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Status: Please note you should read all Brexit changes to the FCA Handbook and BTS alongside the main FCA transitional directions. Where these directions apply the 'standstill', firms have the choice between complying with the pre-IP completion day rules, or the post-IP completion day rules. To see a full list of Handbook modules affected, please see Annex B to the main FCA transitional directions.

Article 19 (Article 11(14)(d) of Regulation (EU) No 648/2012)Details of the intragroup transaction notification to ESMA

  1. (1)

    The notification by a competent authority of the details of the intragroup transaction shall be submitted to ESMA in writing:

    1. (a)

      within one month of the receipt of the notification with respect to a notification under Article 11(7) or (9) of Regulation (EU) No 648/2012;

    2. (b)

      within one month from the decision being submitted to the counterparty with respect to a decision of the competent authority under Article 11(6), (8) or (10) of Regulation (EU) No 648/2012.

  2. (2)

    The notification to ESMA shall include:

    1. (a)

      the information listed in Article 18;

    2. (b)

      whether there is a positive or a negative decision;

    3. (c)

      in the case of a positive decision:

      1. (i)

        a summary of the reason for considering that the conditions set in Article 11(6), (7), (8), (9) or (10) of Regulation (EU) No 648/2012 as applicable are fulfilled;

      2. (ii)

        whether the exemption is a full exemption or a partial exemption with respect to of a notification related to Article 11(6), (8) or (10) of Regulation (EU) No 648/2012;

    4. (d)

      in the case of a negative decision:

      1. (i)

        the identification of the conditions of Article 11(6), (7), (8), (9) or (10) of Regulation (EU) No 648/2012 as applicable that are not fulfilled;

      2. (ii)

        a summary of the reason for considering that such conditions are not fulfilled.

CHAPTER VIII RISK-MITIGATION TECHNIQUES FOR OTC DERIVATIVE CONTRACTS NOT CLEARED BY A CCP

Article 12 (Article 11(14)(a) of Regulation (EU) No 648/2012)Timely confirmation

  1. (1)

    An OTC derivative contract concluded between financial counterparties or non-financial counterparties referred to in Article 10 of Regulation (EU) No 648/2012 and which is not cleared by a CCP shall be confirmed, where available via electronic means, as soon as possible and at the latest:

    1. (a)

      for credit default swaps and interest rate swaps that are concluded up to and including 28 February 2014, by the end of the second business day following the date of execution of the OTC derivative contract;

    2. (b)

      for credit default swaps and interest rate swaps that are concluded after 28 February 2014, by the end of the business day following the date of execution of the OTC derivative contract;

    3. (c)

      for equity swaps, foreign exchange swaps, commodity swaps and all other derivatives not provided for in point (a) that are concluded up to and including 31 August 2013, by the end of the third business day following the date of execution of the derivative contract;

    4. (d)

      for equity swaps, foreign exchange swaps, commodity swaps and all other derivatives not provided for in point (a) that are concluded after 31 August 2013 up to and including 31 August 2014, by the end of the second business day following the date of execution of the derivative contract;

    5. (e)

      for equity swaps, foreign exchange swaps, commodity swaps and all other derivatives not provided for in point (a) that are concluded after 31 August 2014, by the end of the business day following the date of execution of the derivative contract.

  2. (2)

    An OTC derivative contract concluded with a non-financial counterparty not referred to in Article 10 of Regulation (EU) No 648/2012, shall be confirmed as soon as possible, where available via electronic means, and at the latest:

    1. (a)

      for credit default swaps and interest rate swaps that are concluded up to and including 31 August 2013, by the end of the fifth business day following the date of execution of the OTC derivative contract;

    2. (b)

      for credit default swaps and interest rate swaps that are concluded after 31 August 2013 up to and including 31 August 2014, by the end of the third business day following the date of execution of the OTC derivative contract;

    3. (c)

      for credit default swaps and interest rate swaps that are concluded after 31 August 2014, by the end of the second business day following the date of execution of the OTC derivative contract;

    4. (d)

      for equity swaps, foreign exchange swaps, commodity swaps and all other derivatives not provided for in point (a) that are concluded up to and including 31 August 2013, by the end of the seventh business day following the date of execution of the derivative contract;

    5. (e)

      for equity swaps, foreign exchange swaps, commodity swaps and all other derivatives not provided for in point (a) that are concluded after 31 August 2013 up to and including 31 August 2014, by the end of the fourth business day following the date of execution of the derivative contract;

    6. (f)

      for equity swaps, foreign exchange swaps, commodity swaps and all other derivatives not provided for in point (a) that are concluded after 31 August 2014, by the end of the second business day following the date of execution.

  3. (3)

    Where a transaction referred to in paragraph 1 or 2 is concluded after 16.00 local time, or with a counterparty located in a different time zone which does not allow confirmation by the set deadline, the confirmation shall take place as soon as possible and, at the latest, one business day following the deadline set in paragraph 1 or 2 as relevant.

  4. (4)

    Financial counterparties shall have the necessary procedure to report on a monthly basis to the FCA the number of unconfirmed OTC derivative transactions referred to in paragraphs 1 and 2 that have been outstanding for more than five business days.

Article 13 (Article 11(14)(a) of Regulation (EU) No 648/2012)Portfolio reconciliation

  1. (1)

    Financial and non-financial counterparties to an OTC derivative contract shall agree in writing or other equivalent electronic means with each of their counterparties on the arrangements under which portfolios shall be reconciled. Such agreement shall be reached before entering into the OTC derivative contract.

  2. (2)

    Portfolio reconciliation shall be performed by the counterparties to the OTC derivative contracts with each other or by a qualified third party duly mandated to this effect by a counterparty. The portfolio reconciliation shall cover key trade terms that identify each particular OTC derivative contract and shall include at least the valuation attributed to each contract in accordance with Article 11(2) of Regulation (EU) No 648/2012.

  3. (3)

    In order to identify at an early stage any discrepancy in a material term of the OTC derivative contract, including its valuation, the portfolio reconciliation shall be performed:

    1. (a)

      for a financial counterparty or a non-financial counterparty referred to in Article 10 of Regulation (EU) No 648/2012:

      1. (i)

        each business day when the counterparties have 500 or more OTC derivative contracts outstanding with each other;

      2. (ii)

        once per week when the counterparties have between 51 and 499 OTC derivative contracts outstanding with each other at any time during the week;

      3. (iii)

        once per quarter when the counterparties have 50 or less OTC derivative contracts outstanding with each other at any time during the quarter;

    2. (b)

      for a non-financial counterparty not referred to in Article 10 of Regulation (EU) No 648/2012:

      1. (i)

        once per quarter when the counterparties have more than 100 OTC derivative contracts outstanding with each other at any time during the quarter;

      2. (ii)

        once per year when the counterparties have 100 or less OTC derivative contracts outstanding with each other.

Article 14 (Article 11(14)(a) of Regulation (EU) No 648/2012)Portfolio compression

Financial counterparties and non-financial counterparties with 500 or more OTC derivative contracts outstanding with a counterparty which are not centrally cleared shall have in place procedures to regularly, and at least twice a year, analyse the possibility to conduct a portfolio compression exercise in order to reduce their counterparty credit risk and engage in such a portfolio compression exercise.

Financial counterparties and non-financial counterparties shall ensure that they are able to provide a reasonable and valid explanation to the relevant competent authority for concluding that a portfolio compression exercise is not appropriate.

Article 15 (Article 11(14)(a) of Regulation (EU) No 648/2012)Dispute resolution

  1. (1)

    When concluding OTC derivative contracts with each other, financial counterparties and non-financial counterparties shall have agreed detailed procedures and processes in relation to:

    1. (a)

      the identification, recording, and monitoring of disputes relating to the recognition or valuation of the contract and to the exchange of collateral between counterparties. Those procedures shall at least record the length of time for which the dispute remains outstanding, the counterparty and the amount which is disputed;

    2. (b)

      the resolution of disputes in a timely manner with a specific process for those disputes that are not resolved within five business days.

  2. (2)

    Financial counterparties shall report to the FCA any disputes between counterparties relating to an OTC derivative contract, its valuation or the exchange of collateral for an amount or a value higher than EUR 15 million and outstanding for at least 15 business days.

Article 16 (Article 11(14)(b) of Regulation (EU) No 648/2012)Market conditions that prevent marking-to-market

  1. (1)

    Market conditions that prevent marking-to market of an OTC derivative contract shall be considered to occur in either of the following situations:

    1. (a)

      when the market is inactive;

    2. (b)

      where the range of reasonable fair values estimates is significant and the probabilities of the various estimates cannot reasonably be assessed.

  2. (2)

    A market for an OTC derivative contract shall be considered inactive when quoted prices are not readily and regularly available and those prices available do not represent actual and regularly occurring market transactions on an arm’s length basis.

Article 17 (Article 11(14)(b) of Regulation (EU) No 648/2012)Criteria for using marking-to-model

For using marking-to-model, financial and non-financial counterparties shall have a model that:

  1. (a)

    incorporates all factors that counterparties would consider in setting a price, including using as much as possible marking-to-market information;

  2. (b)

    is consistent with accepted economic methodologies for pricing financial instruments;

  3. (c)

    is calibrated and tested for validity using prices from any observable current market transactions in the same financial instrument or based on any available observable market data;

  4. (d)

    is validated and monitored independently, by another division than the division taking the risk;

  5. (e)

    is duly documented and approved by the board of directors as frequently as necessary, following any material change and at least annually. This approval may be delegated to a committee.

Article 18 (Article 11(14)(c) of Regulation (EU) No 648/2012)Details of the intragroup transaction notification to the competent authority

  1. (1)

    The application or notification to the competent authority of the details of the intragroup transaction shall be in writing and shall include:

    1. (a)

      the legal counterparties to the transactions including their identifiers in accordance with Article 3 of Implementing Regulation (EU) No 1247/2012;

    2. (b)

      the corporate relationship between the counterparties;

    3. (c)

      details of the supporting contractual relationships between the parties;

    4. (d)

      the category of intragroup transaction as specified under paragraph 1 and points (a) to (d) of paragraph 2 of Article 3 of Regulation (EU) No 648/2012;

    5. (e)

      details of the transactions for which the counterparty is seeking the exemption, including:

      1. (i)

        the asset class of OTC derivative contracts;

      2. (ii)

        the type of OTC derivative contracts;

      3. (iii)

        the type of underlyings;

      4. (iv)

        the notional and settlement currencies;

      5. (v)

        the range of contract tenors;

      6. (vi)

        the settlement type;

      7. (vii)

        the anticipated size, volumes and frequency of OTC derivative contracts per annum.

  2. (2)

    As part of its application or notification to the relevant competent authority, a counterparty shall also submit supporting information evidencing that the conditions of Article 11(8) and (9) of Regulation (EU) No 648/2012 are fulfilled. The supporting documents shall include copies of documented risk management procedures, historical transaction information, copies of the relevant contracts between the parties and may include a legal opinion upon request from the competent authority.

Article 20 (Article 11(14)(d) of Regulation (EU) No 648/2012)Information on the intragroup exemption to be publicly disclosed

The information on an intragroup exemption to be disclosed publicly shall include:

  1. (a)

    the legal counterparties to the transactions including their identifiers in accordance with Article 3 of Implementing Regulation (EU) No 1247/2012;

  2. (b)

    the relationship between the counterparties;

  3. (c)

    whether the exemption is a full exemption or a partial exemption;

  4. (d)

    the notional aggregate amount of the OTC derivative contracts for which the intragroup exemption applies.

Article 21 Entry into force and application

This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.

Articles 13, 14 and 15 shall apply six months after the date of entry into force of this Regulation.