Where OTC derivative contracts are not cleared by a central counterparty, counterparties must apply risk mitigation techniques.

Timely confirmation of the terms of the OTC derivative contract

Principle: Any non-cleared OTC derivative contract entered into by counterparties should be confirmed, by electronic means or via other means, as soon as possible after the trade(s) is/are executed. 

Note: In its EMIR Q&A, ESMA has stated that it prefers transactions to be confirmed electronically, if possible.

Objective: To ensure mutual understanding and legal certainty of the terms of the transaction.

Confirmation deadlines: 

  • FC+/FC- and NFC+ must confirm their transaction by D+1 at the latest;
  • NFC- must confirm their transaction by D+2 at the latest.

Note: when a contract is executed after 4pm or when the counterparties are in another time zone, a business day will be added to the regulatory confirmation deadlines detailed above.

Société Générale is required to report to the AMF, each month, the number of OTC derivatives transactions for which the confirmation has not been validated by the counterparty within 5 business days.

 

Portfolio reconciliation

Principle: Counterparties (FC+, FC-, NFC+, NFC-) must reconcile their OTC derivative contract portfolios. This reconciliation of portfolios relates to the key commercial terms that identify each OTC derivative contract (e.g. notional value of the contract, effective date, expected maturity, valuation...). It can be performed by the counterparties or by a qualified third party duly mandated by a counterparty.

Objective: To quickly identify any disagreement regarding the key terms of an OTC derivative contract.

Frequency of reconciliation: This varies depending on the size of the portfolio to be reviewed and the nature of the counterparties. Portfolio reconciliation should be performed as follows: 

CounterpartiesFrequencyPortfolio size
For FC+/FC- and NFC+ Every working dayCounterparties with at least 500 live OTC derivative contracts with each other
Once a weekCounterparties with between 51 and 499 OTC derivative contracts outstanding with each other
Once a quarterCounterparties with 50 or fewer OTC derivative contracts outstanding with each other
For NFC-Once a quarterCounterparties with more than 100 OTC derivative contracts outstanding with each other
Once a yearCounterparties with 100 or fewer OTC derivative contracts outstanding with each other


Terms: The counterparties with one OTC derivative contract agree with each of their counterparties, in writing or by equivalent electronic means, on the terms and conditions under which the portfolios will be reconciled, including the method of reconciliation chosen.

The process of portfolio reconciliation takes place in 3 steps: 

  • A prior agreement between the 2 counterparties on the reconciliation method (unilateral transmission or exchange of portfolio data) and on the selected reconciliation date. 
  • The choice of the reconciliation method
    - If the method chosen is the exchange of portfolio data (in this case the client is considered as the "issuer"), Société Générale makes its portfolio available in TriOptima with Triresolve, an external portfolio reconciliation platform.
    - If the method chosen is the unilateral transmission of portfolio data (in this case the client is considered as the "receiver"), Société Générale makes the portfolio data available on a dedicated web portal called E-reconciliation.
  • Examination of discrepancies: this may involve any difference deemed sufficiently significant by one of the parties. Thus, if one of the differences seems significant enough to us, we will contact you in order to start an analysis of this difference with you by sharing the valuation parameters used. If, after this analysis, it appears that the difference is of a contentious nature, we will enter into a dispute resolution process with you.  

 

Portfolio Compression 

Principle: Counterparties (FC+, FC-, NFC+, NFC-) that have at least 500 outstanding OTC derivative contracts with a counterparty and that are not centrally cleared must have procedures in place that allow them, at regular intervals and at least twice a year, to analyze the possibility of conducting a portfolio compression exercise.

According to the MiFIR regulation, portfolio compression is a “risk mitigation service in which two or more counterparties terminate, in whole or in part, some or all of the derivatives submitted by those counterparties for inclusion in the portfolio compression and replace the terminated derivatives with other derivatives, the combined notional value of which is less than the combined notional value of the terminated derivatives”.

Note: Counterparties may conclude that a portfolio compression exercise is not appropriate. However, they must ensure that they are able to provide a reasonable and valid explanation to their competent authority. 

Objective: To reduce the credit risk of the counterparty.

Terms: there are two options for conducting a compression exercise:

  • Multilateral portfolio compression provided via external platforms (e.g. TriOptima, Quantile...).

Note: Société Générale encourages the multilateral compression option because the efficiency of a compression can increase significantly with the number of participants. 

  • Manual compression of the portfolio in bilateral mode.

Note: If you wish to perform a bilateral compression exercise, we invite you to contact us at the following address: SG.Compression@sgcib.com  

 

The daily valuation 

Principle: Financial counterparties (FC+ and FC-) as well as NFC+ value outstanding contracts on a daily basis at market price (mark-to-market). 

Where market conditions prevent a marking-to-market valuation (e.g. when the market is inactive), a reliable and prudent marking-to-model valuation shall be used.

 

Dispute resolution

Principle: Prior to entering into OTC derivative contracts with each other, counterparties (FC+, FC-, NFC+, NFC-) must have procedures and processes in place in relation to:

  • the identification, recording, and monitoring of disputes relating to the recognition or valuation of the contract and to the exchange of collateral between counterparties. Those procedures shall at least record the length of time for which the dispute remains outstanding, the counterparty and the amount which is disputed;
  • the resolution of disputes in a timely manner with a specific process for those disputes that are not resolved within five business days.

Note: Financial counterparties must report to their competent authority any disputes between counterparties relating to an OTC derivative contract, its valuation or the exchange of collateral for an amount or a value higher than EUR 15,000,000 that has been outstanding for at least 15 business days.

Objective: To prevent the development of unresolved disputes which may expose counterparties to additional risks.

 

Collateral exchange

Principle: In accordance with Article 11(3) of EMIR, financial counterparties (FC+ and FC-) and NFC+ must have risk management procedures that provide for the timely, accurate and appropriately segregated exchange of collateral in respect of non-cleared OTC derivative contracts. 

Objective: To protect a counterparty to a non-centrally cleared OTC derivative contract from the potential risk of default by the other counterparty.

Terms: 

2 types of collateral in the form of margins are required to properly manage the risk to a counterparty to a non-centrally cleared OTC derivative contract:

  • The first type is variation margin, which protects counterparties from exposures related to the current market value of their OTC derivative contracts. 
  • The second type is initial margin, which protects counterparties against potential losses that may result from fluctuations in the market value of the derivatives position that occur between the last exchange of variation margins prior to a counterparty default and the time when the OTC derivative contracts are replaced or the corresponding risk is hedged.

Under Delegated Regulation (EU) 2016/2251, financial counterparties (FC+ and FC-) and NFC+ are therefore required to bilaterally exchange initial and variation margins. 

This Regulation also specifies the methodologies to be used for their calculation, as well as the eligibility and diversification criteria that the collateral must meet.

The collateral exchange requirements are or will be implemented according to the following schedule:

 

Types of counterpartiesInitial Margins (« IM »)Variation Margins (« VM »)
Counterparties belonging to a group whose positions exceed €3,000 billion*.February 4, 2017 
IM - Phase 1
February 4, 2017
Counterparties belonging to a group whose positions exceed €2,250bn*.September 1st,2017
IM - Phase2
March 1st, 2017
Counterparties belonging to a group whose positions exceed €1,500 bn*.September 1st, 2018
IM – Phase 3 
Counterparties belonging to a group whose positions are greater than €750bn*.September 1st, 2019
IM - Phase 4
Counterparties belonging to a group whose positions are greater than €50bn*.September 1, 2021
IM – Phase 5
Counterparties belonging to a group whose positions are greater than €8 billion*.September 1, 2022
IM - Phase 6
Counterparties belonging to a group whose positions are less than €8 billion*.Not applicable

 

Useful links :

Please review the Legal Information, Trading Disclaimer and Risk Disclosures available below.

Legal Information

https://wholesale.banking.societegenerale.com/en/compliance-regulatory-information/useful-information/legal-informations/ 

 

Disclaimer Trading

https://wholesale.banking.societegenerale.com/fr/compliance-regulatory-information/general-disclosures/disclaimer-trading/ 

 

Risk Disclosure

https://wholesale.banking.societegenerale.com/fr/compliance-regulatory-information/market-regulation/risk-disclosure/