Guidelines for “Third Country Entities” to Comply with European Market Infrastructure Regulation
Insight Robin Powers · September 15, 2013
In order to help market participants establish the procedures required by EMIR, ISDA has released the ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol (the “EMIR Protocol”). But adhering is not the only way to ensure that you will be able to trade with EU financial entities as of the coming deadline.
1. Classification under EMIR Protocol
a. What is the appropriate designation of a fund that is managed by a US (or other non EU) Manager?
i. An Offshore Fund, domiciled in Cayman, Bermuda, BVI, is classified as a “Third Country Entity.”
b. If we are a TCE, does EMIR apply to us?
i. If you are a TCE, EMIR does NOT apply to you directly. Similar to the “Business Conduct Rules” under Dodd Frank, the dealers need to comply and we will require that their counterparties cooperate.
c. Should we adhere to the Protocol?
i. If you are not subject to EMIR, and have adhered to the Dodd Frank Protocols, it is our view that you should not adhere to the EMIR Protocol.
ii. Adhering to both the Dodd Frank Protocol and the EMIR Protocol is likely to present conflicts with each matched dealer as to which set of rules takes precedence in the event of a conflict.
d. If we are subject to EMIR – where do we designate our classification?
i. The ISDA 2013 EMIR NFC Representation Protocol allows you to designate your status by checking a box.
2. Dodd-Frank Top-Up
a. What does this “Top-up” Agreement accomplish?
i. The Top up Agreement changes certain provisions in your Schedule 4 to the ISDA March 2013 Dodd Frank Protocol to meet the additional requirements of EMIR.
1. Portfolio reconciliation requirements to meet requirements of EMIR.
a. A TCE can choose to be a “Sending Party” or a “Receiving Party.” Note all Dealers (or FC’s) have signed up to be Sending Parties.
b. The "Data Delivery Date" is a date agreed by the parties or, if not agreed, the business day before the EMIR required due date.
c. The process of reconciliation must be agreed between the parties.
d. If one party chooses to allow a third party to perform the reconciliation (manager or administrator), that entity must be approved by the other party.
e. Frequency of Reconciliation depends on the number of trades between the parties:
i. 500 or more OTC contracts outstanding with each other – each business day;
ii. Between 51 and 499 OTC contracts outstanding with each other at any time during the week – once per week; and
iii. 50 or less OTC contracts outstanding with each other at any time during the quarter – once per quarter.
f. What terms must be reconciled?
i. Only “Key Terms” are subject to the reconciliation process, such as:
1. effective date;
2. scheduled maturity date;
3. payment or settlement dates;
4. notional value;
5. transaction currency;
6. underlying instrument;
7. position of the counterparties;
8. business day convention; and
9. any relevant fixed or floating rates.
2. Dispute Resolution provisions are replaced in their entirety
a. Allows either party to identify a dispute by way of sending a “Dispute Notice” to the other party.
b. Requires the parties to consult in good faith in an attempt to resolve any dispute in a timely manner.
c. Requires the parties to escalate any dispute which has not been resolved within five Joint Business Days to “appropriately senior members of staff.”
d. Requires each party to have internal procedures and processes in place to record and monitor any dispute for as long as it remains outstanding.
3. Adds confidentiality waiver for trade reporting to EU regulators (similar to Dodd Frank confidentiality waiver).
b. Does the ISDA March 2013 Dodd Frank Protocol meet all of the EMIR requirements?
i. It does not. The Top Up Agreement allows TCE’s to meet the minimum of adherence.
c. Is the Top Up Agreement it a protocol to which we can adhere?
i. Each Top Up Agreement must be put in place bilaterally with each counterparty that is subject to EMIR.
d. Do we need to put in place Top Up Agreements for each fund separately for each counterparty?
i. No, a Manager can put a Top Up Agreement in place with one dealer for all of the funds that face that dealer listed on an Exhibit.
3. What if the Dealer insists that we adhere to the Protocol?
a. The Top Up Agreement was drafted by a committee of Buy Side and Sell Side ISDA Members. Although we expect each dealer to customize the Top Up Agreement, we do expect each dealer to at least accept the concept.
b. About half as many entities have adhered to the EMIR Protocol as have adhered to the DF Protocol.
4. What happens when other jurisdictions finalize their rules?
a. Section 2 of the Top Up Agreement provides an optional termination provision with a number of suggested alternatives. It allows termination of the Top Up Agreement in the event that, in the future, the parties are able to (and preferred to) comply only with the CFTC’s rules promulgated under the Dodd-Frank Ac, and wish to the position where they are using the DF Protocol in its unamended form).