Risk mitigating obligations

EMIR comprises a number of risks mitigating obligations. These apply to OTC derivatives transactions that are not centrally cleared. Counterparties in OTC derivative transactions need to have certain written agreements in place concerning these obligations.

What are the most important risk mitigating rules?

EMIR contains specific guidelines for the timely confirmation (from both sides) of new OTC derivatives transactions. Timelines for timely confirmation are dependent on the type of product and the time of conclusion. The period within which an OTC derivative transaction must be confirmed is as soon as possible and, in any event, the next business day for OTC derivative transactions concluded between financial counterparties and non-financial counterparties that exceeds the clearing threshold and the second business day for OTC derivative transactions concluded with non-financial counterparties that do not exceed the clearing threshold.

Financial Counterparties must have the necessary procedures in place to report the number of unconfirmed OTC derivatives transactions that have been outstanding for more than five business days. This has to be done to the national competent authority on a monthly basis. For ABN AMRO this is De Nederlandsche Bank.

EMIR obliges counterparties to make sure that the data relating to the OTC derivatives portfolios match. The reconciliation of portfolios is the process of comparing the different key terms of a transaction, such as how transactions are valued by each counterparty. Parties must agree on the arrangements under which the portfolios shall be reconciled. This is the process of portfolio reconciliation.

The frequency of the reconciliation depends on the number of outstanding OTC derivatives transactions and the counterparty classification.

FC+, FC- and NFC+ NFC-
Daily if ≥ 500 transactions Quarterly if > 100 transactions
Weekly if 51 ≤ transactions ≤ 499 Yearly if ≤ 100 transactions
Quarterly if ≤ 50 transactions

 

EMIR requires financial and non-financial counterparties have entered into 500 (or more) OTC derivative transactions with one counterparty that are not obliged to centrally clear, to have procedures in place to investigate the possibility of portfolio compression twice a year and then also, if possible, to carry out such portfolio compression. Portfolio compression aims to reduce counterparty credit risk.

Both financial and non-financial counterparties entering into OTC derivative transactions should agree upon detailed procedures in relation to:

  • The recording of disputes relating to the recognition or valuation of the transactions. 
  • The recording of disputes relating to the exchange of collateral.
  • The resolution of disputes in a timely manner with a specific process for those disputes that are not resolved within five business days.

Financial counterparties are required to report to national competent authority (in the Netherlands: De Nederlandsche Bank (DNB)) any dispute relating to an OTC derivatives transaction which is not centrally cleared. The obligation applies to disputes relating to the valuation of the transaction or the exchange of collateral for an amount or a value higher than EUR 15 million that is outstanding for at least 15 business days.

Financial counterparties and non-financial counterparties that exceed the clearing threshold with their agreements have the obligation to determine the value of outstanding OTC derivative transactions at market value (mark-to-market) on a daily basis. Mark-to-market means keeping track of the market value of an OTC derivative, in order to calculate the losses or profits regarding the transaction. Mark-to-model means using a financial model in order to calculate the value of a transaction.

Financial counterparties and non-financial counterparties that exceed the clearing threshold are required to value their outstanding OTC derivatives transaction at market value on a daily basis and to exchange collateral in a timely manner as security for the counterparty risk. A distinction is made between variable margin and initial margin. Variable margin is collected to hedge the risk arising from changes in the fair market value.

Initial margin is collateral that is collected by a counterparty to cover for its current and potential future exposure in the interval between the last collection of margin and the liquidation of positions or hedging of market risk, following a default of the other counterparty.

Initial margin should be calculated no later than the business day following the day on which an OTC derivatives transaction is concluded or is subject to a change in value.

According to EMIR, if you enter into or entered into OTC derivative transactions with ABN AMRO, you must agree with us on EMIR's risk-mitigating obligations. These agreements must be confirmed. This can be done in a number of ways.

ABD
If ABN AMRO's General Terms for Derivative Transactions (ABD) apply to your transactions, you can download these below. We advise you to read these carefully.

Download the EMIR Terms for OTC Derivative Transactions

If you have entered into an ISDA Master Agreement with ABN AMRO, the ISDA Master Agreement sets out the EMIR Terms and you don't have to do anything. If you entered into an ISDA Master Agreement with ABN AMRO before 2014 and have not yet made agreements concerning EMIR, there are two ways you can make these EMIR agreements with ABN AMRO: