When talking about the European Market Infrastructure Regulation (EMIR), companies think first about its reporting requirements. With the recent authorisation of four trade repositories, the reporting of over-the-counter (OTC) derivatives is scheduled to become mandatory on 12 February 2014. Reports must be created by firms not only for transactions with banks but also for transactions with other group companies. In particular, complex organisations with large derivatives portfolios, as well as companies obligated to carry out reporting on behalf of numerous subsidiaries, will find this task challenging and may need to implement substantial organisational changes.
- First challenge – getting an overview: Treasurers need a clear overview of derivatives usage across the entire corporate group. Moreover, they should know which derivatives need to be reported. Some companies already use systems to manage all their financial transactions, which makes selecting the right derivatives easier. Others will have to gain the required overview manually and create yet another spreadsheet.
- Second challenge– selecting the right method and the right repository: Currently, four trade repositories with different pricing models, different packages and different types of customer accounts are available and have been authorised. Companies have to choose one and need to find the most convenient method for EMIR reporting. BELLIN, for example, decided to build a direct connection to REGIS-TR, one of the new authorised repositories. With a direct connection from treasury system to trade repository, companies are able to transmit the required reports seamlessly and quite easily. Some vendors offer to process reports to the trade repository on behalf of their customers as a third party. This service allows companies to save much time and money by not having to register themselves directly. Moreover, SWIFT offers the possibility to use their network for transmitting the requested data.
- Third challenge – creating and transmitting the reports: Companies have to generate reports in accordance with the European Securities and Markets Authority (ESMA) guidelines, which define what has to be reported and when. Treasurers can, of course, try to create reports manually on their own. However, there are now several ways to create the data automatically and either export and download flat files or transmit them directly to a trade repository.
An existing requirement is that non-financial counterparties above the clearing threshold must ensure stricter timely confirmation of their derivatives contracts. They must also establish processes to meet requirements on portfolio reconciliation, portfolio compression and dispute resolution. For many companies, the transaction volume lies below the clearing threshold. Enterprises should, nonetheless, definitely check their status – particularly if they have a complex organisational structure. This is especially true if they are linked to other groups or joint ventures.
Remember Risk Mitigation
Many companies are so busy preparing for EMIR reporting that they could easily overlook the new risk management requirements. For non-cleared derivatives, EMIR requires companies to apply certain risk mitigation techniques. These include timely and, if possible, electronic trade confirmations and portfolio reconciliation, i.e. the reconciliation of a company’s transaction data with those of its counterparties at regular intervals.
Frequently, companies ask their treasury consultants for details on the required measures to reduce risk. For example, the regulation stipulates that portfolios should be regularly checked for possible reductions in volume. In addition, EMIR requires companies to adjust bilateral derivatives portfolios regularly so that any discrepancies can be resolved. Therefore, it is important to have an overview, preferably electronically, of all derivatives transactions with counterparties to make future reconciliation processes simpler.
What Does this Mean for Treasury Management Systems?
Due to the new reporting requirements, several system changes are necessary on the master data level. Customers must be able to enter a legal entity identifier (LEI) in their system. Ideally, they should also be able to generate reports in accordance with the ESMA guidelines without having to add data manually.
Some treasury management systems (TMSs) offer the possibility to enter bank and intercompany transactions. For risk mitigation purposes, it is very convenient for companies to be able to ‘match’ transaction data electronically within their system. This functionality provides a timely and electronic confirmation for external and internal transactions, greatly facilitating transaction management.
In addition, some treasury solutions are capable of sending the group’s accumulated transaction information to a trade repository. This naturally requires all group companies to be integrated within one treasury platform. Otherwise, collecting data to generate a central report would be a difficult task. This is a good example of how important it is that all group companies work on a single platform if an organisation wishes to achieve group-wide transparency.
Not Just a Change but an Opportunity
EMIR is more than just a small change to be integrated into TMSs; it is an opportunity for companies to take a closer look at their processes. This is particularly true for international corporate groups because EMIR is implemented differently from country to country. Internationally operating companies have to deal not only with local EMIR regulations in their home country but also with the corresponding regulations in other regions.
When financial departments review the group-wide requirements for EMIR compliance, they can take advantage of this opportunity to optimise their processes. All they have to do is to ask the right questions:
- Are there ways to collect the reports of all group companies?
- If we collect data about the financial transactions and derivatives of all our companies, is there a way to manage all of this data in a single system to enhance transparency?
- How can we benefit from the mandatory risk mitigation measures for our corporate risk management in general?
- Can we use instruments such as portfolio compression to improve our internal management of derivatives?
Don’t Get Lost in the Regulatory Jungle
The most important thing is for companies to avoid being lost in the ‘EMIR regulatory jungle’. Not all companies will have to invest in a TMS to become compliant with EMIR. It will become a necessity for those that process a certain number of intercompany transactions.
Corporate groups with very few transactions, conducted exclusively with banks, may find delegating the reporting requirements to their banking counterparties to be a more practical solution. However, they will still be responsible for the data reported and need to access the various repositories used by their banking partners. Those with many derivatives, however, are going to find EMIR a challenge. Such companies will be eager to have system-based support and automation to offset the additional burden from the new regulations. Nevertheless, deciding which steps to take to be prepared is a highly individual process that depends on the company’s particular situation and complexity.
Many organisations have to prepare for EMIR despite limited capacities. Their treasury has to handle its daily work, SEPA implementation may not be finished yet, and they still have many questions to be answered and decisions to be made with regard to EMIR. That is why companies should prepare for EMIR in a targeted, solution-oriented way, with a certain amount of pragmatism – and maybe also with the advice of trusted consultants and EMIR experts who can help them navigate through the jungle.
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