09.11.2016

Are you ready for FINFRAG? (By Point Nine)

by Lantern Fund Forum

400After the 2007/2008 crisis that led the financial markets to chaos, there was an urge for the implementation of regulatory reforms to recreate a stable and efficient financial system. In reaction, the U.S.A. passed the of Dodd-Frank Act in 2010, and the European Market Infrastructure Regulation (“EMIR”) in 2012 in the US and EU respectively are some examples of how the Regulators aim to set strict rules for the entire financial system in view of avoiding another crisis.

In Switzerland, the Financial Markets Infrastructure Act (FMIA), also known as “FinfraG”, was approved by the Parliament in June 2015 and is expected to come into force during 2017. FinfraG will align the Swiss regime for the regulation of derivatives trading with the G20 standards. Examples include key changes in the infrastructures of the derivatives markets, such as trading platforms and central clearing counterparties and risk mitigation techniques.

Impact on market participants

FinfraG will have an impact to both financial and non- financial counterparties in the derivative’s market.
Participants should put in place new tools and processes, establish robust connectivity between themselves, clearing members, central counterparties, and trade repositories. They will need to adjust legal contracts and collateral management agreements and procedures necessary to meet the new requirements.
The obligations addressed by FinfraG will be considered satisfied if the market participants align with G20 peer legislation which has been recognised as equivalent by FINMA. However, the magnitude of that impact depends at first on the type and then on the size of the counterparty.
There are two different counterparty types under FinfraG. The first type is the financial counterparties like banks, insurance companies and investment firms while the second type is the non-financial counterparties like corporates. Both types are then distinguished between large and small, resulting in four different counterparty classifications. A counterparty is considered large or small depending on whether its gross positions in relevant outstanding OTC derivatives transactions, calculated as an aggregated rolling average over 30 working days, is above or below the threshold set by the Federal Council. Financial counterparties are considered large if their aggregated notional outstanding amount in derivatives transactions in a 30-working-day-rolling position are at or above CHF 8 billion. Non-financial counterparties are large if their aggregated notional outstanding amount in derivatives transactions in a 30-working-day-rolling position are at or above amounts specific to each asset class. More precisely, for credit and equity derivatives the threshold is set to CHF 1.1 billion, while for interest rates, foreign exchange and other derivatives and commodities the threshold is set to CHF 3.3 billion.

FinfraG Obligations at a Glance

The main requirements for market participants in derivatives trading are the following:

FinfraG Obligation

Large Financial Counterparties

Small Financial Counterparties

Large Non-Financial Counterparties

Small Non-Financial Counterparties

Reporting obligation of derivatives transactions

YES

YES

YES

*

Clearing obligation of OTC derivatives

YES

NO

YES

NO

Platform trading obligation

YES

NO

YES

NO

Risk Mitigation Techniques

Timely Confirmation of the contract details

YES

YES

YES

YES

Portfolio Reconciliation

YES

YES

YES

NO

Dispute Resolution Processes

YES

YES

YES

YES

Portfolio Compression

YES

YES

YES

YES

Daily Valuation (MTM)

YES

NO

YES

NO

Margin Requirements

YES

YES

YES

NO

*Reporting does not apply to trades between two NFC-s, but an NFC- may still be required to report trades with a non-Swiss counterparty if the non-Swiss counterparty does not itself report the trade

Planning ahead

There are extensive similarities between the European (EMIR) and Swiss (FinfraG) derivatives reporting. Hence, firms that comply with both regimes should keep a consistent reporting approach and have an efficient technology infrastructure to avoid duplications.
Compliance to FinfraG is mandatory by all firms that fall into the regime’s scope so by firms reviewing their products and measure the magnitude of the effect FinfraG will have on their balance sheet at an early stage will facilitate the compliance process.

 

Andrea Peratitis
Head of Regulatory Reporting - Point Nine Limited

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