10 myths around EMIR, Dodd-Frank Act, CCP and central clearing of OTC derivatives


Now, at the beginning of 2013, central clearing of OTC derivatives is not a new topic anymore. At the sell-side central clearing has already been a common practice since more than 10 years. EMIR and the Dodd-Frank Act entered into force in 2012 already and will ultimately impose mandatory central clearing for all financial institutions and some non-financial institutions as well. Institutions established new clearing broker divisions to benefit from the new business of client clearing while buy-side institutions launched projects for selecting and onboarding clearing brokers. Clearing houses have been busy clearing contracts with trillions of USD notional. So everything should be clear by now and everybody should be ready to go.

Looking closer however still reveals a big lack of clarity, leading to some strange myths which we came across during our activities in this space.

The origination of those myths is not caused by a lack of data, as the world wide web offers lots of information about EMIR, the Dodd Frank Act, central clearing of OTC derivatives, the reporting requirement and leading transaction repositories. Most of that information is however very high level, outdated or incomplete, thus sometimes wrong and is therefore causing confusion and contributes to the spreading of myths.

At this point we felt that it is important to disprove these myths, as some of them could really be troublesome for financial institutions around the world.

These are the 10 most common myths we came across:

1. Achieving compliance just means selecting a clearing broker
2. When we are compliant with EMIR, we are also compliant with DFA
3. Let’s not do backloading, it has an impact on P&L
4. I only need one clearing broker, that’s easy!
5. Only centrally cleared deals have to be reported to transaction repositories
6. Only new deals affect capital charges
7. Why should I clear now, nobody clears
8. EMIR is a standalone regulation and done by ESMA
9. EMIR is about clearing, so let’s just not do any IRS and CDS and we are fine
10. CCP has no impact on my business model, it is a pure back office topic

Given the huge impact on the business model and processes across almost all areas within financial institutions, any project failure may have devastating results. Therefore initiatives to comply with EMIR and the Dodd-Frank Act are generally marked as high-risk projects.

While our associated whitepaper focuses on the 10 most common myths, the devil really lies in the details and each financial institutions situation is rather unique. It will require expertise, experience and a dedicated team spanned across all business functions within an institution to not just enable compliance, but to establish a sustainable business model and viable operations.

By sharing our experience from advising and assisting clients in this area for years and by disproving those 10 most common myths, we hope that we are able to contribute to the success of your initiatives.

Please feel free to join us at FOXNET, our online community on LinkedIn and Xing, to discuss the content of this paper with us and other experts.