EMIR Reconciliation and Delegated Reporting Solution
On the 12th February 2014 mandatory reporting for EMIR came into force, but many corporate entities (“NFCs”) do not have the necessary resources in place to meet their regulatory obligations.
What does EMIR require?
- EMIR is designed to catch every EU entity that enters into any form of a derivative contract. This covers Financial Counterparties ("FCs") and NFCs;
- Each NFC is required to obtain an IEI number from one of the authorised providers, the majority of banking counterparties will demand that this is in place prior to trading and may be unable to transact without it;
- From 12 February 2014, each entity must, on a next business day basis, report (or arrange to have reported) details of the derivative contract to a registered Trade Repository (TR);
- This applies to trades which have been freshly entered into, modified or terminated; and
- The reporting process can be outsourced either to the FC or to an independent third party.
- All NFCs under EMIR have a responsibility to report and monitor outstanding positions;
- Internal procedures need to be in place and external processes agreed with counterparty banks to ensure that the dispute resolution process can be satisfied from the initial transaction date to each reconciliation date;
- The legal responsibility to report cannot be outsourced;
- Timely confirmations - each new transaction has to be reconciled (or disputed) against the issued ISDA trade confirmation within the agreed timeline; and
- Portfolio reconciliation – on an agreed periodic timeframe each outstanding transactions detail (including a current market valuation) have to be reconciled (or disputed) within an agreed timeline (T+5 days for NFCs).
It is therefore incumbent on Company Directors to ensure that they have adequate IT systems, risk monitoring and dispute procedures and the staff resource in place to meet the requirements of EMIR, or to consider outsourcing.
Reporting to Trade Repositories: To delegate or not to delegate?
For many NFC entities, it is an attractive and easy option to delegate reporting such that the more experienced party to the derivative trade (usually the FC) performs the trade reporting requirements on their behalf - especially when such a service is offered on a complimentary basis. However, there are some issues that an NFC should consider before opting for this solution:
- NFCs who have inter-group derivative trades are unlikely to be able to delegate the reporting of such trades to an FC;
- Not all FCs offer a delegated reporting service; and
- NFCs have certain obligations under EMIR in relation to risk management including the need to have procedures in place for portfolio reconciliation, trade valuations and dispute resolution.
These house-keeping procedures can be of real benefit to a company in that they reduce the operational risk of holding derivative positions. However, in practice, NFC counterparties are rarely in control of the documentation and reporting process so they rely entirely on their FC to produce derivative contract notes and periodic valuation reports.
An alternative to delegating reporting to an FC is therefore to appoint an independent third party with relevant derivatives expertise. This provides the NFC with much more control over the reporting process, particularly with regard to independence of valuations and dispute resolution.
Pegasus Capital your EMIR outsource provider?
- Pegasus Capital LLP ("PegCap") was founded as a specialist derivatives consultancy in 2010 to provide independent expertise to assist financial institutions, corporates and their advisors navigate the complex world of hedging and derivatives; and
- PegCap’s services range from providing pre-trade advice, structuring and pricing of hedging strategies through to operational tasks including obtaining LEIs, submitting EMIR reports and calculating periodic MTM valuations on derivatives.
PegCap is set apart from other providers of EMIR services in 2 ways:
- PegCap is a FCA-regulated entity and has systems and controls consistent with its regulated status. PegCap’s Compliance team have a a legal and regulatory background including a secondment to the FSA and have a duty to keep informed on regulatory requirements; and
- PegCap’s market and operational team have long and broad experience across the fixed income and capital markets including trading, portfolio management and operations.
Most NFCs will not have access to the necessary derivative portfolio systems to be able to report transactions, reconcile and verify the valuations received or to dispute them within the 5 day timescale. This places a great deal of responsibility on NFCs to ensure that they agree with the figures provided and in doing so, it may prevent them from disputing such valuations at a later date.
Pegasus Capital has the necessary authorisations and systems to provide the required infrastructure to ensure EMIR requirements are satisfied.
PegCap’s reporting proposal is both flexible and adaptable. Based on our existing experience and operational platform, we can:
- Obtain an International Entity Identifier “IEI” for any entity that requires one; and
- Report to any of three of the six Trade Repositories “TR” that are currently registered and recognised by the European Securities and Markets Authority.
The reporting process itself can be achieved either through:
- The client extracting data from their trade systems to either an excel template provided by PegCap or to a CSV file; or
- The client supplying PegCap with the relevant ISDA trade confirmation for reconciliation – we believe this option is unusual in the sector and is made possible due to the long experience of PegCap’s team in the derivatives market;
- If required, generate a Unique Trade Identifier utilising the agreed ISDA protocol; and
- Provide periodic valuations of all derivatives that have been reported to a TR.
The PegCap solution:
- Allows clients the flexibility to fulfil all or part of their EMIR obligations by delegating their direct reporting responsibilities to PegCap;
- The client, simply sends their ISDA trade confirmation to PegCap, and all other requirements will then be met by them;
- Reports using their in-house software, therefore the IT overhead for the client is minimal.
- Ensures new transactions are reconciled within the dispute resolution period;
- Ensure portfolio reconciliation (including valuation) is achieved within the dispute resolution period;
- Ensures that all necessary forms are completed correctly and submitted on time; and
- Provides bespoke client reports to ensure the necessary audit and internal requirements are satisfied.
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PegasusCapital - 07/05/2020