Out-Law / Your Daily Need-To-Know

FCA expects UK firms to comply with new derivatives trading risk mitigation rules by end of April

05 Mar 2014, 10:55 am

UK financial services firms should be able to demonstrate compliance with the risk mitigation aspects of the new EU-wide derivatives trading regulatory framework by the end of April, the Financial Conduct Authority (FCA) has confirmed.

In a statement on its website, the UK market regulator said that firms that had not already implemented the risk mitigation requirements set out in the European Market Infrastructure Regulation (EMIR) should prepare a "detailed and realistic" compliance plan "within the shortest time-frame possible".

"The FCA expects that such plans will be completed and implemented by 30 April 2014 and that firms will be able to demonstrate compliance after that date," it said.

The statement relates to the risk mitigation aspects of the new rules, including trade confirmation with counterparties and the netting or compression of trades to reduce end-of-day exposures. These requirements will apply to those derivatives that are not centrally cleared. Certain aspects of EMIR, including transaction reporting requirements, came into force on 12 February.

EMIR is the regulatory framework which introduces mandatory clearing requirements for over-the-counter (OTC) derivative trades in Europe. The rules form part of the commitments made by the G20 leading world economies in response to the 2008 financial crisis. EMIR was finalised by European lawmakers in March 2013, but certain requirements are subject to a three-year phasing-in period for non-financial firms.

A derivative is a type of financial contract linked to the underlying value of the asset to which it refers, such as the movement of interest rates or currency value, or the possible insolvency of a debtor. OTC derivatives are those not traded on a regulatory exchange, but which instead are privately negotiated between two parties.

Under EMIR, most OTC derivative contracts now have to be cleared through central counterparties (CCPs), which sit in the middle of the trade to ensure financial performance if one party defaults. All derivative contracts, including those involving OTC derivatives, must also be reported to central 'trade repositories'.

The risk mitigation standards that the FCA expects compliance with by the end of April will apply to those OTC derivative contracts that are not specified in the regulations as requiring central clearance. They include trade confirmation with counterparties, the netting or compression of trades to reduce end-of-day exposures and the introduction of dispute resolution procedures.