Regulatory Compliance

Regulatory scrutiny increased significantly and companies must make sure they remain compliant and in control. These set of rules are introduced in order to improve the functioning of financial markets by increasing transparency and efficiency.

Where regulators primarily focused on financial companies such as banks and financial institutions, the latest set of regulations also affects non-financial companies (NFC) like commodity traders and processors. To comply with specific regulations, (derivative) trades need to be stored, aggregated and tracked against thresholds.

With that being the core functionality of TRADESPARENT, we have developed a Regulatory Edition to solve your compliance concerns. TRADESPARENT is recognized as the leading Risk Management Solution for commodity-related industries. The solution solves monitoring and reporting needs for internal stakeholders and provides a platform for the ‘one source of the truth’ on Volume and Performance risk matters. With our Regulatory Add On Edition we serve you with compliance and external reporting matters as well.

Due to the flexibility of the solution, future changes in regulation will easily be incorporated into the system. In any case we have you covered for your January 3, 2018 deadline with the European Regulatory update.  The Regulators don’t stop and niether do we. Together with our partners specialized in regulatory and compliance matters we continue to stay one step ahead as does our Solution.

MiFID II
EMIR-FMIA
Other

MiFID II

Market in Financial Instrument Directive (MiFID) is the European legislation that regulates firms who provide services to clients linked to financial instruments and the venues where those instruments are traded on. MiFID was applied in November 2007, but has been revised to improve the functioning of the financial markets in light of the financial crisis and to strengthen investor protection.

Effective 3 January 2018, this new regulation (known as MiFID II) will have big implications for companies trading commodity derivatives. The MiFID II framework significantly narrows exemptions currently available to commodity derivative traders. Under MiFID I, companies are exempt from the regulation when the trading in commodity derivatives is considered an ancillary activity to the main activity. This exemption is intended to cover commercial users and producers of commodities.

Ancillary Activity

The criteria for determining when the activity was ‘ancillary’ to the main business traditionally had no quantitative criteria. In the absence of quantitative criteria, market participants did not typically calculate the scale of their speculative activities in specific instruments with regard to their main business. Moreover, under MiFID I there were no requirements for market participants to regularly notify authorities of the use of this exemption.

The above-mentioned shortcoming of absent quantitative criteria is rectified by the new legislation of MiFID II. This is the first key regulatory switch when it comes to the new legal environment for commodity markets. The second legislative modification is the need for annual notification of financial authorities by parties making use of the ancillary activity exemption.

Three new quantitative tests are introduced for the determination whether an entity qualifies for the MiFID II regulation exemption:

  • Market Share test
  • Main Business test
  • Capital Employed test

With TRADESPARENT you can actively monitor the outcome of these tests making sure your entities will qualify for exemption if deemed necessary.

Position limit monitoring

MiFID II can be regarded as a ground-breaking piece of legislation. This is also the case with respect to position limits, as this regulation for the first time imposes mandatory restrictions on the size of commercial trading. The legislation is comparable to the US position limit regime, however the EU position limit architecture is far more extensive. Position limits are the most prominent MiFID II implication, while compliance is required of all persons, regardless if they are exempt from the scope of MiFID II under the ancillary activity exemption.

The compliance with the position limits are considered a challenging task for the industry while it will require robust internal procedures and reporting lines as firms will need to monitor aggregated positions across the globe and net any economically equivalent position in real time. Position limits are applicable not only at the end of each trading day, but also throughout the trading day. Positions held which are objectively measurable as risk reducing (i.e. hedging) will not count towards the limit.  How can TRADEPARENT help in your MiFID II compliance?

TRADESPARENT Right to the Point

  • Trade tagging
  • Real-time position limit monitoring
  • Spot and Forward position limits
  • Deliverable Supply & Open Interest tracking
  • Connection to all exchanges and systems
  • Advanced historical limit analysis
  • Drill down to individual trade
  • KPI dashboard
  • E-mail notification
  • Extensive governance framework
  • Ancillary Activity test
  • Market Share test
  • Main Business test
  • Capital Employed test

EMIR-FMIA

The European Market Infrastructure Regulation (EMIR) contains legislation for over-the-counter (OTC) derivatives, central counterparties and trade repositories. It was introduced by the EU to reduce systemic, counterparty and operational risk, and increase transparency in the OTC derivatives market.

The regulation establishes common rules for central counterparties, which interpose themselves between two counterparties to serve as the central point of each trade. Moreover, EMIR requires the reporting of all derivatives, whether OTC or exchange traded, to a trade repository. Not only commodity derivatives are covered under this regulation, but also interest rate, foreign exchange and credit derivatives are in scope. In general, it outlines three sets of obligations, including the clearing, reporting and risk mitigation of applicable products.

In June 2015, the parliament in Switzerland approved the Swiss answer to EMIR: the Financial Markets Infrastructure Act (FMIA, in German also known as FinfraG).  The Swiss requirements on derivatives trading are to a large extent congruent with the EU regulatory framework with minor deviations where the legislator considers it appropriate.

EMIR and FMIA drive derivative market participants to clear some of their trades with the central counterparties, provided the relevant deadlines are met. The key parameter with respect to non-financial companies (NFC) is the clearing threshold. NFCs are not subject to the requirements of EMIR and FMIA regarding central clearing and the exchange of collateral on non-centrally cleared transactions, provided that they are not in breach of the predefined thresholds. How can TRADESPARENT help in your EMIR/FMIA compliance?

TRADESPARENT Right to the Point

  • Trade tagging
  • Handling of OTC and exchange traded derivatives
  • Reference and Master Data Management
  • Reporting to Trade Repository
  • MtM and Notional Value
  • Threshold monitoring
  • Email notifications
  • Multi-currency (including CHF)
  • Stress testing

Other

TRADESPARENT not only solves compliance issues for EU regulations, but is also able to create other formats for regulators in the US. The Regulatory Edition however only includes derivative contracts and hence cannot comply with certain regulations which need inclusion of cash positions. As described earlier MiFID II, EMIR and FMIA are regulations focused on derivative contracts and are included in that particular Edition. With an installation of the Enterprise Edition, cash contracts are also processed and included in the dashboard. This makes reporting on other regulations possible. We currently have two reports standard available.

  • CFTC form 204
  • ICE Annex 12.C
  • Control board

    TRADESPARENT has a comprehensive control board, allowing you to freely configure the application in the way you want. From the configuration of imports to the definition of VaR portfolio´s and setting of limits, full flexibility is key and you are in control of the application.

  • Counterparty Risk

    Screening, classifying and tracking of counterparty exposures. Counterparty risk provides insight on volumetric positions, Mark-to-Market and settlement. Counterparties can be assigned to a personal watchlist.

  • Customisable homepage

    Provides the possibility to design personal, comprehensive risk & margin homepages to support individual preferences. Personal views can be easily built by making an own selection of preconfigured widgets for positions, market prices, Mark to Market, Trade P&L, VAR and limits. Thanks to these tools, TRADESPARENT delivers even faster awareness of exposures and profitability.

  • Drawdown

    Tracking the decline in a P&L (drawdown) supports Value at Risk and Stress measurements. The user sets the threshold for alert and strategy re-think. TRADESPARENT calculates the drop from the last cumulative P&L peak and displays the results in graphs and tables.

  • Forex

    A multicurrency platform, capable to work with contracts in all different currencies and units of measure. Shows contracts in both their original currency, as well in the client’s denominated standard currency, including forex hedges. Is able to show P&L’s split up in the results of FX- and commodity price movements, to keep track of detailed P&L’s per area of responsibility.

  • Forward Margins

    The TRADESPARENT Processing model has the unique feature to present gross processing margins based on variable cost and revenues. Profit margins can be visualised 18 months forward, giving you the chance to act early to optimise returns or re-think strategy.

  • Limit Structures

    Define limit structures around positions, VaR, Drawdown and stress. These limits can be set on a variety of dimensions, like product, product group, entity, country or trade book. Thanks to the display of actuals versus limits you will have timely notification for accurate action to manage risks and results.

  • Mark-to-Budget

    Compare current performance versus predefined budget numbers. Not only on an aggregate level, but on a contract-by-contract level as well. Mark-to-Budget uses your budgeted procurement and sales prices as reference and shows the actual performance against budget.

  • Mark-to-Market

    Obtain a better understanding of the performance of each contract against actual market prices at the relevant contract position. The available MtM information can be easily filtered and viewed on a variety of dimensions (entity, subsidiary, product, trade book, etcetera).

  • Positions

    Reporting of gross and net positions per product, for both trading as well as processing environments. The Insight module shows positions against planning, which provides processors direct insight in volumes to be procured, sold or hedged.

  • Price Catalogue

    The Price Catalogue collects and stores all historical, forward and reference prices by location and priority. It provides the ability to construct a harmonised array of market prices from farm to port or factory-gate.

  • Stress Testing

    Create self-defined stress portfolios, which can be analysed in a number of ways. These include individual commodity trends and market convergence.

  • Trade P&L

    Track your company’s performance and manage its results thanks to daily insight in P&L. TRADESPARENT combines unrealised (Mark-to-Market valuations of open contracts) with the realised P&L. This provides insight in P&L development, split up in organisational units, products, product groups, trade books/business units, plants or any other desired dimension.

  • Value at Risk

    Calculate Value at Risk values based on 3 different calculation models: Historical simulation, Monte Carlo and Parametric. Value at Risk portfolios can be easily configured for organisations, trade books and product groups.

  • Control board
  • Counterparty Risk
  • Customisable homepage
  • Drawdown
  • Forex
  • Forward Margins
  • Limit Structures
  • Mark-to-Budget
  • Mark-to-Market
  • Positions
  • Price Catalogue
  • Stress Testing
  • Trade P&L
  • Value at Risk
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