BBA Rides to the Rescue over EMIR Counterparty Classifications

On 19 March 2013, the British Bankers’ Association (BBA) published a press release regarding the development of a methodology for the consistent classification of counterparties as either financial counterparties (FCs) or non-financial counterparties (NFCs) under EMIR.

The BBA initiative maps industry classification codes (SIC 2007, NACE 2 and NAICS 2012) to the EMIR definitions of FC and NFC in order to produce a set of industry code-based mappings in the form of an Excel workbook.  A report has also been produced which provides an overview, rationale and user guide for the mappings, describing assumptions and approaches to adopt so as to promote consistency and a methodology for dealing with outliers such as holding companies, venture capital funds and securitisation vehicles.

The BBA proposes a two-stage solution to the issue of EMIR client classification in order to strike a balance between practical implementation and the reduction of legal uncertainty.  The first stage involves a data-driven counterparty classification based on the mappings.  This results in a counterparty classification which has either a very high-, or a lesser-, degree of confidence.  The second stage involves firms communicating the classification to each counterparty, asking for a response if the counterparty does notagree with the classification.  Subsequently, normal on-boarding or documentation change processes should be followed to ensure that legal agreements are aligned with counterparty status.  The BBA even goes as far as providing a standard form template letter which can be used to notify clients of their proposed classification.

The report also discusses tactical versus strategic solutions to the question of EMIR counterparty classification, highlighting three possible approaches based on various levels of data-sharing among firms, namely:

  • sharing industry code mapping tables only;
  • sharing industry code mapping tables and classification statistics – the BBA believes that this would be the minimum level of data-sharing necessary in order to maintain the confidence of market participants and regulators in the mappings; and
  • sharing industry code mappings and counterparty-level classifications – the BBA considers this to be the most ambitious approach to data sharing which would entail the establishment of an industry-wide utility whereby actual classifications could be shared at legal entity level.  Not only would this increase legal certainty, but it would also reduce duplicate and redundant communication with clients.  However, it is recognised that there would be a number of hurdles to be overcome before this option becomes viable, including issues around client confidentiality and funding.

The BBA envisages that this initiative would dovetail with, rather than replace, the recently published ISDA 2013 EMIR NFC Representation Protocol, facilitating EMIR classification in circumstances where counterparties have not adhered to the terms of the Protocol.  Either way, understanding whether a counterparty is an FC or an NFC, and ultimately whether it is an NFC+ or an NFC- (although the BBA work does not directly seek to do this) is the first step in complying with many of the provisions of EMIR, such as the clearing and reporting obligations as well as risk mitigation techniques (including the timely confirmation requirements which came into force on 15 March 2013).  As a pre-requisite to trading in an EMIR environment, the issue is relevant right now and should be at the forefront of the minds of the dealer community.  The BBA mapping is a fantastic tool which will provide practical assistance to market participants in this area.  Although it is only accessible to BBA members, anyone who can should take a look at this work.

This piece is cross-posted from Regulatory Reform with permission.