When are FX Transactions subject to EMIR? FX forwards which settle in T+3 or longer are derivatives

On 4th October the European Commission the Commission approved and published proposed technical standards which set out detailed rules on margin collateral that must be exchanged with respect to OTC derivatives not cleared by a central counterparty the Margin Rules. FX forwards, FX swaps and cross-currency swaps are all in-scope, but are subject to certain derogations. The BoE stated that its review had found no evidence that its staff had colluded in any way in manipulating the FX market or in sharing confidential client information. Under certain conditions, the clearing obligation may also apply to third-country non-EU counterparties including when:. Two more categories are added: This was established in order to improve the ability to reconcile trades both with and between counterparties, CCPs and trade repositories, and reduce the likelihood of duplicate reporting. This obligation covers both financial and non-financial counterparties.

In order to assist you finding the best solution for your EMIR reporting we can perform an evaluation of the IT infrastructure of the company as well as available the resources and the type of the instruments and the number of trades that should be reported. We can suggest the best cost effective option for your EMIR reporting solution.

2 | The relevant articles

Where a party is subject to the margin requirements of a jurisdiction other than an EU member state, its netting sets may comprise all the non-centrally cleared OTC derivative contracts encompassed by the netting set that are subject to exchange of collateral in that jurisdiction, even if not all of those contracts are encompassed by the EMIR margin requirements.

Eligible collateral includes, for example, cash, allocated gold, certain debt securities, certain covered bonds, corporate bonds, certain equities, the most senior tranche of certain securitisations and, in certain circumstances, shares or units in UCITS. Additional requirements apply in respect of certain such types of assets.

The Delegated Regulation prescribes the amount of VM to be calculated, frequency of calculation and how the date by reference to which it is to be calculated is determined. This time period may prove challenging for many buy-side parties. However earlier drafts of the Delegated Regulation proposed that the obligation would be to collect VM within this time frame. It is generally understood by the market that the change was intended to substitute the originally proposed obligation to settle VM within the prescribed time frame with an obligation to give within that time frame all instructions required to effect such settlement of VM within the normal settlement cycle.

IM can be calculated using the standardised approach which is similar to the mark to market approach , or by using IM models referred to in the Delegated Regulation, or both; parties must agree on the method that each party uses to determine the IM it must collect but they do not need to agree on a common methodology.

ISDA SIMM TM is structured to enable updating to reflect adjustments and recalibrations required from time to time in accordance with a transparent, centralised governance process. IM amounts must be calculated at a minimum every ten business days or upon the occurrence of certain specified events, including where a new in-scope OTC derivative contract forming part of the relevant netting set is executed or an existing one expires.

As with VM, IM must be provided within the business day of calculation. Cash IM must be deposited in an account with a central bank or third party credit institution authorised in accordance with CRD IV, or in a third country with equivalent supervisory and regulatory arrangements, that is not in the same corporate group as either party. Collateral collected as IM may not be re-used or re-hypothecated, although a third party custodian may use cash IM for reinvestment purposes.

Non-cash IM is subject to concentration limits on securities issued by a single issuer or entities belonging to the same group and on equity and equity-linked securities.

The IM collected may be reduced in certain circumstances. Where a party that is part of a group to which its counterparty does not belong relies on this, its risk management procedures must provide for monitoring at group level whether the threshold is exceeded and the retention of relevant records. The valuation should be performed on a daily basis. Portfolio means the collateral calculated on the basis of net positions resulting from a set of contracts, rather than per trade.

Where collateral is posted on a portfolio basis, this field should include the value of all collateral posted for the portfolio. How to calculate the mark-to-market value?

For uncleared business, the contracts should be valued by the counterparties themselves. The mark-to-market value should represent the absolute value of the contract. Should the valuation reported be agreed between the counterparties? How to calculate the value of the collateral? Which currency to be used as the collateral base currency?

How the change in the amount of collateral should be reported? Should the collateral details be reported at the trade, position or portfolio level? What are the changes in RTS since Nov ? In case the fields in the report do not allow reporting of a complex products by a single line, then the counterparties should decompose the contract and agree on the number of lines with separate UTIs that should be submitted.

The existing contracts shall be reported as terminated and the new contracts resulting from the transaction shall be reported. For contracts concluded and cleared on the same date, only the cleared contract shall be reported. For swaps, futures and forwards traded in monetary units the notional amount should be the reference amount from which the contractual payments are determined in derivatives markets. For options the notional amount should be calculated using the strike price.

Financial CFDs and commodities denominated in units like barrels or tons — the resulting amount of the quantity at the relevant price set in the contract. More new fields like: Identification and classification of the derivatives.

The OTC derivative contracts will be identified by their types. Two more categories are added: For centrally-executed bit not centrally cleared trades the UTI shall be generated by the trading venue. For centrally confirmed and cleared trades the UTI generation obligation is placed to the clearing member.

For trades that were centrally confirmed by electronic means but were not centrally cleared the UTI should be generated by the trade confirmation platform at the point of confirmation. Financial counterparties FC trading with non-financial counterparties — the FCs.

For all other cases — the seller is responsible to generate the UTI and communicate it to the buyer. The UTIs should be generated and communicated in a timely manner so that the other counterparty can meet its reporting obligations.

Date of the last mark to market or mark to model valuation. Whether collateralisation was performed. Whether the collateralisation was performed on a portfolio basis. If collateral is reported on a portfolio basis, the portfolio should be identified by a unique code determined by the reporting counterparty. Value of the collateral posted by the reporting counterparty to the other counterparty.

The transposition of MiFID has given rise, for certain types of instruments or contracts, to different definitions on what constitutes a financial instrument and what should be classified as a derivative contract.

Differences have arisen, in particular in relation to FX forwards, depending on the settlement delivery date the frontier between an FX spot and an FX derivative.

Analysis carried out by the European Securities and Markets Authority ESMA has found that it is not controversial that contracts that settle within two trading days are considered spot contracts and that contracts that settle after seven trading days are FX forwards.

In some countries contracts that settle up to 7 days are not deemed to be derivatives. For contracts with a settlement date between 3 and 7 trading days there are different laws in some Member States determining whether or not they are a derivative. ESMA invited the Commission as a matter of urgency to adopt measures that would clarify the position, in particular in relation to FX forwards and physically settled commodity forwards. The Commission was also asked to clarify:.

The Commission responded on February 26, agreeing that it was essential that there is a fully consistent transposition throughout the EU of the relevant MiFID provisions defining derivatives contracts. The industry associations argued that an FX transaction that is entered into solely to effect the purchase or sale of a foreign security commonly referred to as FX security conversions is a bona fide spot transaction in situations where the settlement period is greater than two days.

The Commission has so far not responded. On April 10, the Commission published a fairly short consultation on FX financial instruments. The deadline for comments on the consultation was May 9, The consultation covered a variety of issues including the key themes of settlement and delivery, FX risks and regulatory implications of classifying an FX contract as a financial instrument.

Noticeably the Commission mentioned that the means of settlement may differ. This netting process may mean that they cannot be used for payment.

Search form

EMIR Rules for Margining Non-Cleared OTC Derivatives: What You Need to Know Share The long-awaited EMIR rules for margining non-cleared OTC derivatives have been published in the Official Journal of the EU 1 which sets the timetable for implementation. From 3 January and with only limited exceptions (applicable to minor currencies and to situations where settlement is in connection with a sale or purchase of securities), FX transactions which settle T+3 or over (Relevant FX Transactions) will constitute FX forwards for EMIR purposes. Option 1 – Defining FX spot contracts as contract with a settlement of up to T+2 FX contracts with a settlement period of more than two days (T+2) would be automatically considered as FX derivative contracts and hence qualified as financial instruments in scope of the MiFID II requirements.