On 15 September 2013, the portfolio reconciliation and dispute resolution requirements of Regulation (EU) No 648/2012 and its supplemental regulations (collectively, "EMIR") will become operative. Parties to OTC derivatives will be required to amend their documentation to comply with these requirements.

What changes are required?

Generally, OTC derivatives documentation will be required to address each of the following:

Portfolio Reconciliation

Financial Counterparties ("FCs") and Non-Financial Counterparties ("NFCs") will be required to agree in writing, with each of their counterparties, means by which portfolios of uncleared OTC derivative contracts are to be reconciled. The reconciliation must cover key trade terms and the valuation attributed to each contract. Portfolio reconciliation must be performed at a specified frequency depending on the number of OTC derivative contracts outstanding between the parties.

Dispute Resolution

Counterparties must have agreed detailed processes and procedures in relation to the identification, recording, monitoring and resolution of disputes relating to their OTC derivative contracts and to exchange of collateral. Furthermore, FCs will be required to report to their national competent authority (which, in Ireland, is expected to be the Central Bank of Ireland) the details of any disputed OTC derivative contract for an amount or value higher than €15 million and outstanding for at least 15 business days.

Who is required to implement the changes?

All FCs and NFCs are required to implement the changes.

How can the changes be implemented?

Broadly, counterparties will be able to effect the amendments to their OTC derivatives documentation in two ways:

  1. Bilateral amendment
Counterparties can bilaterally amend their contractual arrangements to incorporate the necessary amendments. This will have the advantage that the changes can be tailored to the particular circumstances of the counterparties. However, it may well be a challenge for many counterparties to dedicate sufficient resources to facilitate bilateral amendment of all of their OTC derivatives documentation.

  1. ISDA Protocol
The International Swaps and Derivatives Association, Inc. ("ISDA") has published the ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol (the "Protocol").

The Protocol is designed to enable parties to amend the terms of their agreements to reflect the portfolio reconciliation and dispute resolution requirements imposed by EMIR. The Protocol also includes a disclosure waiver to help ensure that parties can meet the various reporting and record keeping requirements under EMIR without breaching confidentiality restrictions to which they may be subject.

Counterparties can opt to apply the Protocol to their contractual arrangements by signing up to an adherence letter in the form produced by ISDA. The adherence letter will require counterparties to make a limited number of elections, depending on their circumstances. Importantly, it is not necessary to be a member of ISDA to avail of the Protocol.

Particular considerations may arise in respect of asset managers adhering to the Protocol on behalf of underlying funds which they advise, and in secured or structured transactions where the consent of third parties may be required in respect of the amendments implemented by the Protocol.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.