If you are an SME owner then you may have received a letter from your bank recently waffling on about European Market Infrastructure Regulation ("EMIR") Obligations, March & September Obligations, ESMA and Risk Protocols. The letter may ask you to agree EMIR terms and it would be unsurprising if SME business owners affected by interest rate swap mis-selling are a little wary of skimming the small print, signing the EMIR acknowledgement and returning it to the bank.
One of the key causes of the global financial crisis was a lack of financial transparency. Regulators and market participants did not have a firm grasp of the extent of risk exposure which was illustrated by the collapse of Lehman Brothers in September 2008. In an attempt to prevent a financial crisis occuring again in the future, the European Parliament adopted Regulation 648/2012 which places various obligations on anyone entering into a derivative contract such as interest rate swaps.
This note is aimed at SMEs who have traded interest rate swaps and endeavours to explain how EMIR’s obligations may affect them and matters they should give some consideration to before deciding to sign the EMIR acknowledgement.
The first matter to consider is whether the total value of interest rate swaps exceeds 3 billion Euros. It is highly likely that the total value of interest rates swaps entered into by the average SME is significantly less that the value threshold in which case the SME need not worry about the clearing obligation.
In the unlikely event that an SME has a total value of interest rate swaps that exceeds 3 billion Euros then after a swap is executed it will need to be ‘cleared’ by an authorised Central Counterparty (CCP).
The second matter to consider is how to deal with the swap reporting obligation. EMIR requires that both the SME and the bank report the details of the swap they have concluded, changed or terminated within one working day of the conclusion, change or termination to a registered trade repository (TR).
Many SMEs will have entered into a swap some years ago and may be forgiven for thinking that this obligation does not apply to them given the one day reporting requirement. However EMIR backdates the reporting obligation so any swaps which were entered into before 16 August 2012 but are not at an end will need to be reported to a TR within 90 days of the reporting start date for interest rate swaps if they are still not finished. If the swap finished after 16 August 2012 but ends before the reporting start date then it must be reported to a TR within 3 years of the reporting start date. Any swaps which ended before 16 August 2012 are not subject to EMIR's reporting requirement.
However the SME’s reporting obligation can be delegated to the bank or a third party. Many banks are happy to do this and shall no doubt be seeking consent from the SMEs to submit their name and transaction information in their EMIR letters. If an SME decides not to delegate the reporting obligation then a registered TR will need to be chosen and the reporting obligation complied with when it comes into force. However the SME will need to make sure the bank is aware so that duplicate reports can be avoided.
The third matter to consider is that EMIR requires parties to agree the terms on which portfolios shall be reconciled before entering into a swap. Portfolio reconciliation must confirm the key trade terms of each swap and also determine the value of each swap. The timing for reconcilation will vary depending on the categorisation of the swap counterparties. Banks are proposing to review the swaps once a year if an SME has less than 100 swaps with the bank.
SMEs and banks must keep a record of their interest rate swap contract for at least 5 years after the contract has been terminated.
SMEs will invariably enter OTC interest rate swaps (concluded over the phone with a trader) and may recall receiving a confirmation of the trade from the bank after the swap had been executed. The confirmation detailed the key information. EMIR states that a swap entered into in the future will be conclusive and binding on SMEs unless they object in writing:
Within 3 business days following date the swap was executed (for swaps executed between 1 September 2013 and 31 August 2014)
Within 2 business days following date the swap was executed (for swaps executed from 1 September 2014 onwards)
Parties need to agree on dispute resolution procedures before entering into a swap which comply with EMIR. The banks are proposing a procedure to comply with EMIR that will implement a specific process for disputes that are not resolved within five business days. The general procedure seems to be issuing a dispute notice to the other party setting out in reasonable detail the disputed issue.
If an SME has signed an ISDA Master Agreement then any dispute resolution procedure contained within it may be used to try to resolve the dispute. If an SME is not happy with the procedure proposed by the bank then it may negotiate amendments but should keep in mind any amended procedure should comply with EMIR dispute resolution requirements. ISDA has prepared a Risk Mitigation Protocol that parties may use to amend their ISDA Master Agreement to reflect the EMIR dispute resolution obligations.
The banks are keen to ensure that they are complying with the new EMIR obligations and this is why the banks may have marked any correspondence as urgent. Accordingly SMEs should not be unduly concerned by the EMIR obligations but if an SME has any doubts then it should take advice or seek to clarify certain matters with their bank.
The above note is for information only and sets out the main issues to consider before deciding whether to sign the banks' acknowledgement. SMEs should seek independent legal advice on their individual circumstances.
Have you received any correspondence from your bank which refers to EMIR? Do you require assistance with EMIR obligations? MBM Commercial LLP’s Financial Services & Banking Disputes team may be able to help you. If you wish to discuss your situation with a solicitor then please contact us on 0131 226 8200.
DISCLAIMER: While every effort has been made to ensure the accuracy of this blog post, it is not intended to provide legal advice as individual situations will differ. No recipients of content in this blog post should act or refrain from acting on the basis of the blog post without seeking the appropriate legal advice on the particular facts and circumstances at issue from a qualified solicitor in their jurisdiction. The blog post is for general information only and is not legal advice. The law changes frequently and varies from jurisdiction and jurisdiction. No solicitor-client relationship is formed nor should any such relationship be implied. If you require legal advice, please consult with a solicitor qualified to practise in your jurisdiction. Should you be interested in seeking our assistance with a legal matter, please contact the Dispute Resolution team on 0131 226 8200.