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Corporate treasurers fall behind on derivatives reporting

A large proportion of corporate treasurers have missed the deadline for the implementation of new rules for derivatives reporting and are falling behind on preparations for more requirements later this year, according to the UK’s Association of Corporate Treasurers (ACT).

Rules under the European Markets Infrastructure Regulation (EMIR), which came into force on March 15, require non-financial companies that use derivatives to provide daily valuations of their positions, as part of their internal valuation process, and timely bilateral confirmations. However, in an ACT survey, just 38% of companies said their implementation projects are up and running, with 41% saying they are starting to think about it and 21% having done nothing yet.

“Some treasurers are falling behind where they should be, but that to a large extent is because the final rules were only approved in February,” says John Grout, policy and technical director at the ACT. “In addition, there are still areas where there is considerable uncertainty, which makes it very difficult to move forward.”

One area in which corporates should be making progress, Grout says, is in ascertaining whether they qualify as non-financial corporates (NFCs), or will be classed as NFC+, meaning they would not be exempt from the trading and clearing provisions of EMIR.

Whether or not they qualify as NFCs depends on the amount of derivatives that companies trade, and the regulator has established threshold levels of value outstanding, which in credit and equity derivatives is €1 billion, and in interest, FX and commodity contracts is €3 billion.

Derivatives “objectively measurable as reducing risks related to commercial activity or treasury financing activity of the NFC or of that group” are excluded, as are some intra-group transactions.

“The key thing to remember on thresholds is that they apply to the sum of the non-hedging derivatives positions, which the corporate group holds globally,” says Grout. “That means you have to be able to marshal all of that data and to show to the appropriate authorities that you are below the minimum levels.

“Even if you know you are below those levels, you still need to go through the process as the requirement is likely to be that you prove that is the case.”

In the UK, the Financial Services Authority (FSA) has said the onus is on domestic NFCs to notify the regulator if their non-hedge trading activity exceeds the EMIR thresholds. Those companies that exceed the thresholds will be required to centrally clear standardized over-the-counter (OTC) trades from the first quarter of 2014.

“Given the requirements around disclosure and the elements of data needed, it will be important to ensure treasurers have a good handle on how they are recorded and that all data is complete including confirmations, manual and electronic,” says Paul Bramwell, senior vice-president in treasury at SunGard’s AvantGard.

“Mark to market calculation is necessary under EMIR regulation and hence it will also be important to ensure that you have adequate means to be able to calculate this on a frequent basis with third-party reconciliation once per year at least.”

If all or a substantial proportion of OTC derivatives are held as part of a structured hedging programme, it will be essential to have all documentation around that programme, says Bramwell.

While in principle companies should be able to calculate whether they qualify as NFCs, the task in hand is made additionally complicated because there is still some uncertainty as to which securities should be included in the calculation.

The types of derivative covered by EMIR are set out in points (4) to (10) of Section C of Annex I of the Markets in Financial Instruments Directive (Mifid). In the UK, the FSA has provided further guidance in its Perimeter Guidance (PERG).

In particular, PERG 13.4 provides that some contracts “in our view” are outside the scope of Mifid, including forward forex instruments and non-deliverable currency forwards.

“You might well believe from what the FSA is saying that those foreign exchange transactions are not included but the ruling is an expression of opinion by the FSA rather than a final rule and we have not been able to get anybody to tell us it’s definitely in or, as common sense would suggest, definitely out,” says Grout.

Another problem for treasurers is in the area of legal entity identifiers, a new unique reference number for each company required for reporting under EMIR. The challenge is that the system for originating and allocating the number has yet to be created, leaving companies with no hope of complying in that respect.

On a positive note for treasurers, penalties have not yet been put in place for non-compliance with the various requirements.

However, with the requirement for next-day reporting of derivatives set to come in any time after July 1, treasurers need to be actively considering their options, and talking to banks and vendors about making sure they are compliant.

“In general, treasurers do not have regulatory reporting expertise and technology in place, and the first things they need to do is to collect data which may be across different systems, subsidiaries and currencies, and to process of all that feedback,” says Robert Bosch, a partner at Frankfurt-based BearingPoint. “It’s not rocket science but it needs to be done and it needs to be done very quickly.”

Software providers are flooding the market with third-party solutions such as BearingPoint’s Abacus TR, released in recent weeks to enable compliant reporting. The system collects and checks all the data, before producing an XML file for remittance to the trade repository.

Banks are also approaching companies with offers of reporting solutions alongside clearing services, so it makes sense for treasurers to look at a few options before making a decision.