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Risk mitigation

For derivatives that are not subject to clearing obligations, and therefore are not settled centrally, EMIR prescribes stricter requirements for risk management. These requirements have been in place since March and September 2014 respectively and include an immediate electronic confirmation of the applicable when concluding an OTC derivatives transaction. The parties to an OTC derivative contract are additionally required under EMIR to conduct a portfolio reconciliation at regular intervals. The required frequency of the checks is dependent on the quantity of outstanding OTC derivative contracts as well as whether the counterparty is a financial or a non-financial counterparty. In addition for counterparties between whom 500 or more OTC transactions are still open, conducting of a portfolio compression shall be mandatory. This aim of this is to reduce the risk of default. In the event that a portfolio compression is not conducted, this is required to be explained to the Financial Market Authority. EMIR also prescribes a daily assessment of open OTC derivative contracts by financial and non-financial counterparties that exceed the clearing threshold. Finally the implementation of dispute resolution procedures between counterparties to an OTC derivative contract are also prescribed.

From September 2016 there will also be a compulsory exchange of collateral between counterparties for OTC derivative contracts. This requirement also includes exchanging both initial and variation margins.