The deadlines for EMIR are looming, with the initial margin provisions for OTC derivatives applying from September 2016, where both counterparties have an aggregate average in uncleared derivatives above €3trn. For the largest derivatives participants there is now little time to finalise changes to existing systems and procedures and put in place the required documentation. 

“Some large institutions have been using makeshift solutions,” says Francis Cook, global trade reporting expert at GFT. “In conversation we sometimes find out that the information is held on a spreadsheet on a laptop, although at the other extreme some firms have hired a whole operations team. 

In many cases they have tried to work in the same way as Dodd-Frank to ensure their reporting is correct, but trying to leverage that expertise is quite difficult as some of the issues are just not the same. 

For example, reporting of collateral is required under EMIR but not done under Dodd-Frank, and technical standards around clearing are different depending on what jurisdiction you are in.” 

Typically, the approach to EMIR is about expense. “Firms are trying to put a lid on costs,” adds Cook. “Some firms have moved on from make-piece solutions and seen it as a mandatory spend to hire a team to do the reconciliation/mediation etc., but that can’t continue. They need to pull in a bit and focus on their core business.” 

Planning for EMIR has been particularly challenging as it has been bedevilled by a host of revisions: the postponement of margin requirements for uncleared OTC derivatives; month-end non-centrally cleared derivatives to be calculated at fund, not group, level for UCIT/ AIFs from Category 2; the removal of foreign exchange from the reach of the regulations; and the publication of the credit default swap regulatory technical standards after the interest rate derivatives standards were complete. The sheer volume and range of EMIR’s obligations and the tailoring required to firm’s business model is enormous, yet has been constantly changing. 

“Margin and compliance requirements have generally been the areas where most are struggling,” explains Anthony Perrotta, global head of research & consulting at TABB Group. “The industry has significantly added to compliance resource expenditures, but there are big gaps in the investment community, which has relied so heavily on their dealer relationships to manage many processes over the years. The market needs a serious upgrade of infrastructure.” 

Question of priorities 

However, with no consistent view of the way EMIR is impacting individual businesses, the view of what is required as a response can be different across market participants and limits the overall continuity of a universal service provider solution. Critically, while EMIR is limited to derivatives, MiFID permeates all parts of a business. 

MiFID is also higher on senior managers’ agendas owing to their responsibilities under the Senior Managers Regime, which is designed to ensure individuals who hold key roles in relevant firms behave appropriately. 

“EMIR has been secondary to the focus on MiFID II and Solvency II requirements because since going live with reporting back in February 2014 the regulation has dragged on,” says Oliver Allwood, consultant, Investit. “Furthermore while EMIR represents a significant change to the way clients manage their derivatives, MiFID II presents a number of challenges across the firm.” 

“Investment firms are experiencing regulatory fatigue, with many firms struggling to secure sufficient budgets to implement strategic solutions,” he explains. “Investment firms with low derivative volumes are just trying to get over the line and become compliant. 

As such these firms are choosing to implement tactical solutions that will undoubtedly require re-working in a couple of years’ time.” However, firms with higher volumes are starting to focus on the challenge of EMIR clearing and more specifically how to manage collateral effectively. 

Consultants report that firms are reviewing their collateral management operating models and looking at how technology can help to increase STP and reduce risk. Collateral management is also becoming more of an investment decision rather than a middle office process. Shifts in business models are more likely to be prompted by MiFID than EMIR.

“Up through now, we have witnessed two specific trends – a maintenance of the status quo in the swap markets and the seeming stagnation of swap market growth,” says Perrotta. “It appears market participants are broadly in a wait-and-see mode, while those in a more aggressive camp are fundamentally looking for ways to arbitrage the regulations.”