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Template:Emir hedging exemption: Difference between revisions
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Now this seems squarely to capture the derivative activity of a [[limited recourse]] repackaging SPV, which is entering derivatives to pass the cashflow of an asset, and receiving a cashflow to pay down a note. Even if you muff up the structuring, the “limited recourse” nature of an SPV forces a careful observer to the conclusion that an SPV who transacts derivatives in this way is “objectively measurably reducing risks directly relating it its commercial activity” — it is eliminating them in point of fact — and given the underlying security structure of such a deal (where the SPV secures its rights to the asset whose cashflow it is manufacturing in favour of the [[dealer]] to whom it is manufacturing that income stream) requiring the SPV to also post collateral ''as a credit mitigant'' makes no sense at all. There is no [[credit risk]]. The asset is the perfect delta-one hedge. | Now this seems squarely to capture the derivative activity of a [[limited recourse]] repackaging SPV, which is entering derivatives to pass the cashflow of an asset, and receiving a cashflow to pay down a note. Even if you muff up the structuring, the “limited recourse” nature of an SPV forces a careful observer to the conclusion that an SPV who transacts derivatives in this way is “objectively measurably reducing risks directly relating it its commercial activity” — it is eliminating them in point of fact — and given the underlying security structure of such a deal (where the SPV secures its rights to the asset whose cashflow it is manufacturing in favour of the [[dealer]] to whom it is manufacturing that income stream) requiring the SPV to also post collateral ''as a credit mitigant'' makes no sense at all. There is no [[credit risk]]. The asset is the perfect delta-one hedge. | ||
Nevertheless, this must have seemed too easy for some of the more curmudgeonly compliance professionals on the continent, and at the time of the [[EMIR refit]] the question arose as to whether this would cover SPVs (such as [[repackaging | Nevertheless, this must have seemed too easy for some of the more curmudgeonly compliance professionals on the continent, and at the time of the [[EMIR refit]] the question arose as to whether this would cover SPVs (such as [[repackaging]] vehicles whose principal activity is to deal in financial instruments. The ESMA Q&A<ref>Which you can find [https://www.esma.europa.eu/sites/default/files/library/esma70-1861941480-52_qa_on_emir_implementation.pdf here].</ref> posed, on page 28, this question: | ||
{{quote|Can non-financial counterparties (NFCs) whose core activity is to buy, sell or own financial instruments, benefit from the hedging exemption when using OTC derivative contracts to hedge certain risks, for example risks arising from the potential indirect impact on the value of assets the NFC buys, sells or owns resulting from the fluctuations of interest rates, inflation rates, foreign exchange rates or credit risk?}} | {{quote|Can non-financial counterparties (NFCs) whose core activity is to buy, sell or own financial instruments, benefit from the hedging exemption when using OTC derivative contracts to hedge certain risks, for example risks arising from the potential indirect impact on the value of assets the NFC buys, sells or owns resulting from the fluctuations of interest rates, inflation rates, foreign exchange rates or credit risk?}} | ||