Financial Market Infrastructure Act also concerns SMEs
The title of the Financial Market Infrastructure Act (FMIA), which became effective on January 1, 2016, gives rise to the assumption that we are dealing with a statute that is only relevant for the classic financial market participants. This conclusion is incorrect. Indeed the main focus of the new legislation is set on stock exchanges, central counterparties, payment systems and other financial market infrastructures. However, to the extent that the new statute regulates derivatives trading, it also concerns SMEs outside of the financial sector.
Action is already required for each company today
Derivatives transactions are not only made by classic financial market participants or large enterprises, but can also be relevant in the practice of SMEs. It is for example conceivable that a SME concludes a swap transaction during the preliminary stages of a credit agreement for the purpose of hedging interest rate risks or in connection with export transactions in order to hedge currency risks.
Even though generous transitional rules are provided to some extent, each SME must already verify today, whether or not it conducts derivatives transactions. If no derivatives transactions are conducted, this is to be held in a written resolution.
SMEs which conduct derivatives transactions, or wish to do so, must document in writing the procedure by which they intend to ensure the implementation of the duties according to the FMIA in connection with derivatives trading (for example in an internal directive).
As of the year 2017, the external auditors of the SME will verify, whether the duties with regard to derivatives trading are complied with. If the auditors determine any violations of the regulations for derivatives trading, they must set a time period for the correction by the entity. In the case that the violations are not remedied within the time period, or are repeated, the auditors must report the violations to the Federal Department of Finance FDF.
The question of whether the verification is also required in the case that a SME waived the audit (opting-out), is not explicitly addressed. Because Art. 114 of the Financial Market Infrastructure Ordinance (FMIO) refers to the audit according to the Code of Obligations, there are strong arguments from the point of view of the authors, that in the case of an opting-out of the audit, there is also no duty of verification under the FMIA.
New regulations for derivatives transactions
The FMIA essentially provides four duties which may also concern SMEs:
Clearing duty: This means the duty to settle derivatives transactions via a central counterparty (CCP). This duty does not include all derivatives, but rather only the derivatives categories defined by FINMA. Particularly only sufficiently standardized derivatives are included, which among other things, depends on the availability of customary documents and conditions.
Risk mitigation duty for non-standardized derivatives: Processing derivatives transactions via a central counterparty is only possible for standardized derivatives. As many derivatives transactions are not accessible to standardization, the new regulations provide for various risk mitigation duties. These include providing collateral, the ongoing val-uation at market price as well as operational risk mitigation.
Platform trading duty: Derivatives transactions shall be concluded via stock exchanges or trading platforms. Again not all derivatives are included, but rather only the categories as defined by FINMA with sufficient standardization.
Disclosure of OTC derivatives transactions: The new regulations shall create transparency with regard to the proceedings and participants of the derivatives market. Therefore, the market participants are obligated to report the conclusion resp. the settlement of derivatives transactions to a transaction register, which is a new type of financial market infrastructure.
The one concluding derivatives transactions must adapt to new requirements
The FMIA generally applies to all financial and non-financial counterparties which have their place of business in Switzerland and trade with derivatives. Already one derivatives transaction can trigger the respective duties. Principally excluded are structured products, securities lending or certain derivatives transactions relating to goods that are delivered physically, as well as electricity and gas.
Financial counterparties are, among others, banks, securities dealers or funds. Companies not operating in the financial sector are considered as non-financial counterparties.
A distinction is made between small and large counterparties. Whether a counterparty is small or large depends on whether the average gross positions of pending derivatives transactions exceed certain threshold values.
Most SMEs may qualify as a small non-financial counterparty. The FMIA provides numerous simplifications and exceptions with regard to these market participants. Thus, neither the clearing duty nor the platform trading duty is applicable. The transparency duty applies. This duty is however, in the case that the counterparty is a bank or a securities dealer, to be fulfilled by the bank or securities dealer. The risk mitigation duty is only applicable to a limited extent. Thus, the statute does not require small non-financial counterparties to exchange collateral or to value ongoing deals. However, it remains to be seen if, due to operational reasons and in order to reduce the risk, the banks and securities dealers will nevertheless apply some of these rules to SMEs in practice. SMEs must therefore be prepared for the possibility that administrative efforts and costs may also increase for them.