EMIR Next Steps: Mandatory Clearing of OTC Derivatives

KAS BANK Newsflash 21 May 2014

As the EMIR legislation continues to be rolled out, the next requirements are almost upon us. The European Securities and Markets Authority (ESMA) has recently designated a number of Central Counter Parties for mandatory clearing of OTC derivatives. We will support you with this obligation by way of a unique proposition which gives you access to several General Clearing Members through KAS BANK.

Read our NewsFlash on EMIR next steps: mandatory clearing of OTC derivatives as PDF (opens in new window).

Main advantages
With KAS BANK’s clearing solution you always remain in control of:

  • The choice of General Clearing Member you use 
  •  The choice of your trading party or parties 
  •  If and how your assets are kept separately (‘segregation model’) 
  •  The Central Counter Party that will be selected

Mandatory clearing of OTC derivatives transactions
A key aspect of EMIR is the concept of Central Clearing. Central clearing of derivatives transactions mitigates one’s risks in relation to other market participants through the new model in which the role of the Central Counter Party (CCP) is essentially the one and only counterparty of all market participants. After the execution of an OTC derivatives transaction the CCP will act as the sole counterparty for both participants involved in the trade. For all current OTC derivative transactions that are cleared the CCP will ask for an initial margin and a variation margin.

Both clearing and enhancement of the bilateral collateral requirements predominantly result in an increase of collateral demands. Additionally one should expect a rise in the number of margin calls. As a result, not only the demand for collateral will increase, the measurements will also occur more frequently. In fact, a CCP may ask for additional collateral 7 to 14 times a day. This means that effective and efficient collateral and liquidity management is even more important.

Acting parties must make use of at least two General Clearing Members (GCM) for clearing their OTC transactions and their connections to the various CCPs. This condition should make porting of positions (including collateral) possible: the transfer of your assets and positions to a second GCM if the first GCM can no longer meet its obligations. In this way, the risks can be further controlled.

Proposition KAS BANK
In practice you have to sign an individual contract for the clearing of OTC derivatives with each GCM separately. Also, you should arrange multiple connections to the technical infrastructure of each CCP. Being a time-consuming, complicated and expensive process, KAS BANK will take care of this. That way you will only have to deal with a single counterparty, KAS BANK, who will arrange all contracts with the GCM and the connections with the CCP for you. You then can fully concentrate on your core business.

The main features of our EMIR solution are: 

  • KAS BANK serves as an operational hub for your connections to the CCP infrastructure through the selection of at least two GCMs by KAS BANK. We establish all connections that are required in the complete OTC derivatives pre and post trade infrastructure and keep them constantly up to date. 
  • We provide all connections for the reconciliation, valuation and administration of your derivative positions. 
  • We monitor your counterparties or your designated clearing members and CCPs in favour of your daily collateral management to regulate your cash. Your collateral with different GCMs and CCPs is therefore always managed in the most efficient manner. 
  • Conducting collateral management on your behalf and regulating liquidities according to specifications that are set in advance. KAS BANK uses the appropriate models to check collateral calls. Furthermore we can execute security finance transactions - such as Repo and Securities Lending transactions - on your behalf while taking into account pre-set parameters. 
  • We notify your derivative positions daily with our trade repository REGIS-TR. You will also be notified if the transactions are confirmed by REGIS-TR.

Exemption from mandatory clearing for pension funds, insurance companies and non-financial parties
Relief from the mandatory clearing requirements has been granted to pension funds and insurers concerned with pension duties until 16 August 2015, with the possibility to extend this period by another three years until 16 August 2018.

The exemption has been granted in order to prevent potential liquidity issues (as a result of the obligation to pledge cash in order to retain collateral) with pension funds and insurers. CCPs will have until 16 August 2015 to develop an opportunity for these parties to deposit other types of collateral too.

Non-financial counterparties do not need to clear their transactions via a CCP as long as its derivatives trading volumes are below the threshold defined by EMIR. If the firm exceeds one of the clearing thresholds it must clear all of its OTC derivatives centrally (not just for the asset class for which the threshold was exceeded).

Voluntary clearing
The regulations of Basel 3 will also affect bilateral OTC derivatives transactions. The costs of these transactions is expected to increase significantly, with the result that parties which are now exempt from clearing will most likely opt for central clearing of their transactions (voluntary clearing).

KAS BANK actively supports its clients in meeting their EMIR requirements on time. With our EMIR services you can fully focus on achieving your own business goals. For example, transactions are received daily and then processed in a report to REGIS-TR. On a daily basis we check that all transactions are complete and report, where necessary, retroactively to REGIS-TR. In this way, we ensure that your institution complies with the notification requirements under EMIR in a timely manner.
We will be happy to support you with your EMIR obligations. Please feel free to contact one of the following individuals to answer any questions you may have regarding KAS BANK’s EMIR service suite: