EMIR requires counterparties to apply stringent risk mitigation processes and techniques for uncleared OTC derivative trades: new confirmation deadlines, execution of portfolio reconciliation and compression, dispute resolution procedures, daily mark-to-market valuation, initial and variation margining, capital requirements.
Introduction to Risk Mitigation
Counterparties must establish ‘appropriate procedures and arrangements’ to ensure the timely confirmation of the terms of all non-cleared OTC derivative contracts, within specified deadlines. These confirmation deadlines depend on the class of derivative you are trading and your classification (FC, NFC+ or NFC-) as per the table below. All counterparties should use electronic means (platforms or systems but not emails) where possible.
Non-Financial Counterparties (NFC)
Financial Counterparties (FC) and Non-Financial Counterparties above the clearing thresholds (NFC+)
Portfolio reconciliation and dispute resolution
When you enter into any new OTC derivative contract with an HSBC entity established in the European Economic Area (EEA) (the relevant HSBC entity being referred to as “HSBC”), you will have to agree in writing on the arrangements under which portfolios will be reconciled and under which disputes will be identified, monitored and resolved to be able to continue trading in-scope products with HSBC.
The frequency of reconciliation depends on the counterparty classification and the volume of outstanding OTC contracts with HSBC as set out in the table below.
You are an FC or an NFC+
500 or more contracts with HSBC
Each business day
51-499 contracts with HSBC
Once per week
50 or fewer contracts with HSBC
Once per quarter
You are an NFC-
More than 100 contracts with HSBC
Once per quarter
100 or fewer contracts with HSBC
Once per year
In accordance with the requirements of EMIR, HSBC requests its EEA and non-EEA clients to have agreed procedures and processes to identify, record and monitor disputes relating to contract recognition or valuation and exchange of collateral; and to resolve disputes in a timely manner to be able to continue trading.
In the event that you have not agreed portfolio reconciliation and dispute resolution with us, please download and complete HSBC's HSBC Bank plc’s EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Agreement or HSBC UK’s EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Agreement. Please scan the entire document and email it to email@example.com.
Portfolio compression is recognised under EMIR as a risk mitigation technique for the purposes of reducing counterparty credit risk. Whether counterparties are required to engage in such a portfolio compression exercise depends on circumstances such as counterparty classification and number of Over The Counter (OTC) derivative contracts outstanding.
Benefits from performing portfolio compression exercises include a reduction in the number of trades and a reduction in exposure to specific counterparties.
EMIR requires both Non-Financial Counterparties (NFCs) and Financial Counterparties (FCs) to have in place a procedure to perform, at least twice a year, a process to analyse the possibility to conduct a portfolio compression exercise. In order to analyse such possibility, HSBC will, at least twice a year:
- Determine whether counterparties are eligible for such an exercise, i.e. do the counterparties have 500 or more OTC derivatives contracts outstanding with HSBC that are not centrally cleared; and
- Analyse portfolios in order to decide whether such OTC derivatives contracts can be compressed.
To comply with above, HSBC is following the EMIR Portfolio Compression market practice guidance provided by the International Swaps and Derivatives Association (ISDA) as published on 18 October 2013.
HSBC will be using Tri Reduce for the purposes of meeting the multilateral portfolio compression requirements.
If you would like further information or would like to undertake a portfolio compression exercise, please speak to your usual HSBC representative.
FCs and NFC+s must mark-to-market on a daily basis the value of outstanding contracts. Mark-to-model can be used in certain circumstances (e.g. inactive markets).
Initial and variation margining
When contracting a product that is not subject to the clearing obligation, FCs and NFC+s are expected to have to apply initial and variation margining requirements to all uncleared derivative contracts.
Financial counterparties have to hold an appropriate and proportionate amount of capital to manage risk not covered by exchange of collateral when trading an uncleared product.
Find out more about EMIR
For more information, please contact your HSBC representative.