Guide to Valuation Reporting under EMIR

Financial counterparties and non-financial counterparties shall mark-to-market on a daily basis the value of outstanding contracts. Thus, the mark to market value should represent the total value of the contract, rather than a daily change in the valuation of the contract. Where market conditions prevent marking-to-market, the reliable and prudent marking-to model shall be used. On the Valuation Type field (Table 1, Field 20), counterparties should Indicate whether the valuation was performed mark to market, mark to model or provided by the CCP.

• M = Mark-to-market
• O = Mark-to-model
• C = CCP’s valuation

Cleared Contracts

For cleared trades, it was proposed that the calculation should be based on the CCP’s settlement price. In regards to futures and options, it was proposed that the value should be calculated using the size of the contract and the current market price (or model price, when appropriate). ESMA recognizes that futures and a great part of options will be cleared and thus valued by the CCPs.

CCP settlement price * Quantity * Multiplier = Value of contract

Non – Cleared contracts

For contracts not cleared by a CCP the counterparties should report valuations performed in accordance with the methodology defined in International Financial Reporting Standard 13 Fair Value Measurement as adopted by the Union.

Example

For CFDs, Forwards, Forward Rate Agreements, Swaps and other derivative types, it was proposed that the value reported should represent the replacement cost of the contract, taking into account the delivery of the underlying. For a majority of these products, the initial value would be typically close to zero, when conducted at market rates. Subsequent values would then be positive if the value of the trade had moved in favour of the reporting counterparty since execution and negative if it had moved against the reporting counterparty.

Under this approach, the value reported by the first counterparty should be approximately equal to the value reported by the second counterparty multiplied by minus one, with any differences being attributable to differences in the specific valuation methodology. According to the feedback received for populating the fields relevant for valuations, it would be too restrictive to prescribe specific methods of calculating the value of a derivative contract.

However, a number of respondents commented that because there is a general obligation for both counterparties to trade to reconcile their portfolio according to Article 11 of EMIR, ESMA should propose a consistent approach to the valuations already being performed through the portfolio reconciliation process. Many market participants provide valuations in accordance with the ‘fair value for the OTC derivatives calculated under international accounting principles’ or more commonly known as the ‘fair values’. ESMA agrees that it would be appropriate to adopt a valuation approach for EMIR that is already widely used and understood by the market, therefore for contracts not cleared by a CCP, the valuation of the contract shall be performed in accordance with the methodology defined in International Financial Reporting Standard 13, Fair Value Measurement.

IFRS 13: Fair Value Measurement

Example