26 September 2013 by

New regulation adds to burden for victims of swap mis-selling

The European Markets Infrastructure Regulation (“EMIR”) is a European Union regulation aimed at improving reporting/transparency and at giving regulators and central banks a better picture of volumes and activity in the European derivatives markets. It is intended additionally to reduce the risks associated with these markets. EMIR applies to all types and sizes of EU entities that enter into derivative contracts, including corporates and small business, and creates regulatory obligations for both parties to the relevant contract(s). It is being introduced in a phased manner from March 2013 through to 2015. Importantly, EMIR does not apply to individuals transacting in a personal capacity and should not affect the review process under the Financial Conduct Authority Redress Scheme.

There are five areas under EMIR in relation to which small business customers will be asked by their banks to provide input or make decisions. These are classification, portfolio reconciliation and portfolio compression, dispute resolution, trade reporting and US connection. We consider each of these areas in turn.

(i) Classification

As a preliminary matter, entities are required to categorise themselves into one of three main classifications. The classifications vary according to the size of the entity and whether aggregate derivative positions exceed or fall below stated thresholds. Small businesses (who are party to a handful of derivative contracts at most) will be classified as “Non-Financial Counterparties minus” (or NFC- for short). Classification as an NFC- means that the overall EMIR compliance obligation will be at its least onerous.

(ii) Portfolio reconciliation and portfolio compression

Portfolio reconciliation obliges parties to derivative contracts to reconcile their portfolio of outstanding trades on a regular basis to ensure that any discrepancies are identified and addressed. How the portfolio is reconciled will depend upon an election made by the customer as part of the compliance process. In our view, the simplest election for a small business will be to follow the relevant bank’s suggested standard. The standard approach will involve the relevant bank periodically contacting the customer to outline key terms of outstanding transactions and seeking the customer’s agreement to those key terms (or, if there is a discrepancy, seeking a resolution of that discrepancy). In the case of an NFC-, portfolio reconciliation will take place once annually. If the NFC- fails to respond to the relevant reconciliation request within 10 business days of receipt, the portfolio will be considered reconciled on the terms outlined.

Portfolio compression applies only to large portfolios (500 transactions plus) and is not therefore relevant to small businesses.

(iii) Dispute resolution

EMIR requires all counterparties, regardless of classification, to have procedures and processes in place to identify, record and monitor disputes relating to derivative transactions. As with portfolio reconciliation, the resolution process will depend on an election made by the customer and, as before, our view is that the simplest election will be to follow the relevant bank’s suggested standard. Agreement to a specified dispute resolution procedure should not affect or over-ride the review process under the Financial Conduct Authority Redress Scheme.

(iv) Trade reporting

Under EMIR, all EU entities that use derivatives, regardless of classification, are obliged to report their derivative transactions to an appropriately authorised trade repository. The start date for reporting is likely to be 1 January 2014. It is possible that customers will be able to delegate the reporting function to the bank that sold them the derivative in the first place – but will retain responsibility for ensuring that reports submitted on their behalf are accurate. Developments in this regard are awaited.

(v) US connection

The US legislation that covers broadly the same ground as EMIR is known as Dodd-Frank. Dodd-Frank will only apply to UK small businesses that have a US connection. Banks will be writing to ascertain whether their customers have a US connection – and whether therefore Dodd-Frank imposes an additional layer of compliance – in due course.

Over and above the issues discussed above, EMIR introduces a ‘timely confirmation’ obligation that requires that the terms of a transaction are confirmed by both parties within a given time-frame. In the case of an NFC-, the requirement by 1 September 2014 will be to confirm within two days of transacting. Small businesses should note this obligation when entering into fresh transactions.

Note, finally, while EMIR is relatively ‘soft’ regulation, non-compliance may result in fines and could conceivably constitute an event of default under the relevant transactions. In any event, banks will expect their customers to comply. It is our concluding view that EMIR is further evidence of the inherent complexity and risk associated with derivative products and is indicative of their inappropriateness in the context of small UK businesses.

If you would like more information in relation to the matters discussed in this article or advice if you think that you may have been mis-sold an interest rate derivative, please contact Gary Walker or Simon Bishop.

12 September 2013 by

Commercial Property: Update

I am not sure how many of you are aware, but the VAT exemption for premises used for the purposes of storage has been withdrawn. HMRC recently published further information explaining the ramifications of the changes.

20 September 2013 by

Google Glass Preparing for a brave new augmented world

As rumours surface that Google’s latest world changing piece of technology will be released by the end of 2013, there have been many legal and moral questions raised regarding the practical implications of allowing the opportunity to monitor and record every image and sound we take in during our daily lives.

Signup To Our Weekly e-News

"*" indicates required fields

We’ll never share your details with any third party in line with our privacy policy.