EMIR Risk Mitigation Measures
The risk mitigation measures apply to parties who entered into OTC derivatives contracts, which are not cleared via a central clearing counterparty, irrespective of whether such parties are FCs, NFC+ or NFC-. The risk mitigation techniques are further described below.
- OTC derivative contracts must be confirmed within pre-defined timelines. EMI specifies these timelines between 1 to 7 business days. The exact number of days depends on the classification as an FC, NFC- or NFC+ and the nature of the derivative contract. EMIR will be implemented step by step. The timely confirmation will increasingly tighten as EMIR implementation progresses.
- This obligation came into force on 15 March 2013.
- Parties are obliged to agree on detailed procedures to identify, record and resolve disputes. Via these procedures the length of time for which the dispute remains outstanding, the counterparty and the amount which is disputed must be recorded. A specific process must be in place for resolving disputes that have been outstanding for more than five business days.
- This obligation came into force on 15 September 2013.
Portfolio reconciliation and compression
- Every involved party has a portfolio reconciliation obligation with respect to OTC traded derivatives which are not cleared. Counterparties are obliged to agree, before entering into an OTC derivative contract, the arrangements under which portfolios shall be reconciled.
- Portfolio reconciliation is the process used to ensure that key transaction terms of transactions in a derivative portfolio between two counterparties are in agreement. Parties shall agree on the arrangements under which the portfolios shall be reconciled. Reconciliation frequency:
- Daily if ≥ 500 contracts;
- Weekly if 51 ≤ contracts ≤ 499;
- Quarterly if ≤ 50 contracts.
- FCs and NFCs which have more than 500 not centrally cleared OTC derivative contracts outstanding must have procedures in place to analyze and consider the possibility of conducting a portfolio compression exercise at least twice a year.
- Portfolio compression is an effective and efficient process for reducing notionals and number of outstanding contracts, thereby reducing counterparty credit risk.
- For any further questions with regard to portfolio reconciliation, please contact: email@example.com
Daily MTM valuation
- FCs and NFCs+ are required to mark to market their derivative portfolio on a daily basis. When a mark to market valuation is not possible, reliable and prudent marking-to-model shall be used instead.
- FCs and NFC+ will in principle fall under the margin requirements (exchange of collateral) under EMIR.
- Subject to certain conditions being met, intragroup transactions are exempt from this obligation.
- FCs (and NFC) may apply as an alternative to collateralization additional retention of capital.
- This obligation will be phased in in the course of 2016.
For more information about EMIR Risk Mitigation Measures, please visit the Q&A section.