
The choice of another Trade Repository is possible, as TRs have an obligation to reconcile transactions among themselves. Thus, you do not need to do anything specific in that respect, should you use another Trade Repository.
Page 50 / 83
3.3. Reporting delegation service
58. Can you please advise if Societe Generale is planning to offer a reporting service to its customers, i.e. do the reporting of its customers’ trade data on their behalf?
If so, what are the conditions to subscribe to this service (Fee, Societe Generale v. third party trades, timescales)?
Yes, Societe Generale offers a Reporting Delegation Service to its clients, free of charge. We are therefore offering you to report on your behalf OTC trades in which we are your counterparty.
1. For your OTC Transactions
The transactions reported on your behalf are displayed through a dedicated website: eReporting. Reports are also available directly within DDRL.
Should you decide to use that service, we will send you a contract to be signed. Data reported by Société Générale on your behalf remain under your liability.
Should you have any questions you can address them to [email protected]. Given that SG is using DDRL as its trade repository, only a Full Delegation Service is possible. Pursuant to this service Société Générale reports on your behalf all data related to our transactions (Common Data + Counterparty Data). You have the opportunity to manage the delegation service per asset class but no other “ad hoc” service is offered.
Upon request from an FC or NFC+, SG may offer collateral and valuation reporting (our offer combines the two). However, it will be SG’s own valuation. It should be emphasised that the position of regulators is that counterparties who have delegated the reporting of their valuation must be able to check periodically and correct the valuation reported if necessary.
2. LME-Registered Contracts
For any queries on the reporting of ETD transactions conclucted on the London Metal Exchange and for which Société Générale is your clearing broker, please contact [email protected]
3.4. International Identifiers
59. What is the LEI / Pre-LEI?
The Legal Entity Identifier (LEI) is a reference code to identify in a unique way a given entity that engages in a financial transaction. Currently, there are many ways to identify entities, but there is no unified global identification system for legal entities across markets and jurisdictions. The LEI will be a linchpin for financial data – the first global and unique entity identifier enabling risk managers and regulators to identify parties to financial transactions instantly and precisely. Currently, public and private organizations are joining efforts to develop the LEI, with the support of the Financial Stability Board (FSB) and endorsement of the G-20. Until the LEI becomes operational, pre-LEIs have been in production (see question below).
Page 51 / 83
60. Which LEI type do you expect to be the retained standard? Where and when will it be available? Who will define and provide this standard? How would you suggest dealing with these requirements for a possible interim period?
The final LEI will be an ISO standard (ISO17442).
While LEIs have not been issued yet, pre-LEIs have been “in production” since Q3 2013. In parallel, GMEI codes are used as an interim solution (ISO compliant with LEI norm) for Dodd-Frank reporting obligations. Legal Entities can register today with the CFTC (the US regulator) to obtain a GMEI, which costs approximately USD 200.
At national level, LOUs – Local Operating Units – are national institutions which are in charge of tracking LEIs in their respective countries. They represent the primary interface for entities wishing to register for a LEI. They will be the local implementers of the global system. LOUs offer facilities such as local registration, validation, and maintenance of reference data; protection of information that must be stored locally; andfacilitates the use of local languages and organization types.
For instance, the French National Institute of Statistics and Economic Studies (INSEE) is the French LOU. Each Legal Entity has to register with its national pre-LOU and provide it with the requested certified information.
As a reminder, be aware that the LEI subscription needs to be renewed every year. A pre-LEI is issued by any of the endorsed pre-LOUs of the Global Legal Entity Identifier System. The list of endorsed pre-LOUs is available at: http://www.leiroc.org/publications/gls/lou_20131003_2.pdf The table below is a list of operating pre-LOUs, as of June 2014, indicating which ones are multijurisdiction, i.e. that can register entities from all nationalities.
Sponsor Pre-LOU website Multi-
jurisdiction
Date of endorsem
ent
Bundesanstalt für Finanzdienstleistungsaufsicht
https://www.geiportal.org Yes
03 Oct 2013
French Ministry for Economy and Finance
https://lei-france.insee.fr No
03 Oct 2013
U.S. Commodity Futures Trading Commission
https://www.ciciutility.org Yes
03 Oct 2013
Capital Markets Board of Turkey
http://www.takasbank.com.tr/en/Pages/LEI.aspx
Yes 11 Nov 2013
UK Financial Conduct Authority
http://www.lseg.com/LEI Yes
11 Nov 2013
Central Bank of Ireland https://www.isedirect.ie No
07 Dec 2013
Central Bank of Russian Federation
https://www.nsd.ru/en/services/lei No
27 Dec 2013
Polish Financial Supervisory Authority
http://www.kdpw.pl/en/business/LEI/Pages/default.aspx
No 27 Dec 2013
Netherlands Authority for the Financial Markets
http://www.kvk.nl/english/how-to-register-deregister-and-report-changes/legal-entity-identifier-lei/
No 07 Jan 2014
Page 52 / 83
Financial Supervisory Authority, Finland
http://www.prh.fi/en/uutislistaus/2013/P_1048.html
No 07 Jan 2014
Czech National Bank http://www.centraldepository.cz/index.php/en/lei-pre-lei-legal-entity-identifier
Yes 06 Feb 2014
Banca d’Italia and Commissione Nazionale per le Società e la Borsa
https://lei-italy.infocamere.it/leii/Home.action
No 07 Feb 2014
Banco de España https://www.lei.mjusticia.gob.es/es/Paginas/home.aspx
Yes 05 Mar 2014
National Bank of Slovakia
http://www.cdcp.sk/ TBD 21 May 2014
Bundesanstalt für Finanzdienstleistungsauf sicht
https://www.ceireg.de/banzlei/cust
Yes 21 May 2014
Royal Norwegian Ministry of Trade, Industry and Fisheries
http://www.glei.no/
TBD 06 Jun 2014
Financial Services Agency of Japan (JFSA)
http://www.tse.or.jp/english/news/44/140704_a.html TBD 22 Jul 2014
61. Can we report using identifiers other than the LEI (for instance BIC codes)?
No. Pursuant to the last Q&A published by ESMA, only LEIs are authorised for reporting purposes (except for private individuals). It is our understanding that from now on, all EEA counterparties will need a LEI.
62. As a non-EEA entity do I need a LEI for EMIR?
Yes, if you intend to enter into a derivative transaction with an EEA counterparty.
SG is aware that many jurisdictions do not yet have a local LOU.
The list of LOU allowing multi-jurisdiction is available in Q.60.
63. Is a LEI mandatory for out of EMIR scope reporting? For instance, what happens when reporting to a European Trade Repository a transaction with a counterparty that is subject to the reporting obligations under the Dodd-Frank Act?
LEIs are required by both EMIR and DFA, so you will always need to use this type of identification if you and/or your counterparty are subject to one of the two regulations. They may also be used in the context of other regulations in the future.
Page 53 / 83
64. What are the LEIs used by Societe Generale and its affiliates?
Country Entity LEI Creation status LEI
France Societe Generale S A Done
Certified O2RNE8IBXP4R0TD8PU41
Luxembourg Societe Generale Bank & Trust Done
Certified TPS0Q8GFSZF45ZZFL873
France SG Option Europe Done
Certified 969500FDN8G43HMHZM83
Maroc SG Marocaine De Banques Done
Certified 549300WHIMVBNIDQWK21
Russie Rosbank Done
Certified HOXMZG026UQNRK6J0C60
France Inter Europe Conseil Done
Certified VH4XNLMLBEU4NGDFRN07
France Credit Du Nord Done
Certified 54930076YK05WVH25M52
Roumanie BRD – Groupe Societe Generale Done
Certified 5493008QRHH0XCLJ4238
Bulgaria Societe Generale Expressbank Done
Certified 549300ASHQEYUZ8ARW85
Czech Republic
Komercni Banka as Done
Certified IYKCAVNFR8QGF00HV840
Romania BRD - Groupe Societe Generale SA Done
Certified 5493008QRHH0XCLJ4238
Slovenia SKB Banka d.d. Done
Certified 549300H7CCQ6BSQBGG72
Serbia Societe Generale Srbija a.d. Done
Certified 549300K2A8P5HGJ3B435
Croatia Societe Generale - Splitska Banka dd. Done
Certified 54930006A7BQRKDHV809
65. What is a UTI?
Unique Trade Identifier (UTI) designates a unique identifier on the transaction level agreed between the two counterparties, used throughout the life of the trade. ISDA has been working on a white paper on UTIs over the last few months. ESMA believes that in order to effectively match counterparties to a contract, a Unique Trade Identifier (UTI) should be reported with each counterparty to allow for pairing contracts. This will be particularly relevant when counterparties are reporting to two different TRs.
66. What is your approach to determining and communicating a UTI?
ESMA has described the UTI as a 52 character string with no prescribed format.
In order to ensure uniqueness across all reportable transactions, a UTI is comprised of two parts: 1. a UTI Prefix that is unique to the party generating the UTI – up to 10 alphanumeric
Page 54 / 83
characters (Party ID field); 2. a Transaction Identifier – up to 42 alphanumeric characters (Text string).
The UTI prefix can be built from characters 7-16 of your LEI.
The UTI may be communicated through different media depending on the type of transaction:
When there is a central market infrastructure (electronic execution platform or Middleware) which is willing to generate the UTI, then the central infrastructure will generate the identifier and communicate it to both counterparties;
When there is no central market infrastructure, paper confirmation will be used. The Generating Party will send a UTI to its counterparty via confirmation or affirmation.
67. What is Societe Generale’s approach to generating a UTI when transacting with a non-EEA counterparty?
As of today, under the UTI Generation Logic we have elected to follow, Societe Generale will systematically be the UTI Generating Party when facing a non-EEA counterparty. Therefore, non-EEA counterparties will neither have to generate a UTI nor to match the one which Societe Generale will create.
In the future, this may change if the local non-EEA regulator requires the counterparty to report derivative transactions with an identifier. In this case, ISDA will work to ensure the UTI is given prevalence.
68. The transaction I concluded is eligible to Dodd-Frank and EMIR, which trade identifier should I use? The USI or the UTI?
Both ESMA and ISDA agree on the fact that whenever a deal is eligible to Dodd-Frank and EMIR it is the Unique Swap Identifier (USI, the reference used for reporting purposes under Dodd-Frank), which should be reported to the Trade Repository. This means that the USI should be used as the UTI.
Societe Generale is a Swap Dealer under the Dodd-Frank Act which means that if you are not yourself a Swap Dealer, Societe Generale will generate a USI on all Dodd-Frank eligible transactions. This USI should be used as a UTI for your own EMIR reporting purposes.
69. If we decide to report on our own, how do we manage the generation and communication of a UTI?
In a nutshell, there are 4 different scenarios:
If there is a central infrastructure (electronic execution platform or middleware), it will generate or communicate the UTI to both counterparties. You will use this UTI in your reporting;
o FX: Bloomberg, GFI, ICAP, SwapEx, Reuters Transaction Services, Tullett Prebon, Tradition, Barclays, 360t, SG Alpha, Currenex, Digital Vega, FX All, FX Connect, FXCMpro, FX Inside, SG FX Trade, Trading Screen.
o Rates: MarkitWire, DSMatch, Bloomberg, DealerWeb, GFI, ICAP, Javelin, SwapEx, Tullett Prebon, Tradition, trueEX, TradeWeb, Tradition.
o Credit: MarkitWire, DSMatch, ICE, ICE Link, Bloomberg, DealerWeb, MarketAxess,
Page 55 / 83
GFI, ICAP, Javelin, Tullett Prebon, Tradition, TradeWeb, Tradition. o Equity: MarkitWire, Bloomberg o Commodities: Bloomberg, CME, EFETnet, ICE eConfirm
If the transaction is cleared, the Central Counterparty (CCP) will generate and communicate a new UTI;
If there is no central infrastructure and: o If you are the Generating Party (see the table below to understand the logic used to
define who will be the Generating Party) you need to build an UTI as described (cf Q61) ensuring uniqueness across all UTIs you generate. You will use it in your reporting and communicate it to your counterparty via confirmation;
o If you are not the Generating Party, then you will recover the UTI generated by your counterparty through the confirmation and update your report with this new reference.
Whenever possible, Société Générale will rely on electronic media to communicate its UTI.
FX: SWIFT messages, CLS, Misys Credit: DSMatch
You can find more information on the UTI at:
http://www2.isda.org/attachment/NjI3MQ==/2013%20Dec%2010%20UTI%20Workflow%20v8.7.8b%20clean.pdf
The following table presents the industry best practices to determine the UTI Generating Party:
Asset Class Product Explanation Generating Party
Credit
All Exluding Swaptions Floating Rate Payer (a.k.a "seller")
Swaptions Floating Rate Payer of the underlying
swap
Rates
Cap/Floor When a single Fixed
Rate Payer exists
Fixed Rate Payer, otherwise Reverse ASCII sort if both have LEIs, LEI is GP if CP
does not have one
Debt Option All Option buyer
Exotic All Reverse ASCII sort if both have LEIs, LEI is
GP if CP does not have one
FRA All Fixed Rate Payer
IRS Basis All Reverse ASCII sort if both have LEIs, LEI is
GP if CP does not have one
IRS Fix-Fix All Reverse ASCII sort if both have LEIs, LEI is
GP if CP does not have one
IRS Fix-Float All Fixed Rate Payer
IRSwap: Inflation
When a single Fixed Rate Payer exists
Fixed Rate Payer, otherwise Reverse ASCII sorti f both have LEIs, LEI is GP if CP
does not have one
IRSwap: OIS All Fixed Rate Payer
Page 56 / 83
Swaption All Option Buyer
XCCY Basis All Reverse ASCII sort if both have LEIs, LEI is
GP if CP does not have one
XCCY Fix-Fix All Reverse ASCII sort if both have LEIs, LEI is
GP if CP does not have one
XCCY Fix-Float All Fixed Rate Payer
Equity
Any product in ISDA
Taxonomy
Seller of performance If seller cannot be identified,
counterparties have to agree on GP
Others Exotic Seller of performance
If seller cannot be identified, counterparties have to agree on GP
Portfolio Swap Agreements
The seller remains the seller regardless of
the performance of the underlying
Fixed Floating
Swap
Fixed leg seller (receiver of cash on the fixed leg)
Commodity Option Receiver of
premium payment or Option writer
Seller
Swaption Receiver of
premium payment or Swaption writer
Seller
Option
Strategies Collars, corridors,
multi-leg Premium receiver
No premium Alpha convention Reverse ASCII sort, first LEI/Entity ID
FX
Forward Cash rule
The counterparty selling the currency that occurs first in the 26-letter English
alphabet.
For FX Swaps, the Generating Party of both legs of the swap would be
determined by applying the Cash Rule to the far-leg of the Swap
NDF Cash Rule Same as Forward
Options Option seller
NDO Option seller
Simple Exotic Option Seller
Page 57 / 83
Complex Exotic
For a complex exotic product where there is an unambiguous seller of the product, then the Option Seller Rule
would apply. The seller determination would be driven by the seller as agreed in the standard FpML representation of
the product.
IF there is no clear seller, then the FX Cash Rule would apply.
70. Can you specifiy the existing solutions offered by SGCIB with regards to the communication of UTI by asset class?
Two distinct workflows exist with respect to the communication of the UTI: the electronic workflow and the paper workflow. In terms of volumes, a majority of our transactions fall under the former category except for commodities where paper transactions are more common.
1. ELECTRONIC WORKFLOW
Whenever a platform proposes the generation and communication of the UTI to both counterparties SG CIB will rely on it. You will find hereunder a list of platforms which provide this service. The main ones are:
1. Foreign exchange: most execution platforms 2. Credit: DS Match and MarkitWire 3. Rates: MarkitWire and DS Match 4. Equity: MarkitWire 5. Commodities: ICE and EFET
Certain electronic platforms propose (i) to generate the UTI and/or (ii) to help communicate it to the counterparties. If you have a question on this topic, please do not hesitate to contact us at [email protected]
2. PAPER WORKFLOW
The so-called “Paper Workflow” covers all the cases where the UTI is not generated by a central platform (execution and/or confirmation). SG relies on the following channels to communicate the UTI:
Meth
od
MEDIA ASSET CLASSES
Ele
ctr
on
ic
SWIFT Messages
-> Swift Net Accord
-> Misys
-> CLS
FX
Commodities
DS Match Credit, Rates
Page 58 / 83
Pap
er
Confirmations
(T+0 -> T+3)
Credit, Rates, FX, Equity, Commodities
Affirmations
(T+0 -> T+1) Credit, Rates, Commodities
End-of-day Transaction Reports
Position Reports Dynamic Portfolio Swaps
Pla
tfo
rms
SG eConfirmation Credit, Rates, FX, Equity, Commodities
SG eReconciliation
(UTI not live) Credit, Rates, FX, Equity, Commodities
SG eReporting Credit, Rates, FX, Equity, Commodities
TriOptima
(UTI not live)
Credit, Rates, FX
Equity, Commodities
71. I expected to receive a UTI from Societe Generale but it was not present in the confirmation. What do I do?
If you are a financial counterparty, SG CIB anticipated following the ISDA Best Practices to determine who should be the UTI Generating Party. If you wish SG CIB to generate UTIs on all transactions, please inform [email protected].
In all cases, you should contact us at this email address for all UTI-related queries. SG will then provide you with a UTI as soon as possible.
72. How does SG CIB generate its UTIs on multi-legged transactions?
There is no agreement at the industry level about the attribution of UTIs on multi-legged transactions. Certain counterparties may elect to position their UTI at the master deal level while others may want UTI on all the legs of the transactions. These discrepancies are expected to persist as long as an industry-wide solution is not defined.
You will find below a table summarizing the way SG CIB generates its UTIs on such transactions.
Page 59 / 83
For FX Swaps, SG CIB generates a UTI on both the near and the far leg.
73. What is a UPI?
UPI is the Unique Product Identifier. This code should reference the Product Id (as per the EMIR Technical Standards). UPI is cross referenced in various regulations (JFSA / DFA and EMIR) but its more comprehensive definition is given by the CFTC as: “Unique product identifier means a unique identification of a particular level of the taxonomy of the asset class or sub-asset class in question”.
To meet this request, the industry has developed an OTC taxonomy. The concatenation of the taxonomy values provide a solution to UPI for data aggregation that is being used by reporting counterparties and regulated platforms under the DFA scope. The ISDA OTC Taxonomy is also approved as the UPI value for reporting globally in Japan, Australia, Hong Kong, Singapore, and Canada.
ISDA has requested that ESMA endorse this standard for EMIR reporting.
We invite you to download the latest version of the ISDA OTC taxonomies at:
http://www2.isda.org/attachment/NDg5NQ==/ISDA%20OTC%20Derivatives%20Taxonomies%20-%20version%202012-10-22.xls
Asset Class Type Reporting UTI
Rates All Master (one report)
Master (single UTI)
Credit All Master (one report)
Master (single UTI)
Commodities
Semi Complex Elementary deal (multiple reports)
Elementary deal (multiple UTIs)
Stripped Semi Complex Elementary deal (multiple reports)
Elementary deal (multiple UTIs)
Stripped Master (one report)
Master (single UTI)
Equity All Elementary deal
(multiple reports)
Elementary deals
(multiple UTIs)
Foreign Exchange (Options)
SWIFTable elementary deals
Elementary deal
(multiple reports) Elementary deal
Non-SWIFTable elementary deals
Elementary deal Elementary deal
FX Swap All Elementary deal Elementary deal
Page 60 / 83
4. CLEARING OBLIGATION
4.1. CLEARING OBLIGATION
4.2. FRONTLOADING
4.3. INTRAGROUP TRANSACTIONS
4.4. CLEARING THRESHOLDS for NFCs
4.5. COLLATERAL ON CCPS
Page 61 / 83
4.1. Clearing obligation
74. Which entities are subject to the clearing obligation and when do these entities have to comply with the obligation?
The following entities are subject to clearing obligation:
EEA Financial Counterparties EEA Non Financial Counterparties (NFC) that are above any one of the clearing thresholds Counterparties located outside of the EEA that would be subject to the clearing obligation if
established in the EEA
An exemption applies for:
Certain counterparties (Central Banks…)
Intra-group transactions (trades between entities in the same consolidation group on a full basis) are exempt with conditions: Counterparties have to notify their competent authority in advance that they intend to use this exemption
The clearing obligation will take effect following a phased implementation from six months to three years after the entry into force of the RTS, depending on the types of counterparties:
Category Description Effective Date
Category 1 Counterparties which, on the date of entry into force of the Delegated Clearing Regulation, are clearing members for at least one of the classes of OTC Derivatives of at least one CCP authorised before that date to clear
6 months after the date of entry into force, approx. From June 2015
Category 2
FC that do not fall under Category 1
AIF that are non FC and not in Category 1 and who belong to a group whose aggregated uncleared derivative positions on a monthly average, for the months of Nov. 2014, Dec. 2014 and Jan . 2015 are higher than 8 billion EUR.
12 months after the date of entry into force, approx. From February 2016
Category 3 Financial counterparties (FC) and AIFs who do not fall in Categ. 1 or 2
18 months after the date of entry into force , approx. From June 2016
Category 4 Non FC that do not fall under Category 1, 2 or 3 3 years after the date of entry into force, approx. From February 2018
There are clearing thresholds values calculated at group level, which only apply to NFC (defined in gross notional value per asset class). The crossing of the threshold in any of the asset class triggers mandatory clearing for all assets:
EUR 1 billion in gross notional value for OTC credit derivatives and OTC equity derivatives EUR 3 billion in gross notional value for OTC interest rate derivatives and OTC foreign
exchange derivatives EUR 3 billion in gross notional value for OTC commodity derivatives and other asset
classes not defined above
The calculation of the thresholds does not take into account hedging for commercial activities. It includes transactions entered into by all other NFCs within the group on a worldwide basis. The positions of entities that are Financial Counterparties are not aggregated.
Page 62 / 83
75. How is the product scope defined for OTC Clearing?
In accordance with Article 6 of EMIR, ESMA must establish and maintain a public register (which it shall publish on its website) identifying those classes of OTC derivatives subject to clearing. Identification of “eligible” EMIR Derivatives traded OTC will follow a two-fold approach:
Bottom up : Competent authorities of each Member State must notify ESMA of contracts authorised for clearing in their Member State. ESMA will then determine whether to require mandatory clearing of such contracts in all member states
Top down : ESMA can identify certain derivatives contracts to be cleared by an authorised CCP. Relevant factors include standardization of contracts, liquidity and reliability of available pricing. The effective date from which clearing is mandatory will be determined by the expected volume and the ability for CCPs to manage the volume
Once the clearing obligation is declared to apply to a particular class of products of OTC derivatives, it will apply to each transaction within that product class entered into either (i) on or after the date which ESMA has established as the effective date for the obligation to clear that class; or (ii) on or after the (earlier) date on which ESMA receives notification from a national regulator that a CCP has become authorised to clear that product class of derivatives.
76. Which are the existing CCPs authorised for clearing ?
ESMA is still in the process of authorising CCPs and the eligibility of products has yet to be clarified. The clearing obligation should come into force in June 2015.
As of August 2014, ten (10) CCPs have been authorised by ESMA, as follows :
Page 63 / 83
Source : http://www.esma.europa.eu/news/ESMA-adds-CME-Clearing-Europe-Ltd-list-registered-CCPs-under-EMIR For your consideration, below is the link to all the non-EU CCPs that have applied to ESMA for recognition under EMIR in those countries. http://www.esma.europa.eu/content/List-applicant-central-counterparties-CCPs-established-non-EEA-countries-updated-24-April-20
77. Where can I see the list of products eligible for mandatory clearing?
A provisional list was published by ESMA in its consultation on clearing IRS and CDS.
Proposed IRS clearing obligation on four sub-asset classes, on a range of currencies and underlying indices, all with constant or variable notional:
Basis Swaps
Fixed-to-float interest rate Swaps
Forward rate agreements
Overnight index Swaps
Proposed CDS clearing obligation on European untranched Index CDS (for iTraxx Europe Main and iTraxx Europe crossover)
Page 64 / 83
78. Has SG already built a commercial offer for its clients/counterparties for this service ?
SG offers client clearing through its fully owned subsidiary Newedge. On-boarded clients have already started clearing OTC derivatives through this subsidiary (mainly IRS).
Below are some highlighted services provided for OTC clearing:
Newly-mandated centrally-cleared asset classes are a natural extension of Newedge’s leading role in centrally-cleared derivatives
Memberships of all major CCP venues Comprehensive central clearing offering for IRS, CDS and FX Significant infrastructure and personnel investment Cross-product portfolio margining Collateral management facilitation Active industry participation and lobbying Commitment to support a variety of clearing models including emerging margin settlement
models and indirect clearing Flexible approach to commercial models Newedge’s agency model which mitigates risk and minimises conflicts of interest
79. What type of business model are you planning to set-up: CCP Member or Client member?
Newedge is a member of all major CCPs (CCP Member), which are listed below:
The Americas: CME ClearPort - LCH US - CME IRS OTC - ICE OTC - Nodal - LCH Swpaclear FCM
EMEA: CME Clearing Europe - ICE Clear Europe - LCH Clearnet Ltd - LCH RepoClear – LCH Enclear - LCH SwapClear - Eurex IRS OTC
Asia: SGX AsiaClear
In addition, Newedge is currently working on getting the following memberships within the next few months:
The Americas: ICE Credit Clear - CME CDS
EMEA: CME IRS OTC - ICE Clear Europe CDS - LCH Clearnet CDS - LCH ForexClear
Page 65 / 83
4.2. Frontloading
80. What is frontloading?
Pursuant to current ESMA proposal, a frontloading obligation would be imposed to financial counterparties of categories 1 and 2 (cf. question 74) from the publication of the clearing RTS until the start date of the clearing obligation for products which present a minimum remaining maturity duration of more than 6 months at the time of clearing.
Pursuant to such obligation, financial counterparties would have to identify all relevant trades during the phase-in period (up to 18 months for non-clearing members) and backload them for clearing on the clearing start date.
In view of the difficulty to price a transaction which is to be cleared in the future, such frontloading obligation could lead to adverse consequences on market liquidity and stability. The industry is therefore trying to obtain the removal of such obligation for non-clearing members and to keep it only for clearing members, i.e. the largest financial institutions.
4.3. Intragroup transactions
81. What is an intragroup transaction?
A transaction is considered intragroup where both counterparties are within the same consolidation on a full basis, subject to centralised risk evaluation, measurement and control procedures and counterparties are established in the EU or in a recognized equivalent third country.
82. Are intragroup transactions excluded from the calculation of the clearing thresholds?
No, EMIR only excludes OTC derivatives that are directly related to the commercial activity or treasury financing activity of Non-Financial Counterparties (NFCs) from the calculation of the clearing threshold. Thus, if a NFC enters into an intra-group transaction that does not fit the hedging definition, as specified in the corresponding Technical Standards to be adopted by the Commission on the basis of article 10(4), that transaction will have to be counted towards the applicable clearing threshold.
INTRAGROUP TRANSACTIONS NFC/NFC
If two NFC group entities enter into an intragroup transaction with each other which does not fit the hedging definition, both sides of the transaction should be counted towards the threshold. The total contribution to the group-level threshold calculation would therefore be twice the notional of the contract.
INTRAGROUP TRANSACTIONS NFC/FC
For non-hedging intragroup transactions between one NFC and one Financial Counterparty (FC), only the NFC side of the transaction needs to be counted towards the threshold.
Page 66 / 83
83. Is central clearing required for intragroup transactions?
There are two scenarios for which central clearing is not required for intragroup transactions :
1. If the counterparties (FC or NFC) are both established in the EU and have notified the competent EU authorities which have not objected
2. If one counterparty (FC or NFC) is established in the EU and the other is located in a recognized equivalent third country, and a prior authorisation was granted to the EU counterparty by its competent authority.
84. Where should an entity notify or apply for Intragroup exemption?
Intragroup exemptions must be notified or applied by each counterparty to its own national competent authority.
In France it depends on the nature of the entity:
- The ACPR is competent for financial counterparties - The AMF is competent for non-financial counterparties
In the UK, the FCA is the relevant authority.
85. Do Intragroup exemptions also work with non EEA affiliates ?
An Intragroup exemption can be granted only if the affiliate is established in a non EEA country that has been recognized equivalent by the European Commission.
86. When should intragroup exemption notifications or applications be made ?
Intragroup exemption notifications or applications should be made no later than 30 days before the intended use of the exemption.
Exemption notifications and applications will have to be made gradually in accordance with the three clearing phase-in periods proposed by ESMA (June 2015 for clearing members, June 2016 for non-clearing members and December 2017 for NFCs).
When counterparties are established in two different Member States, notifications will have to be made when both national competent authorities are ready to receive these notifications.
Intragroup notifications for affiliates established in France can already be made.
Page 67 / 83
4.4. Clearing Thresholds for NFCs
87. What are the Clearing Thresholds?
The Clearing Thresholds are amounts of gross nominal positions set by class of OTC derivative contracts. They will be reviewed on a regular basis after public consultation.
It concerns only NFC counterparties.
Currently the thresholds are set as follows:
Value of the clearing thresholds Type of derivatives
€ 1 billion
(in aggregate gross notional value of outstanding non-hedging OTC derivative
transactions)
Credit derivatives
Equity derivatives
€ 3 billion
(in aggregate gross notional value of outstanding non-hedging OTC derivative
transactions)
Interest rate derivatives
Foreign exchange derivatives
Commodity derivatives & Others not defined above
88. How do the clearing thresholds work?
Preliminary remark : several questions are answered in the ESMA Q&A
CALCULATION
The thresholds are calculated per asset class of OTC derivative products, excluding transactions aiming at reducing the risks directly related to the commercial activity or treasury financing hedging of that entity,
TIME PERIOD
When the rolling average position of the related derivatives transactions over 30 working days exceeds one or more thresholds, non financial counterparties (NFC) will have to start clearing new OTC derivatives transactions but will be given a four month grace period to start clearing.
NOTIFICATION
Qualifying EEA NFCs (NFC+) will have to notify both ESMA and their relevant national competent authority (e.g. the FCA in the UK) without delay if they cross one of the clearing thresholds. Non-EEA NFC+ entities should notify their EEA counterparties of their status.
Financial regulators across the EU have been adopting their notification procedures.
- For NFCs incorporated in the UK, notifications need to be made to the FCA. Details of the notification process as well as the notification form are available on its notification webpage. http://www.fca.org.uk/firms/markets/international-markets/emir/emir-notifications-and-exemptions
Page 68 / 83
- For NFC incorporated in France, notifications need to be made to the AMF. Details of the notification process as well as the notification forms are available on tis notification webpage
http://www.amf-france.org/Formulaires-et-declarations/Produits-derives.html
For the purposes of notifying ESMA, forms are also available on its webpage.
CONSEQUENCES OF CROSSING THE THRESHOLDS
Crossing the thresholds in one of the asset classes triggers mandatory clearing for all asset classes, including transactions that qualify as hedging. The entity must clear all future OTC derivative contracts through a CCP, for all asset classes whether they fall within the “hedging” exception or not, with a four month applicable grace period following the crossing of the threshold.
Should NFC+ OTC derivatives positions fall below the clearing threshold at a later date the NFC will become an NFC- and the clearing obligation ceases immediately, even if no clearing has actually taken place. In this instance, the NFC should immediately notify ESMA and the relevant competent authority of this change, or for non-EEA entities your EEA counterparts should be notified.
89. For NFCs, should contracts cleared on a voluntary basis be counted against the clearing threshold?
OTC contracts cleared on a voluntary basis which do not qualify as risk reducing are included in the calculation of the clearing threshold.
90. Should positions taken by financial subsidiaries of a Non-Financial Counterparty be counted against the clearing threshold?
As per Article 10(3), only the positions taken by non-financial entities of the same group have to be counted towards the clearing threshold. However, for transactions between two NFCs of a same group, both sides of the transaction should be counted towards the threshold.
91. Do macro-hedges & proxy-hedges qualify as risk reduction trades?
Macro-hedges and proxy-hedges qualify as risk reduction strategies for the purpose of EMIR.
Page 69 / 83
4.5. Collateral on CCPs
93. Does the Intragroup exemption obtained for clearing also apply for collateral management?
No, a specific exemption must be requested for the Collateral obligation.
92. What should be included in the calculation for the clearing thresholds?
When carrying out clearing threshold calculations, a non financial counterparty (NFC) shall disregard OTC derivative contracts which qualify as hedging, i.e. those which are objectively measurable as reducing risks directly related to its commercial activity or treasury financing activity or that of other non-financial entities in its group.
The relevant Regulatory Technical Standard published by ESMA sets out the precise definition of derivatives contracts that qualify for the “hedging” exception. In summary, this includes any activity which:
covers risks incurred in the normal course of business; or covers risks arising from fluctuations in interest rates, inflation rates, foreign exchange
rates, credit risk, etc.; or qualifies as a “hedging contract” under International Financial Reporting Standards
(IFRS).
All non-hedging OTC EMIR Derivatives entered into by the NFC or by other non-financial entities of the group, (irrespective of whether those entities are located within or outside the EEA) are to be included in the clearing threshold calculation. Furthermore, transactions subject to an intragroup exemption must also be taken into account in the calculation.
Page 70 / 83
94. In the case of collateral posted in the form of securities, what are the transfer procedures put in place the CCPs and by the Clearing Members (and under which legal regime - French, British, Belgian, etc.)?
Procedures vary among the transfer types, as follows:
1) Transfer in full ownership:
Collateral is posted to the Clearing House by Clearing by title transfer as detailed in the Clearing rules and Clearing Membership Agreement.
2) Pledge in the depositary’s account:
Securities posted to the clearing house are held in dedicated accounts at the respective custodians
3) Physical transfer without transfer in full ownership:
This is not an option for European Clearing Members, collateral is transferred to the Clearing House by title transfer.
Note: For further details, we invite you to go through the CCP websites (cf. links below).
Eurex:
http://www.eurexclearing.com/clearing-en/cleared-markets/eurex-otc/
ICE:
https://www.theice.com/publicdocs/Regulatory_Clearing_Landscape.pdf
CME:
http://www.cmegroup.com/europe/clearing-europe/files/full-segregated-accounts.pdf
http://www.cmegroup.com/europe/clearing-europe/clearing/files/cme-clearing-otc-irs-
solution.pdf
http://www.cmegroup.com/europe/clearing-europe/risk-management/customer-protection-and-
segregation.html
LCH:
http://www.lchclearnet.com/home
OMX:
http://www.nasdaqomx.com/europeanclearing/newsmandatorychanges/segregationportability/ KDPW:
http://www.kdpwccp.pl/en/kdpw_ccp/Authorisation%20of%20KDPW_CCP/Pages/default.aspx
95. Will the Clearing Member or a CCP be able to appoint any 3rd party collateral manager?
CCP has put in place arrangements with Euroclear and Clearstream in relation to tri-party collateral. Such collateral may only be used to cover Initial Margin requirements only.
Page 71 / 83
96. Will the collateral posted in the form of securities be re-used or transformed?
Collateral posted with the CCP can not be transformed or re-hypothecated by the CCP. However, the CCP has a right of use on these securities in the event of default of the Clearing Member.
97. How does the Clearing Member handle the posting of collateral to the CCP?
Newedge passes all acceptable collateral to the CCP in relation to OTC Clearing. Newedge does not rehypthecate or transform the collateral. Newedge may choose not to allow clients to deposit all CCP eligible collaterall.
If clients send ineligible collateral to Newedge, we are able to offer transformation services.
98. How are client assets protected under EMIR?
EMIR (art. 39 (2)) aims to achieve protection of clients assets and positions against:
Fellow customer risk by mandating clearing members to offer their clients: “at least, the choice between omnibus client segregation and individual client segregation.” They would also need to inform their clients of the costs and the level of protection
Clearing member default Clearing members have to “keep separate records and accounts that enable it to distinguish
both in accounts held with the CCP and in its own accounts its assets and positions from the assets and positions held for the account of its clients at the CCP”
CCPs need to offer portability of positions and assets of the clients of the clearing members. Portability would be triggered by the default of the clearing member
CCP default
Each CCP has to be authorised by ESMA, ensuring that it meets the criteria set out under EMIR (default waterfall, living will, risk management framework…)
99. What is portability?
Porting under EMIR rules can be defined as the transferring of client positions and assets on the default of a clearing member to another clearing member designated by the client, the CCP must commit to on the client's request and without the consent of the defaulting clearing member.
This definition applies equally to omnibus and individually segregated accounts, with the distinction that in the case of omnibus client segregation the back-up clearing member must be designated by all clients.
The important reservation is the new clearing member is only required to accept the positions and assets if it has previously committed to do so.
Page 72 / 83
100. What segregation options are available at the CCPs?
EMIR mandates CCP to offer Individual Segregation and Omnibus Client Segregation models. CCPs have developed the below high level models, although CCP offerings may vary. CCPs continue to enhance their models to provide greater levels of protection and flexibility. This level of security needs to be mirrored by the clearing members to their clients.
Page 73 / 83
5. COLLATERAL OBLIGATIONS
5. COLLATERAL OBLIGATION
Page 74 / 83
101. Do you know more about frequency? The kind of eligible collateral? The minimum threshold amount, if any? What major changes do you anticipate with respect to our current bilateral set up? Will we still be able to use your valuations or will we be forced to value our products with our own models?
Under Article 11(2) of EMIR, the segregated exchange of collateral only involves Financial Counterparties (FC) and qualifying Non Financial Counterparties (NFC+). They must implement and maintain procedures for the timely, accurate and appropriate segregated exchange of collateral, other than in respect of certain intragroup transactions.
The precise level and exact type of collateral to be exchanged will be specified in yet to be published Regulatory Technical Standards (RTS). We will revert to you with more information once available.
BCBS and IOSCO issued a final policy framework to reduce systemic risk and promoting central clearing on 2 September 2013 and has been globally followed by ESMA in its draft RTS recently published.
http://www.bis.org/press/p130902.htm
Scope: Non-centrally cleared derivatives transactions between two covered entities
Requirement: Exchange Variation Margins (“VM”) (zero threshold) and the gross Initial Margins (“IM”) (threshold ≤ EUR 50 m; segregated)
The rules on margins for uncleared trades are not yet finalized and therefore the content of this section is subject to change.
Exemptions:
IM only: Nominal exchange in cross-currency swaps, FX forwards and physically settled FX swaps
IM only: When at least one one of the counterparties belongs to a group whose aggregate month-end average notional amount (AMEANA) of non-centrally cleared derivatives is below a specific amount as stated below, as per the phase-in requirements:
o From 1st December 2015, when the relevant AMEANA for June, July and August of
2015 is below EUR 3 trillion
o From 1st December 2016, when the relevant AMEANA for June, July and August of
2016 is below EUR 2.25 trillion
o From 1st December 2017, when the relevant AMEANA for June, July and August of
2017 is below EUR 1.5 trillion
o From 1st December 2018, when the relevant AMEANA for June, July and August of
2018 is below EUR 0.75 trillion
o From 1st December 2019, when the relevant AMEANA for June, July and August of
2019 is below EUR 8 billion
NB : There are currently no phase-in requirements for third-country entities, although EU entities must collect margin from them, unless explicitely exempted by EMIR or under the EUR 8 billion threshold.
Eligible collateral
Alignment with Central Counterparty (“CCP”) practices in allowing a broad array of collateral (cash, high-quality government and central bank securities, high-quality corporate & covered bonds, gold…)
Subject to haircuts
Phase-in of requirements : Variation Margin : applies to all new contracts entered into after 1
st December 2015
Initial Margin : phased-in implementation based on the notional amount of derivatives traded by the
Page 75 / 83
group the covered entity belongs to
TRIGGER: REQUIREMENT:
if aggregate month-end average notional amount of non-centrally cleared derivatives
exchange 2-way INITIAL MARGIN with a threshold up to €50mln:
for period: exceeds (in € billion): Phase-in:
Jun-Jul-Aug 2015 3,000 Dec15 Nov16
Jun-Jul-Aug 2016 2,250 Dec16 Nov17
Jun-Jul-Aug 2017 1,500 Dec17 Nov18
Jun-Jul-Aug 2018 750 Dec18 Nov19
Jun-Jul-Aug 2019 8 Dec19 on
102. What are the main requirements on Initial and Variation margins?
The present Table was made pursuant to the current proposal of ESMA. Therefore, they are subject to change.
SG’s counterparty
Variation Margin Initial Margin
FC (NB this include a third country entity if its falls within the financial counterparty definition)
Must exchange
From 1 Dec 2015
Article FP1(1) and counterparty definition
Article 1FP 3
Must exchange IM from:
Where both SG’s and the counterparty’s Exposure is above EUR 3 trillion
1 Dec 2015
Where both SG’s and the counterparty’s Exposure is above EUR 2.25 trillion
1 Dec 2016
Where both SG’s and the counterparty’s Exposure is above EUR 1.5 trillion
1 Dec 2017
Where both SG’s and the counterparty’s Exposure is above EUR 0.75 trillion
1 Dec 2018
Where both SG’s and the counterparty’s Exposure is above EUR 8 billion
1 Dec 2019
Where either SG’s or the counterparty’s Exposure in 2019 is below EUR 8 billion
SG and the counterparty may agree not to exchange IM
Page 76 / 83
EU NFC+ Must exchange
From 1 Dec 2015
Article FP1(1)
Article 1FP 3
Must exchange IM from:
Where both SG’s and the counterparty’s Exposure is above EUR 3 trillion
1 Dec 2015
Where both SG’s and the counterparty’s Exposure is above EUR 2.25 trillion
1 Dec 2016
Where both SG’s and the counterparty’s Exposure is above EUR 1.5 trillion
1 Dec 2017
Where both SG’s and the counterparty’s Exposure is above EUR 0.75 trillion
1 Dec 2018
Where both SG’s and the counterparty’s Exposure is above EUR 8 billion
1 Dec 2019
Where either SG’s or the counterparty’s Exposure in 2019 is below EUR 8 billion
SG and the counterparty may agree not to exchange IM
EU NFC- Need not
exchange provided parties agree not to do so pursuant to Art GEN 2(4)(b)
From 1 Dec 2015
Art FP1(1)
Need not exchange provided SG and the NFC- agree not to do so pursuant to Art GEN 2(4)(b)
If no agreement is reached, then timings set out for EU NFC+ will apply.
A third country entity that would be an FC if it were in the EU
Must collect
From 1 Dec 2015
Art FP1(1) and see para 3 on p7 of CP
Art 1 GEN (1), FP1 (3) and see para 3 on p7 of CP
Must collect IM from:
Where both SG’s and the counterparty’s Exposure is above EUR 3 trillion
1 Dec 2015
Where both SG’s and the counterparty’s Exposure is above EUR 2.25 trillion
1 Dec 2016
Where both SG’s and the counterparty’s Exposure is above EUR 1.5 trillion
1 Dec 2017
Where both SG’s and the counterparty’s Exposure is above EUR 0.75 trillion
1 Dec 2018
Where both SG’s and the counterparty’s Exposure is above EUR 8 billion
1 Dec 2019
Where either SG’s or the counterparty’s Exposure in
SG and the counterparty may
Page 77 / 83
2019 is below EUR 8 billion agree not to exchange IM
Third country NFC+
Must collect
From 1 Dec 2015
Art FP1(1) and see para 3 on p7 of CP
Art 1 GEN (1), FP1 (3) and see para 3 on p7 of CP
Must collect IM from:
Where both SG’s and the counterparty’s Exposure is above EUR 3 trillion
1 Dec 2015
Where both SG’s and the counterparty’s Exposure is above EUR 2.25 trillion
1 Dec 2016
Where both SG’s and the counterparty’s Exposure is above EUR 1.5 trillion
1 Dec 2017
Where both SG’s and the counterparty’s Exposure is above EUR 0.75 trillion
1 Dec 2018
Where both SG’s and the counterparty’s Exposure is above EUR 8 billion
1 Dec 2019
Where either SG’s or the counterparty’s Exposure in 2019 is below EUR 8 billion
SG and the counterparty may agree not to exchange IM.
Third country NFC-
Must collect (we do not think Art GEN 2(4)(b) applies)
From 1 Dec 2015
Art FP1(1) and see para 3 on p7 of CP
Art 1 GEN (1), FP1 (3) and see para 3 on p7 of CP
Must collect IM from:
Where both SG’s and the counterparty’s Exposure is above EUR 3 trillion
1 Dec 2015
Where both SG’s and the counterparty’s Exposure is above EUR 2.25 trillion
1 Dec 2016
Where both SG’s and the counterparty’s Exposure is above EUR 1.5 trillion
1 Dec 2017
Where both SG’s and the counterparty’s Exposure is above EUR 0.75 trillion
1 Dec 2018
Where both SG’s and the counterparty’s Exposure is above EUR 8 billion
1 Dec 2019
Where either SG’s or the counterparty’s Exposure in 2019 is below EUR 8 billion
SG and the counterparty may agree not to exchange IM.
Art 1(4) or (5) exempt counterparty
Need not exchange provided parties agree not to do so pursuant to Art GEN 2(4)(c)
From 1 Dec 2015
Art FP1(1)
Need not exchange provided parties agree not to do so pursuant to Art GEN 2(4)(c)
If no agreement is reached, then timings set out above will apply.
Page 78 / 83
“Exposure” means the aggregate month-end average notional amount of all non-CCP cleared derivatives (including foreign exchange forwards, swaps and currency swaps) for June, July and August of the applicable year calculated on a group basis – e.g. for the calculations for the 1 Dec 2015 commencement date the exposure will be calculated for June, July and August of 2015
Please also note effect of Art GEN 2(4)(a) which is a minimum transfer amount of EUR 500,000.
Page 79 / 83
GLOSSARY
MOST COMMON TERMS AND ACRONYMS
CCP Central Clearing Counterparty
Clearing
Clearing is a post-execution process in which an independent third party – known as a derivative clearing organization (“DCO”), central clearing counterparty (“CCP”) or clearing house – steps in between the original parties to a derivative transaction and guarantees the performance of both parties. The intent behind the clearing requirement is that, by having the clearing house guarantee performance, clearing reduces the impact that a default by one party could have on the other party or the rest of the financial system. Parties to a cleared trade are required to post substantial amounts of liquid collateral to the clearing house – or to a member of the clearing house – as so-called “margin.”
Clearing threshold
The threshold size of derivative positions at group level specified for the purposes of determining whether a non-financial counterparty is subject to the clearing obligation under EMIR.
Confirmation For the purposes of EMIR, “confirmation” means the documentation of the agreement of the counterparties to all the terms of an OTC derivative contract
Derivative (Or derivative contract) a financial instrument as set out in points (4) to (10) Section C, Annex 1 of MiFID
EEA
The European Economic Area comprises the 28 Member States of the European Union, plus Iceland, Norway and Liechtenstein. Gibraltar and Monaco also fall under EMIR.
As of today, the member states of the European Union are: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom.
The Outermost Regions of the Union are covered by EMIR: the Canary Islands (SP), the Azores (PT), Madeira (PT), Martinique (FR), Guadeloupe (FR), French Guyana (France), la Reunion (FR), the Åland Islands (FI), Martinique (FR), Saint Martin (FR), and Saint-Barthélémy (FR).
The Overseas Countries and Territories of the Union are not covered by EMIR: Akrotiri and Dhekelia (UK), Anguilla (UK), Aruba (NL), Bermuda (UK), Bonaire (NL), British Antarctic Territory (UK), British Indian Ocean Territory (UK), British Virgin Islands (UK), Cayman Islands (UK), Curacao (NL), Falkland Islands (UK), French Polynesia (FR), French Southern and Antarctic Territories (FR), Greenland (DK), Mayotte (FR), Montserrat (UK), New Caledonia and Dependencies (FR), Pitcairn (UK), Saba (NL), Saint Barthelemy (FR), Sint Eustatius (NL), Sint Maarten (NL), South Georgia and South Sandwich Islands (UK), Saint Helena, Ascension Island, Tristan da Cunha (UK), St. Pierre and Miquelon (FR), Turks and Caicos Islands (UK), Wallis and Futuna Islands (FR), Jersey (UK), Guernsey (UK) & Isle of Man (UK).
Page 80 / 83
EMIR European Market Infrastructure Regulation
ESMA European Securities and Markets Authority
FC
A Financial Counterparty a credit institution (a bank),an investment firm, an insurance or reassurance undertaking, a registered UCITS fund, a pension fund or an alternative investment fund managed by an alternative investment fund manager (all as defined in the EU legislation under which the entity is authorised or regulated).
GMEI (ex-CICI) The Global Markets Entity Identifier utility, formerly known as the CICI utility, is a Legal Entity Identifier (LEI) solution to standiardize the identification of legal entities that engage in financial transactions
ITS Implementing Technical Standards proposed by a European Supervisory Authority (EBA, EIOPA or ESMA) and adopted by the European Commission under powers conferred by an EU regulation or directive.
LEI The Legal Entity Identifier (LEI) program is designed to create and apply a single, universal standard identifier to any organization or firm involved in a financial transaction internationally.
Mark-to-Market
(MtM)
The act of recording the value of a position or portfolio based on the day's closing price. Instead of being valued at the original purchase price, the portfolio is valued at its current worth, reflecting any profit or loss which is not yet materialised but which would be if the position were sold immediately.
MiFID
MiFID is the Markets in Financial Instruments Directive (Directive 2004/39/EC). It replaces the Investment Services Directive (ISD) which was adopted in 1993, and came into force in 2008. It is a cornerstone of the EU's regulation of financial markets. It seeks to improve the competitiveness of EU financial markets by creating a single market for investment services and activities, and ensuring a high degree of harmonised protection for investors in financial instruments, such as shares, bonds, derivatives and various structured products. MiFID has brought greater competition across Europe in the provision of services to investors and between trading venues.
NFC A Non-Financial Counterparty: cover any undertaking established in the EEA which is not a Financial Counterparty
NFC +
An NFC whose derivative trading position exceeds one of the “clearing thresholds” set out in the RTS.
OTC
Abbreviation for Over The Counter. An OTC market or trade is one conducted directly between dealers and principals via a telephone and computer network rather than via an exchange. In contrast to exchange trading, there is no automatic disclosure of the price of deals to other market participants and deals and traded instruments are not standardised.
OTC derivative A derivative contract whose execution does not take place on a regulated market as defined in MiFID or on a third country market considered as
Page 81 / 83
equivalent to a regulated market
RTS Regulatory Technical Standards proposed by a European Supervisory Authority (EBA, EIOPA or ESMA) and adopted by the European Commission under powers conferred by an EU regulation or directive.
Trade Repository
Trade repositories centrally collect and maintain the records of derivatives. Under EMIR (Titles VI and VII of Regulation EU n°648/2012), ESMA has direct responsibilities regarding the registration, supervision and recognition of Trade repositories. In particular, Article 55 of EMIR provides that “a trade repository shall register with ESMA. The registration of a trade repository shall be effective for the entire territory of the Union”.
UPI
UPI is the Unique Product Identifier. This code should reference the Product Id (as per the EMIR Technical Standards). UPI is cross referenced in various regulations (JFSA / DFA and EMIR) but its more comprehensive definition is given by the CFTC (17 CFR part 43) as: “Unique product identifier means a unique identification of a particular level of the taxonomy of the asset class or sub-asset class in question”. In 2012 the industry made recommendations to the CFTC Technology Advisory Committee (TAC) on the development of UPIs for OTC derivatives (derived from the ISDA OTC Taxonomy) and requested further input on the level of granularity of the UPI.
USI
Unique Swap Identifiers (USI), which is the CFTC term, is an identifier on the transaction level that stays unique throughout the life of a trade. ISDA has published an overview document with USI design and guiding principles to be used for the generation and consumption of a USI. This document includes the treatment of USI in various workflow scenarios. The CFTC has published a document with the technical specifications for a USI.
UTI
Unique Trade Identifier (UTI) designates a unique identifier on the transaction level agreed between the two counterparties, used throughout the lifecycle of the trade. We are expecting the ISDA white paper on the UTI. ESMA believes that in order to effectively match counterparties to a contract, a Unique Trade Identifier (UTI) should be reported with each counterparty to allow for pairing contracts. This will be particularly relevant when counterparties are reporting to two different TRs.
Page 82 / 83
This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Societe Generale S.A. nor Societe Generale Corporate & Investment Banking can accept any responsibility for loss occasioned to any person acting or refraining from action as a result or any material in this publication. Even though SG CIB has made every reasonable effort to present current and accurate information, SG CIB does not however guarantee the accuracy and the currency of any information contained herein. On any specific matter, reference should be made to the appropriate advisor
e adviso
Contacts
If you need more information, do not hesitate to contact your Sales people who will mobilise our team of experts.
You can also send an email to our dedicated address,[email protected]
SOCIETE GENERALE
SOCIETE ANONYME CAPITAL SOCIAL 975 339 185 EUR
SIEGE SOCIAL 29BD HAUSSMANN 75009 PARIS FRANCE
552 120 222 R.C.S. PARIS
Societe Generale Corporate & Investment Banking is one of the three pillars of Societe Generale. Present in all major markets with nearly 10,000 employees in 34 countries across Europe, the Americas and Asia-Pacific, we are a vital player in fuelling the economic growth through our key role of intermediary between issuers and investors. As a Corporate and Investment bank, we support our core clients in their long-term and strategic goals across four essential functions: financing, advisory services, risk management and investment solutions. In these areas, our teams both offer issuers – corporates, financial institutions, the public sector – a broad access to markets and investors, and provide investors – institutionals and retail such as funds, asset managers, private banks, insurance companies and family offices – , smart solutions and access to investment opportunities.