Mandatory clearing on OTC derivative contracts along with the frontloading requirement deserve particular interest in the following months.
Actions to be scheduled cover:
- analysing portfolios to identify contracts potentially subject to this requirement (taking account of their counterparties' statuses),
- carrying out the necessary calculations associated with the use of thresholds,
- examinations whether the intragroup exemption from mandatory clearing could be applied under circumstances and whether its use is adequate to the company's business model,
- communications between counterparties whether they are subject to the mandatory clearing and the to the frontloading requirement,
- providing appropriate representations,
- amendments to the documentation of OTC derivatives contracts,
- pricing models' adaptations, pricing recalculations to include the price of the frontloading in the contracts,
- implementing necessary arrangements for the frontloading to take place,
- making relevant changes to systems, controls and internal procedures to reflect these determinations and representations.
If the above analyses show the counterparty is within the scope of application of mandatory clearing, and, potentially, of the frontloading requirement, it will be necessary to arrange for the necessary clearing relationships.
The above process will have the iterative character, first come the IRS derivatives but the potential scope is much more extensive.
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