EMIR REFIT, but also a relief for corporate treasurers

 

To be honest, the coming “EMIR refit” is going further than what we treasurers were expecting. For once,
I have the impression it went a step further than we were requesting. All treasurers asked for was a removal of the provision imposing to report intercompany derivative transactions. All what, we, as corporate treasury association, i.e. EACT and ATEL, requested has been obtained.

 

What have we obtained we were asking for?

The tainting rule of a portfolio threshold overtaking for non-hedging derivatives has been withdrawn. Therefore, if you are above one of the thresholds, it doesn’t mean anymore you will have to collateralize all portfolios. In future, you will collateralize only the class of assets for which you are over the threshold.

The hedging exemption principle (without clear definition of what they meant by “hedging”) has been also maintained conversely to what they initially wanted. Although we still don’t know how to define hedging, it is a great news. They wanted to exclude completely any notion of hedging and therefore to consider the whole portfolios. Even if not really defined, the hedging concept, in my opinion, is all what is qualified for hedge accounting. If you apply hedge accounting according to IFRS 9, it means it is clearly “hedging” and cannot be contested for this threshold assessment.

Eventually, (to make it short), they propose to remove the reporting on intercompany transactions. Again, what a great news!

What I consider as a special “bonus” granted by European Union is the liability and responsibility that has been also removed. The reporting burden relief for NFC- through a move to a mandatory delegation reporting system in which the financial counterparty is legally liable and responsible for timely reporting of a dual data stream to the trade repository. In this context, we understand that some technical drafting will still take place to clarify the distribution of liability between NFC and FC to the extent of setting out that the NFC is liable for passing on some information that the FC cannot be expected to possess in a timely and accurate manner. If our reading and understanding is correct, it means EMIR reporting will be revolutionized.

 

What does it mean?

In practice, I guess all corporates will stop reporting intercompany deals directly to TR’s. They will save fees paid to TR’s. Why reporting bank derivatives (i.e. external deals) to a TR if the liability now rest on bank’s shoulders? TR’s will lose a huge part of their corporate customers if not all. Let’s leave this obligation to financial counterparties which will have to report both deals (i.e. their deals with a corporation and the deal of the corporation with them). In my view, it completely distorts what was intended. However, it is a great news. It will also mean more work for banks which will have to consider this and potentially to charge customers for this service even if compulsory. We will see… Does it mean you still need reconciliation tools? Yes, if you use it for controlling portfolios, to assess mark-to-market (rather than mark-to-model) and to get confirmations of portfolios for year-end closings.

Therefore, it is a very good news. Nevertheless, be patient!  We expect EMIR refit to be published by end of Q2, 2019. Then we need another couple of months before benefiting from these provisions. Sometimes, the regulations can be surprising and eventually reduce your workload.

It is my understanding of this new EMIR2 provisions and I am astonished that no one has yet noticed such good news. Doing and undoing is working, isn’t it?

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