VIDEO: Portfolio Reconciliation Requirements

Heather Fritzinger of Chatham Financial discusses the advantages of reconciling a portfolio of derivatives transactions with bank counterparties on a periodic basis. In addition, she explains which parties are required to reconcile trade portfolios under Dodd-Frank and EMIR, and describes how this reconciliation must be properly documented according to protocols published by the International Swaps and Derivatives Association (ISDA). A full transcription of the video is available below.


Video Transcript:
Heather Fritzinger: The frequency of portfolio reconciliation varies by jurisdiction, and depends on two factors; entity classification and the number of trades between the counter parties. Under Dodd-Frank, swap dealers must make reasonable efforts to engage in portfolio reconciliation with their end-user counter parties. If those counter parties have less than 100 trades with each other, the frequency is annual, and if they have more than 100 trades, it goes to quarterly. It’s important to keep in mind that end-users do not have to engage in portfolio reconciliation with their swap dealers. They can decline to do so. It’s a bit different under EMIR. Any entity that is domiciled in the EU, or an entity that faces a bank that’s domiciled in the EU must engage in portfolio reconciliation. Again, that’s based on entity classification. Under EMIR, there are FCs, NFC pluses, and NFC minuses. NFC minuses only have to engage in portfolio reconciliation once per year if they have less than 100 trades. If they have more than 100 trades, it goes to quarterly. For NFC pluses and FCs, the requirement is at a minimum quarterly, and then increases in frequency the more trades there are.

The portfolio reconciliation requirement under EMIR is different than that of EMIR reporting, but there is an obligation for FCs to report information to their national regulator if a dispute remains outstanding on a trade for more than 15 business days, and if that dispute is greater than 15 million Euros. Under both Dodd-Frank and EMIR, counter parties have the option of either exchanging data with each other, or simply reviewing data that they receive from one party. It’s important to keep in mind that under EMIR, if you elect to be a data-receiving entity and review the information that is sent from your bank, you have five business days within which to respond, otherwise, the information is deemed affirmed. Dodd-Frank and EMIR regulations require that the parties put in place documentation to govern the portfolio reconciliation process and dispute resolution procedures. An efficient way to satisfy those documentation requirements are via the protocols published by ISDA. Under Dodd-Frank, this could be satisfied using the ISDA March 2013 Dodd- Frank protocol, and under EMIR, that protocol is the ISDA 2013 EMIR port-rec and dispute resolution protocol. In general, portfolio reconciliation can be a good exercise, especially if you have a large portfolio of trades. Despite having correct trade documentation in place at the time of execution, minor discrepancies may arise in the portfolio reconciliation process. This can help you avoid surprises in the event you wish to modify a trade or unwind it early.