Canada: Deadline Approaches For Compliance With European Derivatives Risk Mitigation Measures

Canadian firms (among others) will continue to be asked by European counterparties in the global over-the-counter derivatives market to provide information to enable the aforementioned counterparties to comply with the European Market Infrastructure Regulation (EMIR) under Regulation (EU) No. 648/2012 of the European Parliament.

By April 30, 2014, any entity under the jurisdiction of the British regulator Financial Conduct Authority (FCA) is required to implement risk mitigation measures relating to OTC derivatives and other instruments covered by EMIR.

BACKGROUND

A wide range of compliance obligations affecting parties trading OTC derivatives with European counterparties went into effect this year, including, for example, OTC reporting requirements that came into force on February 12, 2014. Risk mitigation requirements in Europe first went into effect on September 13, 2013 and a leading regulator in Europe, the U.K. Financial Conduct Authority (FCA), issued in March 2014 an advisory that it expects EMIR risk mitigation measures to be in place by no later than April 30, 2014. The FCA publicly stated that firms that had not already implemented the risk mitigation requirements of EMIR should prepare a "detailed and realistic" compliance plan "within the shortest time-frame possible" and that "The FCA expects that such plans will be completed and implemented by 30 April 2014 and that firms will be able to demonstrate compliance after that date".

RISK MITIGATION GENERALLY

European and U.S. derivatives laws currently require parties on both sides of an OTC derivative trade to implement internal processes and procedures that are designed to mitigate the risk of default. Eventually many or all regulators of derivatives will require these or similar measures. Regulators in the leading markets were concerned in 2008-09 that the risk of default of market participants threatened the health of the financial markets as a whole. As a result, regulators have more recently imposed new requirements that apply either directly or indirectly depending upon the jurisdiction in which an entity is organized and operates (and the counterparties with whom it trades OTC derivatives).

APPLICATION TO ENTITIES OUTSIDE OF THE EU

The European Securities and Markets Authority (ESMA) clarified in published guidance that EMIR Risk Mitigation applies to non-EU entities classified as third country entities. It stated, "Article 11 of EMIR, which provides the basis of these [Risk Mitigation] requirements, applies wherever at least

one counterparty is established within the EU. Therefore where an EU counterparty is transacting with a third country entity, the EU counterparty would be required to ensure that the requirements for portfolio reconciliation, dispute resolution, timely confirmation and portfolio compression are met for the relevant portfolio and/or transactions even though the third country entity would not itself be subject to EMIR. However, if the third country entity is established in a jurisdiction for which the Commission has adopted an implementing act under Article 13 of EMIR, the counterparties could comply with equivalent rules in the third country."

PORTFOLIO RECONCILIATION

Portfolio reconciliation is a post execution process that involves sending or receiving data from each counterparty and conferring by phone, email or otherwise to ensure that both sides to a derivative are in agreement on trade details, events that take place during the pendency of a trade and valuation and collateral issues. If EMIR portfolio reconciliation obligations apply, your firm has to select one of two options and adopt that option in internal policies and procedures:

Option A: Bilateral reconciliation (your firm and its counterparty exchange portfolio data)

Option B: Unilateral reconciliation (only your firm's counterparty sends its portfolio data to you)

Many European counterparties have developed a dedicated web portal for unilateral reconciliation ("one-way delivery of portfolio data") because many of their counterparties have selected Option B. In this case, the European counterparty will send a designated person an email two weeks prior to the reconciliation date informing that person that the portfolio will be made accessible on a web portal on the date of the reconciliation. You will then be asked to approve the data or inform the counterparty of any issues with respect to the data (differences in internal valuations and so forth).

The key point is that your operations and legal teams will have, following the date on which data is made accessible, generally only five (5) business days (that are business days for both parties to the derivative), or a shorter period, if agreed, to object to the data. If no objection is made, then the data provided by the counterparty will be deemed the "correct" data and no objections can be made.

DISPUTE RESOLUTION

EMIR also requires that European counterparties (and their counterparties) implement a dispute resolution process. The reason that regulators require these processes is that, in the past, disputes have resulted in massive losses that have destabilized the system, and regulators were not aware of those losses until massive damage was done to the system. Today, regulators are requiring parties to implement internal policies and procedures to meet and confer and to identify and resolve disputes. If those disputes exceed a threshold in the aggregate, then the parties are to report those disputes to the applicable regulator. Such dispute resolution process should apply to transactions and collateral margin calls.

PORTFOLIO COMPRESSION

In addition to the above obligations, counterparties are required to assess the possibility of a portfolio compression with certain counterparties. If these obligations apply, it is recommended that your firm have internal tracking processes in place to ensure that a compliance professional is contacted if this threshold is exceeded.

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions