Trésorier/Treasurer magazine - N°83 — Oct/Nov/Dec 2013 - (Page 8)
INTERVIEW
Mr. David White,
Head of Product Marketing of
TriOptima in London.
LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE — N°83 — OCT
/ NOV / DEC 2013
- The regulations for OTC derivative portfolio reconciliation will
soon come to effect. What are the
last developments?
8
New regulations for OTC derivative
portfolio reconciliation will come into
effect in the EU on September 15, 2013.
Under the ESMA rule, both financial
and non-financial counterparties will
have reconciliation, dispute resolution
and subsequent reporting obligations.
Both collateralized and uncollateralized transactions will be subject to the
standards of the new regulations. Even
with standardized credit and interest rate
swaps going into clearing, things seem to
be getting more complicated rather than
simpler.
First, clearing does not eliminate the
need for independent reconciliation
and verification of transactions so there
is a fiduciary (if not mandated) need to
reconcile cleared trades as reported to
clearinghouses by various intermediaries.
Next, according to the new regulations,
uncleared trades, whether legacy or new,
collateralized or uncollateralized, must be
reconciled and valuation methods must
be agreed between the counterparties
along with the reconciliation parameters
and procedures.
While most large financial institutions
have already put systems in place to
address the regulations, smaller financial
institutions and non-financial counterparties (e.g., corporates hedging their
interest rate, currency, commodity exposures) are still in the process of implementing procedures and processes.
Reconciliation: Complying with new
portfolio reconciliation regulations
is also the foundation for effective
collateral management
- Which are the requirements for new
portfolio Reconciliation and dispute
resolution ?
For OTC derivative portfolios with more than
500 transactions, reconciliation is mandated daily; for portfolios between 51 and 499
transactions, reconciliation is weekly; and
for portfolios with less than 50 transactions,
reconciliation is quarterly. If a non-financial
counterparty has a portfolio below designated
clearing thresholds of gross notional exposure, trades need to be
reconciled quarterly for portfolios with more than 100 trades and
annually for portfolios below 100 trades. In addition, counterpparties must agree the reconciliaton procedures between them.
- From your point of view, are these requirements easy to
implement?
Particularly burdensome is the requirement to implement procedures for identifying, recording and monitoring disputes that
arise during the reconciliation process related to the terms of the
contract, the valuation of the transaction and the exchange of
collateral. Disputes must be resolved in a timely manner (within
5 days), and any dispute that extends for more than 15 days with
a value greater than EUR 15 million must be reported to the local
competent authority.
Even for those firms outside of the scope of EMIR and Dodd Frank,
dealer counterparts are increasing their demands for regular reconciliations in order to meet the new regulatory standards. And
with dealers submitting trades to the swap data repositories for
regulatory reporting purposes, their counterparties are eager to
validate the information that has been sent to regulators on their
behalf or to reconcile trades they have submitted themselves with
the data in other systems.
- Which challenges will then face the firms
seeking to comply?
As firms move to comply with the regulations or accommodate
their counterparties who are complying, they will face significant
challenges. These challenges are made even more complex by the
range of solutions available. Any opportunity to centralize and
standardize methodology will help to simplify the implementation
of new systems and workflow.
Under the rules, each covered entity will have to agree portfolio
reconciliation terms with each one of its trading counterparties
and document the agreement in writing or electronically. ISDA is
offering the 2013 EMIR Reconciliation, Resolution and Disclosure
Protocol to facilitate the market in this process but the terms of
the protocol might not necessarily be a good fit for all firms. What
is certain is that even for market participants with relatively few
trading relationships, initiating bilateral discussions with each
counterparty and then formalizing the output through documentation will be time consuming and prone to error.
The next challenge is the broad product scope of the EMIR rules.
Both collateralized and uncollateralized OTC derivatives have to
be reconciled according to the requirements. These trades usually
reside in different systems within an institution making it difficult
for institutions to source these trades and ensure the data is of
sufficient quality.
But the greater challenge will lie in the portfolio reconciliation
Table des matières de la publication Trésorier/Treasurer magazine - N°83 — Oct/Nov/Dec 2013
Couverture
SOMMAIRE
EDITORIAL
FINANCIAL HIGHLIGHTS Luxembourg Tax News
INTERVIEW David White - TriOptima
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CORPORATE FINANCE
15 MINUTES WITH Capita Asset Services - Luxembourg
NEWS
THE FINANCIAL RISK OBSERVATORY
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