Case Study: NASDAQ OMX Europe’s EMIR Compliance Project

NASDAQ OMX Europe’s EMIR compliance project had two central business objectives: to obtain formal certification and licensing for NASDAQ OMX’s Nordic clearing house’s operations and to select and implement a robust, compliant solution for trade reporting under EMIR. Among the business changes necessitated by this major regulatory advance are increased clearing house volumes – as activity in over the counter (OTC) derivatives moves into clearing houses – and new requirements that demand quality increases in areas from permitted collateral investment policies to custodian organisations.

gtnews: How is the NASDAQ OMX treasury department organised and what is your role within it?

Charles Whalen:
We operate two treasury centres, in New York and Stockholm. Group treasurer Peter Strandell is responsible for treasury and risk management within NASDAQ OMX and reports to the group chief financial officer (CFO), Lee Shavel. The New York treasury has a headcount of six, and is responsible for debt management, cash flow, treasury accounting and merger and acquisition [M&A] – related operations. In Stockholm, where I’m based, we manage foreign exchange [FX] risk, investments, clearing house operations and guarantees. I report to the European treasurer and am responsible for managing the EMIR compliance project for trade reporting.

gtnews: Could you summarise the scope of treasury’s global operations?

CW:
NASDAQ OMX’s debt portfolio comprises draw-downs from revolving credit facilities, and also US dollar [USD] and euro denominated bond issues. FX dealing is mostly in spot, forward and swap contracts. We manage several investment portfolios which are placed in short term instruments including government bonds and bills, repo, commercial paper and time deposits. Our central function in Stockholm is to support the NASDAQ OMX’s clearing house business, which operates derivatives in interest rate products, equities and, increasingly, commodities – primarily energy and futures contracts.

gtnews: What technology solution supports treasury operations?

CW:
We use SunGard’s AvantGard Quantum treasury management solution (TMS). It has been implemented for over a year, and supports the New York and Stockholm treasury centres using a single system and database solution. Besides supporting daily cash and dealing operations, we issue cash and security transaction settlements from Quantum through our SWIFT gateway. We also monitor compliance to all our regulatory requirements via Quantum’s risk module.

gtnews: Would you outline the business objectives of the NASDAQ OMX’s EMIR compliance project?

CW:
There are two distinct elements to NASDAQ OMX’s EMIR compliance project, namely clearing house certification and the production of the mandatory trade reporting.

For the first, the project has been a high priority exercise at NASDAQ OMX due to the impact that the new EMIR regulations have had on the Nordic clearing house. As European clearing houses are required to obtain certification under EMIR, the certification process has been a high focus activity at NASDAQ OMX during 2012-13, and has involved substantial efforts by a multi-disciplinary team, which includes executives from the treasury, risk and legal departments. This is an absolutely critical business requirement, as it directly impacts our core business.

As for the trade reporting requirement under EMIR, the project objective has been to put in place an effective process to enable NASDAQ OMX to continue to utilise the FX and interest rate derivative contracts necessary to hedge our financial risks in accordance with our treasury mandate.

gtnews: What are the main business impacts of achieving EMIR compliance?

CW:
The main impact of achieving compliance is within the clearing house business. Being a licensed clearing house under EMIR allows enables us to retain existing business and gives us a base on which we can grow.

Additionally, it is important to be compliant in order to continue to trade FX derivatives so we can hedge our exposures within the group. We did have active trading in interest rate derivatives, but this was closed due to a prohibition on trading these contracts under EMIR.

The collateral we receive into the clearing house is either cash or securities. A notable change caused directly by EMIR compliance requirements is that the permitted investments must now either have direct government or government guaranteed risk. We now use repos and outright purchases of treasury bills and government issued short-term bonds, and also some high quality supranational entity issues. These investments are denominated in US dollars, sterling and euros, and also in the Nordic currencies.

So EMIR has been a catalyst for treasury growth and change, as we have restructured our collateral investment policies and practices, under the regulation’s time pressure.

gtnews: How did you tackle the solution selection project?

CW:
It was a joint effort between me and the internal IT team. We discussed prospective solutions both internally and with our relationship banks.

The EMIR project has been running for more than two years. The vast majority of the effort has related to re-engineering the clearing house organisation and workload to fulfil the new requirements. We needed to understand the demands of compliance, and then to select and implement a solution. Implementing a trade reporting solution was a secondary – though of course essential – project objective.

We looked at three different alternatives for fulfilling the trade reporting requirement: a relationship bank reporting on our behalf, a solution offered by our TMS vendor and an in-house solution. The review process was relatively informal. As we have a limited volume of trades – 30 to 40 payments and 15 to 20 securities transaction and repo settlements daily – and also just a few corporate entities – and also due to the demanding timelines involved – a request for proposal [RFP] was never issued.

gtnews: Which solution was selected, and why?

CW:
We chose the NASDAQ OMX EMIR trade reporting Service. This solution was found to be the most cost-effective alternative, and it gives flexibility going forward. Being a proven in-house product also enables a greater degree of access in securing resources to complete the project in time – a key factor underlying our decision. Also, all connectivity to the trade repositories is taken care of in the scope of the service.

gtnews: Would you explain how, at a high level the NASDAQ OMX EMIR trade reporting service solution integrates with other treasury and finance functions, including NASDAQ OMX’s clearing systems, the TMS, external banks and securities custodians.

CW:
Basically, SunGard’s AvantGard Quantum holds all the details of the different trades. We have implemented a process to extract EMIR-compliant files for the trade repository. The fact that we are using a single TMS was a very helpful factor in achieving a demanding – and successful – solution implementation.

We did find some useful synergies in our analysis of the integration possibilities. The NASDAQ OMX EMIR trade reporting service is directly linked to our clearing systems, so any derivative contracts cleared through our Nordic clearing house will be able to be automatically reported based on trade data contained in our clearing systems.

gtnews: What were the most challenging implementation issues, and how were they overcome?

CW:
We encountered a technical challenge in accommodating internal transactions. We just needed to create one side’s record for external transactions, but we had to create both sides for internal transactions, and ensure that they were correctly formatted.

gtnews:
Could you summarise how your operations have generally benefitted from the project – including any non-EMIR compliance functions?

CW:
We have benefitted from a relatively deep knowledge pool within our group as we were able to draw on internal EMIR expertise thanks to our familiarity with the regulations. As an example, we have not seen a need to modify any of our operational processes – such as confirmations management – to be EMIR compliant, which has helped with efficient and effective implementation.

gtnews: How does EMIR compliance compare with Dodd-Frank compliance?

CW:
For NASDAQ OMX, we currently only trade derivatives out of our Europe-based entities and, as such, are only directly subject to EMIR requirements. While there are many similarities between the regulations we are aware of many differences in requirements and we would need to do a thorough review of those before we begin a derivative trading operation under Dodd-Frank.

As a general observation, EMIR requires that more trade detail be reported than appears to be the case for Dodd-Frank.

gtnews: Has there been any tangible gain in risk visibility or risk management efficiency at NASDAQ OMX attributable to EMIR implementation?

CW:
Frankly, we have experienced a mixed bag of results in this area. Some of the regulation may not be of practical value to us. On the other hand, implementing EMIR has helped us to identify and focus on some new areas of risk.

A practical example of this is that we now must hold collateral directly in the central securities depositories [CSDs] or with specialist custodian organisations, rather than using commercial banks’ services for this important function. The effect of this is a real and valuable reduction of our risk exposure in the field of collateral management.

gtnews: What were the main lessons learned in the project? Can you offer any recommendations to others, for example non-European treasurers, who are planning similar compliance projects?

CW:
One lesson is always to allow more time than you may initially think will be needed! Compliance projects impose a range of demands on your resources, and are often carried through against mandatory deadlines.

gtnews: Does NASDAQ OMX have further development plans that will impact the EMIR compliance solution?

CW:
As we complete the trade reporting requirements for financial products and commodities, we will be looking to add new products to our offering.

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