Risk mitigating measures for non-cleared derivatives within EMIR

To further minimize the risks in the OTC derivatives business, the EMIR regulation has provided numerous mitigation measures applicable to bilateral OTC derivative transactions not cleared through a central counterparty (CCP), some of which have already been implemented:

  • The timely confirmation and re-confirmation of concluded OTC deals at transaction level
  • Regular and EMIR-compliant portfolio adjustments with the counterparty for all OTC derivatives, collateralized or unsecured
  • Timely settlement of disputes to avoid reporting unexplained differences to the supervisory authorities.
  • Regular portfolio conformity checks and portfolio compression

Furthermore, financial institutions are now facing the task of implementing formalized collateral procedures in accordance with new regulatory requirements associated with collateralization.

Until now, the collateralization process was based on a standard and voluntary bilateral agreement. The new requirements aim to reduce the overall risk on all non-cleared OTC derivatives with the introduction of new margin requirements, in particular:

  • Variation margin to cover claims associated with adverse price movements in the market
  • Initial margin to protect against future exposure of counterparty default

The implementation will be a major challenge, not only for market participants who already have collateral procedures in place, but more so for those who do not. With the introduction of initial and variation margin, a new challenge in the collateralization process will be the implementation of complex procedural issues involved in margin calculation and custody services.

Firstwaters has already successfully completed several middle and back office projects relating to EMIR. Our regulatory expertise enables us to stay at the forefront in developments relating to market regulations and ensures that we remain well positioned to offer advice or help implement projects in this environment. 

Firstwaters is able to offer the following services around risk mitigating measures concerning the EMIR regulation:

  • Process design and system recommendation for the reconciliation of portfolios and discrepancy handling
  • Streamlining the processes associated with trade confirmations
  • Introduction and Redesign of collateral management processes (see also Collateralization of OTC Derivates
  • Test management and full implementation support
  • Analysis and monitoring of the regulatory requirements relating to the posting of collateral for non-cleared OTC derivative transactions