Discount factor and EMIR: Difference between pages

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''Financial maths.''
''Financial markets - regulation - infrastructure.''


'''1.'''
The European Market Infrastructure Regulation (EMIR) became law within the European Union in 2012, although certain of its requirements came into force only after a period of delay.


(DF).
The objective of EMIR is to reduce the risks posed to financial systems from the vast web of [[over the counter]] (OTC) derivative transactions and the large contingent credit exposures that may arise as a consequence.


A discount factor is a number less than one, that we multiply a single future cash flow by, to work out its present value as:


PV = DF x future cashflow.
The Regulation is designed to achieve this objective by three significant requirements for:


#Central clearing and margining of standardised OTC derivatives (with certain exemptions for Non-Financial Counterparties)
#Reporting of all derivative transactions to a trade repository
#Risk mitigation measures for all non cleared derivatives including collateral exchange and  confirmation and reconciliation procedures


The periodic discount factor is calculated from the periodic [[yield]] as:


DF = (1 + periodic yield)<SUP>-n</SUP>
== See also ==
 
* [[AIFMD]]
''(= 1 / (1 + periodic yield)<SUP>n</SUP>)''
* [[Buy-side firm]]
 
* [[Central counterparty]]  (CCP)
 
* [[CFTC]]
Commonly abbreviated as DF(n,r) ''or'' DF<SUB>n,r</SUB>
* [[Clearing]]
 
* [[Central securities depository]]  (CSD)
Where:
* [[Derivative instrument]]
 
* [[Dodd-Frank]]
n = number of periods.
* [[Dual reporting]]
 
* [[European Securities and Markets Authority]]  (ESMA)
r = periodic yield (or periodic cost of capital).
* [[European Union]]
 
* [[FATCA]]
 
* [[FC]]
 
* [[Infrastructure]]
<span style="color:#4B0082">'''Example 1: Discount factor calculation'''</span>
* [[Know-your-customer]]
 
* [[Legal entity identifier]]
Periodic yield or cost of capital (r) = 6%.
* [[Margining]]
 
* [[MiFID]]
Number of periods in the total time under review (n) = 1.
* [[MiFID II]]
 
* [[NFC]]
 
* [[Over the counter]]  (OTC)
Discount factor = (1 + r)<sup>-n</sup>
* [[Pension Scheme Arrangement]]
 
* [[Regulation]]
= 1.06<sup>-1</sup>
* [[Regulatory Technical Standard]]  (RTS)
 
* [[Securities and Exchange Commission]]  (SEC)
= 0.9434.
* [[Trade repository]]
 
* [[UK EMIR]]
 
* [[UTI]]
The greater the time delay, the smaller the Discount Factor.
* [[WGMR]]
 
 
<span style="color:#4B0082">'''Example 2: Increasing number of periods delay'''</span>
 
Periodic yield or cost of capital = 6%.
 
The number of periods delay increases to 2.
 
Discount factor = (1 + r)<sup>-n</sup>
 
= 1.06<sup>-2</sup>
 
= 0.8890.
 
''(A smaller figure than the 0.9434 we calculated previously for just one period's delay.)''
 
 
 
'''2.'''
 
Historically, the yield or cost of capital used for the purpose of calculating Discount Factors, as defined above. 
 
For example the 6% rate applied in definition 1. above.




== See also ==
==External link ==
* [[Annuity factor]]
*[https://www.fca.org.uk/markets/uk-emir UK EMIR - Financial Conduct Authority]
* [[Certificate in Treasury Fundamentals]]
* [[Certificate in Treasury]]
* [[Compounding effect]]
* [[Compounding factor]]
* [[Cumulative Discount Factor]]
* [[Day count conventions]]
* [[Discount]]
* [[Discounted cash flow]]
* [[Expected credit loss]]
* [[Factors]]
* [[Present value]]


[[Category:Cash_management]]
[[Category:Accounting,_tax_and_regulation]]
[[Category:Liquidity_management]]
[[Category:Corporate_financial_management]]
[[Category:Risk_frameworks]]

Revision as of 04:19, 26 April 2023

Financial markets - regulation - infrastructure.

The European Market Infrastructure Regulation (EMIR) became law within the European Union in 2012, although certain of its requirements came into force only after a period of delay.

The objective of EMIR is to reduce the risks posed to financial systems from the vast web of over the counter (OTC) derivative transactions and the large contingent credit exposures that may arise as a consequence.


The Regulation is designed to achieve this objective by three significant requirements for:

  1. Central clearing and margining of standardised OTC derivatives (with certain exemptions for Non-Financial Counterparties)
  2. Reporting of all derivative transactions to a trade repository
  3. Risk mitigation measures for all non cleared derivatives including collateral exchange and confirmation and reconciliation procedures


See also


External link

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