While some corporates are required to report on mark-to-market valuations of positions and on collateral value, collateral management could benefit those who aren't required to comply with EMIR.

Both the European Market Infrastructure Regulation (EMIR) and the Markets in Financial Instruments Directive (MiFID) are introducing changes to how over-the-counter (OTC) derivatives are reported and cleared, in order to reduce risk associated with them.

EMIR came into force during 2013 and 2014. According to the Financial Conduct Authority, it requires entities using derivative contracts to:

• report each derivative contract to a trade repository;
• implement new risk management standards for all bilateral over-the-counter (OTC) derivatives i.e. trades that are not cleared by a CCP; and
• clear, via a CCP, those OTC derivatives subject to a mandatory clearing obligation.

This means that some companies that use OTC derivatives are having to improve and build their collateral management functions, while firms are also more likely to choose collateralised trading over non-collateralised (because the latter could leave the firm exposed to a counterparty default). Bilgehan Aydin, head of collateral solutions at Commerzbank told FX-MM: “The regulation…asks you to clear eligible OTC transactions and collateralise any other bilateral derivatives which cannot be cleared.”

Since 11 August 2014, financial counterparties, such as banks, brokers and investment managers, have to provide daily reports on mark-to-market valuations of positions and on collateral value. Certain non-financial counterparties (NFCs) also have to comply – but only if they exceed one of the following three criteria:

1. €1 billion in gross notional value for OTC credit and equity derivative contracts,
2. €3 billion in gross notional value for interest rate and FX derivative contracts, and/or
3. €3 billion in gross notional value for commodities and others.

Contracts used for commercial hedging purposes aren't included in the three thresholds (although they will have to be cleared and reported if a threshold is met). If an NFC meets one of the criteria, they are known as an NFC+ and have to comply with EMIR rules.

Corporates who don't meet the criteria are called NFC- and they are not required to comply with the regulation. Some of these, particularly those with higher ratings, are nonetheless looking into ways to mitigate counterparty risk and strengthen their collateral management. Clement Phelipeau, product manager, derivatives and collateral management services at Societe Generale Securities Services, told FX-MM: “Corporates with a rating higher than their counterparties are finding that exchanging collateral is an efficient means to mitigate credit risk.”

The management and implementation of collateral management practices is therefore likely to be an area that more corporates will consider, even if they aren't required to comply with EMIR.