FCA clear on 2015

The FCA has updated its webpage, outlining its supervisory priorities arising from EMIR for 2015. Forthcoming areas of focus will include;

• Counterparty compliance for trade reporting. Connectivity or delegated reporting should have been established, appropriate LEI’s should have been acquired and preparations made for their renewal
• Clearing Member compliance with Article 39 EMIR in respect of account segregation, account offering and risks\costs disclosure to clients
• Non-financial  firms’ assessment and monitoring of their clearing threshold status
• The readiness of both financial and non-financial firms to comply with the clearing obligation and for collateralisation of non-cleared derivatives

The update contains two relatively stark warnings:

• Non-compliance with long-past deadlines will be dealt with. In respect of risk mitigation under EMIR, “The FCA expects that such plans were completed and implemented by 30 April 2014 and that firms are able to demonstrate compliance since that date. “
• 2015 will be the year of Clearing Compliance. “In relation to the new EMIR obligations coming into force from 2015 onwards, firms should have robust and specific plans in place to comply with them as they come into force”.

The extremely low number of reported trades that can currently be matched, highlights the ongoing difficulty of complying even with those regulations that have “bedded-down”. The many obligations and complications consequent on clearing promise to make the mammoth task of trade-reporting look relatively trivial. Of the above list of regulatory priorities, collateralisation on non-cleared derivatives is set to be the most burdensome, both financially and operationally. Firms should take no comfort from the phased-in timeline for clearing, the ESAs themselves recognise that daily valuation and exchange of collateral will impose a substantial burden. As a minimum, the following internal operational procedures will be required:

• Procedures for monitoring counterparty classification
• Procedures for dispute escalation and resolution
• Procedures to ensure sufficient collateral liquidity and monitor concentration limits
• Procedures for notification, confirmation and adjustment of margin calls
• Procedures for settlement of margin calls in respect of all relevant types of collateral
• Procedures for the annual testing of the above procedures

The negotiation of external agreements is likely to take even longer than the design and installation of internal systems and procedures. As a minimum, fully documented counterparty agreement will have to be reached on the following areas:

• the segregation arrangements
• the levels and type of collateral required
• the transactions to be included in the calculation of margin
• the procedures for notification, confirmation and adjustment of margin calls
• the procedures for settlement of margin calls in respect of all relevant types of collateral
• the methods, timings and responsibilities for calculating margin and valuing collateral
• the procedures for the storing of agreements and for the prompt recording and application of the terms and arrangements agreed above

The above lists are “new” obligations imposed by the clearing RTS, as onerous as they are themselves, their implementation must be preceded by a thorough examination and likely remediation of existing CSA portfolios and collateralisation processes. Phase-in begins on 1 December 2015, however the “compliance clock” is already past midnight.

 

 

 

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