Trade Repository Reporting and Risk Mitigation Requirements for Over-the-Counter (OTC) Derivatives Contracts

Trade Confirmation 4. Banks are required to confirm the material terms of a non-centrally cleared over-the-counter derivatives transaction as soon as practicable after execution of the transaction, including a new transaction resulting from novation. Banks are also required to adopt policies and procedures to confirm material changes to the legal terms of, or rights and obligations under, the non-centrally cleared over-the-counter derivatives contract, such as those relating to termination prior to scheduled maturity date, assignment, amendment or extinguishing of rights or obligations. 5. The material terms confirmed should include terms necessary to promote legal certainty to the non-centrally cleared over-the-counter derivatives transaction, including incorporating by reference, the trading relationship documentation or any other documents that govern or otherwise form part of the trading relationship documentation. 6. The confirmation should be executed in writing through: A. Non-rewritable, non-erasable automated methods where it is reasonably practicable for the bank to do so; B. Manual means; or C. Other non-rewritable, non-erasable electronic means (such as email). 7. Banks are required to implement appropriate policies and procedures to ensure a two-way confirmation is executed with a counterparty (financial and non-financial). 8. For non-centrally cleared over-the-counter derivatives transactions concluded after the bank’s dealing system cut off time, or with a counterparty located in a different time zone, banks are required to execute the confirmation as soon as practicable. 4.1.3 Valuation 9. Banks are required to agree with their counterparties the process for determining the values of the non-centrally cleared over-the-counter derivatives transactions in a predictable and objective manner. The process should cover the entire duration of the non-centrally cleared over the-counter derivatives transaction, at any time from the execution of the contract to the termination, maturity, or expiration thereof. All agreements on valuation process should be documented in the trading relationship documentation or trade confirmation and may include matters such as the approach to valuation, the key parameters and the data sources for such parameters. 10. The valuation determinations should be based on economically similar transactions or other objective criteria. Banks should be able to compute the valuation internally and be able to corroborate any valuations done by their counterparts or third parties. Where a bank uses a proprietary valuation model, it must use a model employing valuation methodologies with mainstream acceptance. If new methodologies are used, these should have a sound theoretical basis and the bank will need to justify their use, e.g. by showing that the new methodology addresses a limitation of an existing methodology or improves the reliability of the valuation. 11. Banks are required to perform periodic review of the agreed upon valuation process to take into account any changes in market conditions. Where changes are made as a result of the review, the relevant documentation must be updated to reflect such changes. 12. Banks are required to agree on and document: A. The alternative process or approach by which the bank and its counterparty will determine the value of a non-centrally cleared over-the counter derivatives transaction in the event of the unavailability, or other failure, of any inputs required to value the transaction; B. Any changes or procedures for modifying the valuation process at any time so long as the agreements remain consistent with the applicable law; and C. How a dispute on valuation, if it arises, should be resolved.