FINAL EMIR info session - Febelfinfiles.febelfin.be/FINAL_EMIR_info_session.pdf1. Central clearing...

EMIR info session

Agenda14.00 Introduction J.P. Rousseau

14.10 EMIR overview of the legal aspects of the various components of the whole regulation

Frédéric De Bleye

14.55 The clearing obligations: products, counterparties, timelines, frontloading

Etienne Dessy

15.40 Break

15.55 The journey towards central clearing of OTC derivatives: lessons learnt and pitfalls

Alexander JacobsPhilippe Tortelboom

16.30 Debate: clearing: indirect clearing, positions segregation, collateral management

All speakers

17.15 Networking drinks



Frédéric De Bleye, PwC | Senior Manager - Banking & Financial Services -Legal

EMIRAll clear(ed)?Recap & Update Session

March 2015

www.pwc.com

March 2015

PwC

Agenda

Section one – European Market Infrastructure Regulation: Recap

1. Derivatives market

2. Too big to fail

3. G20 Summit - Pittsburgh 2009

4. EU Response: EMIR

Section two – Applicable Rules

1. Central clearing of standardised OTC

2. Reporting obligations (ETD/OTC, centrally cleared or not)

3. Risk Mitigation (non-centrally cleared OTC)

5March 2015EMIR

PwC

EMIR: recap1. Derivatives Market

2008 : Derivatives – Gigantic market but hardly monitored

• WHAT

- Derived Risk

- Independently traded

• WHY

- Risk management and investment purposes, lower the cost of capital

- Used by more than 94 % of the world’s largest companies

• TYPES

- regulated markets (listed) versus over-the-counter (OTC)

- Standardised versus customized

- CCP versus bilateral clearing

EMIR6

March 2015

PwC

EMIR: recap1. Derivatives Market (continued)

• MARKET SHARE

- $ 625 tn of outstanding notionals vs. $ 80 tn on listed derivatives

- OTC = 90% of the market in terms of notional amount outstanding.

- Only one-third of the market’s notional is cleared via central counterparties (listed + standardised OTC)

Financial leverage

- Credit derivatives = 5 times debt market

EMIR7

March 2015

PwC

EMIR: recap2. To big to fail

AIG Financial Products

- Sold CDS with an implied risk of ~$ 400 bn

- Spring 2008: enormous losses due to crisis

- September 2008: downgrade – effect on AIG Global

- Federal Reserve Bank – ~$ 85 bn

- nationalisation and liquidation

- Effect on reinsured positions / OTC counterparties

EMIR8

March 2015

PwC

EMIR: recap2. To big to fail (continued)

Lehman

- Lehman holding over $600 bn in assets

- Sub-prime market crisis

- First half of 2008 Lehman stock lost 73% of its value

- On September 10, 2008, Lehman announced a loss of $3.9 bn

- Uncertainty about derivatives exposure

- 18 September 2008: Chapter Eleven Bankruptcy protection

- Effect on creditors / OTC counterparties

Significant positions of systemic importance difficult to track

EMIR9

March 2015

PwC

EMIR: recap3. G20 Summit - Pittsburgh 2009

G20 Pittsburg Summit 2009:

Before end 2012:

- All standardised OTC derivative contracts should be traded onexchanges or electronic trading platforms, where appropriate,(MIFID2/MIFIR)

- and cleared through central counterparties (EMIR)

- OTC derivative contracts should also be reported to traderepositories (EMIR)

- Non-centrally cleared contracts should be subject to higher capitalrequirements (EMIR)

10March 2015EMIR

PwC

EMIR: recap 4. EU Response: EMIR

European Markets Infrastructure Regulation (EMIR)

Regulation N° 648/2012 of the European Parliament and Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories.

Entered into force on 16 August 2012.

Lamfalussy Procedure:

Level 1: Framework Legislation (Regulation)

Level 2: Regulatory Technical Standards (RTS) and Implementing Standards (ITS) from technical committees (e.g. ESMA) adopted by EC

Level 3: Consultation and guidance (ESMA)

Level 4: Supervision and enforcement (EC checks member states)

EMIR11

March 2015

PwC

4. EU Response: EMIR (continued)

EMIR12

March 2015

• All standardized OTC derivative transactions should be cleared through central counterparties

CCP clearing

Trade repository • OTC and listed derivative transactions should be reported to trade repositories

Valuation • A valuation, mark-to-market or by default mark-to-model, on a daily basis has to be provided

• IRS: 2015 / 2016

• 12 Feb 2014 (OTC & Listed)

• 11 August 2014• (FC/NFC+)

• 15 March 2013

Confirmation • OTC derivative transactions must be confirmed asap. • 15 March 2013

Portfolio reconciliation &

Disputes resolution

• Periodic reconciliation procedure has to be defined with counterparties

• 15 September 2013

Collateral management

• Initial and variation margin for uncleared OTC derivative transactions

• 2015-2019

Portfolio compression

• Depending on the number of transactions, parties should endeavor compressing (reduce the number of transaction) their uncleared OTC derivatives portfolio.

• 15 September 2013

OTC

OTC & listed

Risk mitigation

for non cleared

OTC

1

2

3

4

5

6

7

Products Requirements Detailed obligation Timing

PwC

EMIR: recap5. Who is concerned

Undertakings in EEA and in third countries

- Financial Counterparty (FC)

◦ Credit institutions◦ Insurance, assurance and reinsurance undertakings◦ Investment firm◦ UCITS and its manager◦ Institutions for occupational retirement provisions◦ AIF managed by registered or authorized as AIFM

- Non-Financial Counterparty (NFC)

- NFC, exceeding the clearing threshold (NFC+)

◦ Calculating threshold: hedging exemption

EMIR13

March 2015

PwC

EMIR: recap5. Who is concerned (continued)

These thresholds are:

- Credit derivatives € 1 billion gross notional

- Equity derivatives € 1 billion gross notional

- Interest rate derivatives € 3 billion gross notional

- Foreign exchange derivatives € 3 billion gross notional

- Commodity and other derivatives € 3 billion gross notional

If rolling average position over 30 working days exceeds the threshold:

NFC should clear all relevant future contracts within four months of becoming subject to the clearing obligation.

EMIR14

March 2015

PwC

EMIR: recap6. What is a derivative contract

Financial instruments under (4) to (10) of Section C of

Annex I to MiFID:

- Options, swaps, forward rate agreements and futures, in each case relating to securities, currencies, interest rates, commodities, emissions allowances and weather derivatives

- Derivative instruments for the trading of credit risk and financial contracts for differences are also covered

- Contracts traded on MTFs or other markets that are not regulated markets would therefore be considered to be OTC contracts for the purposes of EMIR

EMIR15

March 2015

PwC

EMIR: recap7. Cross-border effects (Third Country Entities)

EMEA counterparty facing TCE:

EMIR applies:

- Article 13 of EMIR provides that EMIR can be disapplied and the provisions of the third country applied if equivalent

- ESMA issues advice on EMIR (conditional ) equivalence

- Hong Kong, Switzerland, US, Singapore, Australia, Canada, India, South-Korea, Japan,…

EMIR16

March 2015

PwC

EMIR: recap7. Cross-border effects (Third Country Entities)

TCE facing TCE:

EMIR applies if:

- OTC have a ‘direct, substantial and foreseeable effect within the Union’, i.e.:

◦ the OTC exposure is guaranteed by EEA FC for at least EUR 8 billion AND is equal to or more than 5% of that FC’s total OTC exposure; or

◦ the OTC transactions between them are entered into between their branches in the EEA

OR:

- OTC is ‘deemed evading’ the EMIR requirements, i.e.:

◦ Primary purpose is evasion◦ Lacks business rationale, commercial substance or relevant

economic justification, is artificialEMIR

17March 2015

PwC

Applicable Rules

Section two – Applicable Rules

1. Central clearing of standardised OTC

2. Reporting obligations (ETD/OTC, centrally cleared or not)

3. Risk Mitigation (non-centrally cleared OTC)

EMIR18

March 2015

PwC

Applicable Rules1. Central clearing of standardised OTC

Who is subject to mandatory clearing:

- two FCs (or TCE equivalent(s))

- an FC and an NFC+ (or TCE equivalent(s))

- two NFCs+ (or TCE equivalent(s))

- an FC or an NFC+ (or TCE equivalent(s))

Exemptions:

- NFC- (or TCE equivalent)

- Pension schemes (at least until August 2015, another 2 Y postponed)

- Intra-group derivatives (conditioned)

- Exempt entities (central banks, FSB,…)

EMIR19

March 2015

PwC

Applicable Rules1. Central clearing of standardised OTC (continued)

What products are to be cleared and by when?

- Not expected before end 2015, starting with IRS and some CDS

- List of products defined by ESMA in Regulatory Technical Standards(RTS)

◦ draft RTS of 1 October 2014 IRS› Amendment EC & intention to endorse/ Response ESMA /

Corrigendum EC◦ Consultation paper CDS

› Letter ESMA 20 November 2014 to EC: no draft RTS on CDS before endorsement of draft RTS on IRS.

◦ NDF:› ESMA feedback statement on its consultation on 4 February

2015, no clearing for non-deliverable FX forwards in the near future

EMIR20

March 2015

PwC


Timing triggered by authorisation of first CCP

◦ Nasdaq OMX Clearing AB on 18 March 2014◦ 16 CCPs◦ BNYM / RBS

Cooperation Memorandum

◦ ESMA and the Financial Services Agency of Japan (JFSA)◦ Effective as of 18 February 2015

EMIR21

March 2015

PwC


Central clearing IRS

- ESMA’s draft RTS sets out four classes of interest rate swaps (IRS)that will be subject to mandatory central clearing, i.e.:

◦ basis swaps denominated in EUR, GBP, JPY, USD; ◦ fixed-to-float swaps denominated in EUR, GBP, JPY, USD;◦ forward rate agreements denominated in EUR, GBP, USD; and ◦ overnight index swaps denominated in EUR, GBP, USD

- phased-in approach will apply

EMIR22

March 2015

PwC


• Category 1: Clearing Members of a recognised or authorised CCP

6 months after the RTS enters into force.

• Category 2: FC and AIFs that are NFCs+, which are not Category 1 and which belong to a group for which the aggregate month-end average notionalamount of non-centrally cleared derivatives over a certain 3 month period isabove €8 bln

12 months after RTS enters into force.

• Category 3: FCs and other NFC+ AIFs that have a low level of activity in uncleared derivatives and which are not included in Category 1 or 2


• Category 4: NFCs that are not included in Category 1, 2 or 3


EMIR23

March 2015

PwC


Frontloading

• Categories 1 and 2:

Contracts entered into or novated before the publication of the RTS:

50 y for basis swaps and fixed-to-float IRS contracts;

2.5 y for foward rate agreements and overnight index swaps.

Contracts entered into or novated on or after the publication of the RTS:

6 months

• Category 3:

50 years for basis swaps and fixed-to-float IRS classes and

3 years for forward rate agreements and overnight index swaps.

• Category 4:

not subject to frontloadingEMIR24

March 2015

PwC

Applicable Rules2. Reporting obligations

Who is subject to reporting:

• Both parties to a derivatives trade (OTC/ETD) & CCP

What to report:

• Data on transaction & clearing

• Collateral & MtM /MtModel: FC & NFC+

To whom:

• Trade Repository (registered with ESMA)

• Recognition of 6 TR:

- DTCC, KDPW, Regis-TR, Una Vista (effective 14/11/2013)

- ICE and CME (effective 5/12/2013)EMIR

25March 2015

PwC

Applicable Rules2. Reporting obligations (continued)

What products:

All derivatives:

“The reporting obligation shall apply to derivative contracts which:

- were entered into before 16 August 2012 and remain outstanding onthat date;

- are entered into on or after 16 August 2012”

When:

- T+1

- 12 February 2014 for OTC and ETC

- EC refused delay until 2015 for ETC

- Backloading

EMIR26

March 2015

PwC


Reporting start date: 12 February 2014

Reporting Mtm/MtModel / collateral: 11 August 2014

Backloading:

• contracts outstanding before 16 August 2012 and still outstanding on the reporting start date: within 90 days of the reporting start date.

• contracts outstanding on or after 16 August 2012 and still outstanding on the reporting start date: within T+1 days of the reporting start date.

• contracts entered into before 16 August 2012 and still outstanding on 16 August 2012; or entered into on or after 16 August 2012 and not outstanding on or after the reporting start date: within 3 years of the reporting start date.

EMIR27

March 2015

PwC


EMIR28

March 2015

For financial and non-financial counterparties OTC-derivatives (cleared and non-cleared) and exchange-traded derivatives New contracts, changes to existing contracts and termination of contracts Retrospective reporting of derivatives starting from 16th August 2012 (backloading) Daily reporting of mark-to-market (for counterparties subject to clearing obligation only) Latest reporting on the following working day Reporting obligation may be delegated to counterparty or a third party (including CCP) Reported data must be archived for 5 years from the termination of the contract

Unique legal entity identifier (LEI) Name, domicile, sector Financial/non-financial counterparty Buy/Sell side Clearing member, CCP and reporting

entity (if required) Trade venue

Unique Product Identifier (UPI) Transaction details (trade ID, underlying,

price, volume/notional, currency, derivative type, settlement type, maturity date, etc.)

Confirmation Collaterals/Clearing

Reporting scope and frequency

(Counterparty and contract-specific) reporting data

PwC


Review Reporting RTS and ITS

ESMA consultation paper 10/11/2014

• The practical implementation showed some shortcomings

• Clarify the interpretation of the data fields needed for the reporting to TRS and the most appropriate way of populating them.

• ESMA considered stakeholder's feedback to the proposed revised standards until 13 February 2015.

EMIR29

March 2015

PwC


MoU with Third Country States:

• November 2014 between ESMA and the Australian Securities & Investments Commission (ASIC)

• 18 February 2015 ESMA and the Reserve Bank of Australia (RBA)

EMIR30

March 2015

PwC

Applicable Rules3. Risk mitigation

31

Marking-to-market is mandatory except if:• The market is inactive• The range of reasonable fair value estimates is significant and the probabilities of the various estimates cannot be

reasonably assessed In such situations, Financial Counterparties and NFC+ shall use reliable and prudent marking-to-model.Models should be fully documented and approved (delegation is possible) by senior management

Mark-to-marketMark-to-model

Valuation

Reporting Valuation data shall be reported on a daily basis

Portfolio reconciliation

Requirement

Definition

Frequency

Counterparties shall agree, before entering into the derivative contract, in writing on terms on which portfolios shall be reconciledReconciliation shall cover the key trades terms that identify each particular OTC derivative contract and shall include at least the valuation

Counterparty type Portfolio size (OTC transaction) Frequency

Financial or NFC +

NFC -

portfolio => 500

portfolio >50 but < 500

portfolio =< 50

portfolio > 100

portfolio =< 100

Daily

Weekly

Quarterly

Quarterly

Annually

Requirement Item Detail

Dispute resolution

Requirement

Scope

Reporting

All counterparties should have agreed detailed procedures and processes regarding the identification, recording and monitoring of disputes; the resolution of disputes in a timely manner with a specific process for those disputes that are notresolved within five business daysDisputes relate to- recognition of the contract- Valuation

Financial counterparties shall report to the competent authority any disputes between counterparties relating to an OTC derivative contract, its valuation or the exchange of collateral for an amount or a value higher than EUR 150 million and outstanding for at least 15 business days

Portfolio compression

Requirement Counterparty must study the possibility to perform a portfolio compression. Depending on the result the counterparty must: compress the portfolio- Justify to the competent authority the reason why such a compression is not appropriate

Scope Portfolios with more than 500 derivatives with the same counterparty

Frequency Analysis should be performed at least twice a year

PwC


EBA, ESMA & EIOPA – Consultation draft RTS 14 April 2014(BCBS – IOSCO)

Variation margin (VM) uncleared OTC

• 1 December 2015.

• Reflecting changes in exposure

• Mtm approach, daily

• Net basis

• Zero threshold for transfer of VM.

• Counterparties may agree not to collect IM/VM if total margin is below €500K

EMIR32

March 2015

PwC


EBA, ESMA & EIOPA – Consultation draft RTS 14 April 2014(BCBS – IOSCO)

Initial margin (IM) uncleared OTC

• Phased in from 1 December 2015.

• Future exposure, recalculated every 10 business days

• Mtm (CRR) or model

• On gross basis and segregated (no rehypothecation).

• FCs may agree with their FC or NFC counterparties not to collect margin if calculated initial margin on group level is not higher than €50m

• Counterparties may agree not to collect IM/VM if total margin is below €500K

• Deliverable FX forwards and swaps out of scope

EMIR33

March 2015

PwC


• IM Phase-in:A counterparty is required to collect IM where both counterparties belong to consolidated groups having aggregate month-end gross notional values of uncleared OTC derivatives (including foreign exchange forwards/swaps) over the trigger level.

1 Dec 2015: €3tn1 Dec 2016: €2.25tn1 Dec 2017: €1.5tn 1 Dec 2018: €0.75tn 1 Dec 2019: €8bn

• Eligible collateral includes cash, gold, high quality government and corporate bonds, shares in major stock indices, specific securitisations.

• Concentration limits – Collateral Squeeze?

EMIR34

March 2015

Contact Details

© 2013 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Marleen MoutonLaw Square | Director - Advocaat/AvocatDirect: +32 2 7104735 | Mobile: +32 498 522931 Fax: +32 2 7107899Email: [email protected] Square bcvba

Frédéric De BleyePwC | Senior Manager Banking & Financial Services - LegalDirect: +32 2 7104996 | Mobile: +32 491 621789 Fax: +32 2 7104299Email: [email protected] Tax Consultants bcvba/sccrl



Frédéric De Bleye


Etienne Dessy, avocat, LinklatersLLP

Febelfin Info Session - EMIR

The Clearing Obligation

Etienne Dessy

19 March 2015

38

Overview

> Why clear OTC derivatives?

> What is client clearing?

> Who is obliged to clear?

> How will the clearing obligation be phased in?

> Will you be affected by frontloading?

> What account structures are on offer?

> How do you document a clearing arrangement?

39

Why clear OTC derivatives?

40


> Clearing is the process by which a central counterparty (CCP) interposes itself between two parties to what would otherwise be a bilateral derivative contract

> The process results in the ‘division’ of the original contract into two separate limbs, each with the CCP as counterparty

> The parties no longer have exposure to each other but instead are exposed to the CCP

> The CCP becomes the buyer to every seller and the seller to every buyer

41


Party A Party B

Party F Party C

Party E Party D

Bilateral contracts with market counterparties

Sell

Buy

Cleared contracts with CCP counterparty

Party A Party B

Party F Party C

Party E Party D

CCP

42

What is client clearing?

43

What is client clearing? (1)

> Transactions can only be cleared through a CCP via a clearing member (CM)

> The costs and infrastructure requirements to be a CM are significant and are, in practice, only justifiable for entities with a substantial derivatives business

> Most entities that wish to clear derivative transactions will therefore not become CMs but, instead, are likely to enter into a relationship with one or more CMs to clear their transactions

44


> Client clearing involves a market participant becoming a client of a CM in order to access a CCP to clear its derivative transactions

> Two main models exist to support client clearing: the agency model and the principal model

> The principal model (predominant in the EU) involves the CM having

> a contract as principal with the CCP and

> a corresponding back-to-back contract as principal with the client

> What happens if the CM defaults?

> the contract will be transferred to another CM (default porting), or

> the contract will be unwound (default close-out)

45


Party A Party B

Bilateral contract

Client clearing

Party A (EB) CM

Party B (Client)

original bilateral contract

new contract

new contract

back-to-back contract

CCP

46


> Indirect clearing is where a market participant becomes the CM’s client in order to clear transactions of underlying clients of that market participant

> It was formally introduced into EMIR in order to ensure that entities who may not have direct access to a CM could still have indirect access to clearing

> However, the practicalities of indirect clearing remain uncertain and there is no widely accepted market solution for indirect clearing in place yet

47

Who is obliged to clear?

48

Who is obliged to clear?

The table below sets out when the clearing obligation may apply to a derivative contract that is not entered into intra-group

* i.e. a TCE that would be an FC or a NFC+ if it were incorporated in the EU.** i.e. a TCE that would be an NFC- if it were incorporated in the EU.*** A contract between two TCEs will only be subject to the clearing obligation if it has a direct, substantial and foreseeable effect

within the EU or where it is necessary or appropriate to prevent the evasion of EMIR. A contract would have a direct, substantial and foreseeable effect in the EU if the parties are located in a third country where arrangements have not been declared equivalent by the Commission and (i) one of the TCEs benefits from a guarantee issued by an FC established in the EU, which covers at least EUR 8 bn gross notional amount and is equal to at least 5% of total OTC derivatives exposure of theFC, or (ii) both TCEs are EU branches of entities established in non-equivalent third countries that would be FCs if they were established in the EU.

Counterparty

YouFC NFC+ NFC- TCE

(FC/NFC+)*TCE (NFC-)**

FC X XNFC+ X XNFC- X X X X XTCE(FC/NFC+)* X /X*** XTCE(NFC-)** X X X X X

49

How will the clearing obligation be phased in?

50

How will the clearing obligation be phased in? (1)

> The obligation to clear derivatives of a certain class will follow the publication of a clearing RTS for such class and will commence for the entities belonging to each category once the phase-in period for such category has elapsed

> This means that several mandatory clearing timetables will be running in parallel

51


> Entities subject to the clearing obligation will be divided into four categories.

> The categorisation determines the date on which the clearing obligation with respect to a particular asset class becomes effective

> Category 1 entities: 6 months after the RTS comes into force




52


> Category 1: Entities that are CMs of at least one CCP that has been authorised to clear any of the classes subject to a clearing obligation

> Category 2: FCs that are

> either not CMs or

> CMs of CCPs that do not clear derivatives that are required to be mandatorily cleared and

whose group’s aggregate month-end average notional of uncleared derivatives for the 3 months preceding the first clearing RTS coming into force is above EUR 8 billion.

> Category 3: FCs that are not in Category 1 or 2

> Category 4: NFC+s that are not in Category 1, 2 or 3

53


> Two clearing RTS are currently being finalised by ESMA and the Commission

> Mandatory clearing is expected to apply first to the following classes of interest rate derivatives and credit default swaps> basis and fixed to floating swaps denominated in four major

currencies (EUR, GBP, USD and JPY)> forward rate agreements and overnight interest swaps denominated

in EUR, GBP and USD> iTraxx Europe Main and iTraxx Europe Crossover credit default swaps

with 5 year maturity> It is likely that ESMA will conduct further public consultations on other

asset classes in the future

54


* Assuming publication of RTS in official journal around mid-July 2015 (Q3 2015)

** Assuming publication of RTS in official journal around mid-October 2015 (Q4 2015)

Category Interest Rate* Credit**

Category 1 RTS in force + 6 monthsQ1 2016?

RTS in force + 6 monthsQ2 2016?

Category 2 RTS in force + 12 months Q3 2016?


Category 3 RTS in force + 18 months Q4 2016?

RTS in force + 18 months Q1 2017?

Category 4 RTS in force + 36 monthsQ3 2018?


55

Will you be affected by frontloading?

56

Will you be affected by frontloading? (1)

> Frontloading refers to the obligation to clear contracts that were entered into prior to the date on which the relevant class of contract becomes subject to mandatory clearing

> In other words, it refers to the category of older contracts that will also be subject to the clearing obligation on the date it is introduced

> Frontloading results in a retroactive change to the terms of existing derivative contracts

> Frontloading may lead to incorrectly price positons> The pricing of derivatives positions typically reflects collateral

arrangements between the parties> Where collateral requirements of a CCP differ from those agreed

between the parties, one of the parties will suffer a loss when the trade is cleared

57


> In order to be subject to frontloading, a contract must> fall within a class of OTC derivative which is subject to the clearing

obligation> be between two entities that fall within Category 1 or Category 2> have been entered into on or after the date falling the specified time

after the relevant clearing RTS enters into force > the current proposal is that the period is two months for parties in

Category 1 and five months for those in Category 2> satisfy the minimum remaining maturity requirement

> the proposed threshold for contracts concluded during the frontloading period is currently set at six months

> A solution to avoid frontloading? Voluntary clearing

58


RTS publishedin OJ

01/08/2015

RTS enters intoforce

21/08/2015

Clearing obligation starts

21/02/201621/10/2015

Frontloadingperiod starts

20 days 2 months 4 months

Category 1*

RTS publishedin OJ

01/08/2015

RTS enters intoforce

21/08/2015

Clearing obligation starts

21/08/201621/01/2016

Frontloadingperiod starts

20 days 5 months 7 months

Category 2*

* All theoretical dates

59

What account structures are on offer?

60

What account structures are on offer? (1)

> CCPs and CMs must at least offer to their clients a choice between omnibus and individual segregation

> Omnibus segregation account (or ‘OSA’) > An OSA is an account where the CCP and the CM operate a single

account for several clients of a CM> For net omnibus structures, all positions of different clients are pooled

in order to determine the required amount of margin. Any offsetting positions of different clients reduce the overall amount of margin and therefore, in a CM default, not all of the assets posted by a client will necessarily be returned

> Individual segregation account (or ‘ISA’) > An ISA is one where the CCP and the CM operate a separate account

for positions held for a client, distinct from positions held for the account of other clients and from those of the CM

61


> Before choosing an account structure, you should consider

> whether you are required under law/regulation to choose a particular type of account

> how much protection the account structure will give you in a default scenario

> how much you will be charged for the relevant account

> how much margin you will have to provide

> whether you want your positions to be ported if your CM defaults (default porting), or would prefer for them to be liquidated by the CCP (default close-out)

62

CCPHouse Client Segregation by Asset

(gross)Client Segregation by Value (gross)

(LSOC equivalent)

Positions

Collateral

Client E

Omnibus Client Segregation (net)

Clients A and B

CLEARING MEMBER

Client D

Client F

Positions

Collateral

Client E

Positions

Collateral

Client F

Positions

Collateral

Client G

Direct Client Participation

Client G

Positions

Collateral

Client B

Client A

Client C

Client C

Positions

Collateral Value

Client D

Positions

Collateral Value


63

How do you document a clearing arrangement?

64

How do you document a clearing arrangement? (1)

> What documentation will a client need to have in place?

> an execution agreement between a client and each executing broker (EB)

> a master agreement between the client and each CM (e.g. an ISDA Master Agreement or FOA Professional Client Agreement)

> a clearing agreement based on the ISDA/FOA Client Cleared OTC Derivatives Addendum or the FOA Clearing Module between the client and each CM

> a collateral arrangement with respect to cleared transactions between the client and each CM

> documentation supporting all operational processes

65


> What are the CCP Rules and how do they affect a clearing arrangements?

> Each CCP operates in accordance with its rules and procedures (CCP Rulebook)

> To ensure an effective default management process, certain provisions of the relevant CCP Rules will apply to (and, to the extent of any inconsistency, override) the contractual terms between a Client and the CM

66


1. Execution Agreement between EB and Client (“Give-Up”)

2. CCP Rules apply between CCP and CM and CCP and EB

3. Master Agreement between CM and Client (e.g. an ISDA or FOA)

4. Client Clearing Agreement between CM and ClientCCP Rules

Master Agreement

Client Clearing Agreement

Execution Agreement

EB (CM) CM

Client

CCP

67

Questions?

Etienne Dessy

Avocat – Financial RegulationLinklaters LLPTel: 02/501 90 [email protected]

A19627835



Frédéric De Bleye


Etienne Dessy

15.40 Break

“Journey towards central clearing”

In this session the speakers will share insights of what is important for the boarding experience in real life.

How long does it take to negotiate legal documentation and what can be negotiated?

What project resources are required to manage the set up of the accounts and to monitor the processing of (initial) cleared trades?

What is important in the selection process next to costs?

Have you considered futurisation as an alternative to swaps? ...

Alexander Jacobs, Head of OTC-Clearing, ABN AMRO Clearing

Philippe Tortelboom, directeur financieel beleid / directeur politique financière, Crelan NV/SA



Frédéric De Bleye


Etienne Dessy

15.40 Break




All speakers

Debate: some discussion points (1/2)

Increased collateral costs due to portfolio fragmentation impacting the netting efficiency. Clearing fragmentation likely to undermine benefits of multilateral netting

Clients opting for indirect clearing may face higher margin requirements and clearing fees imposed by the direct clearing member (compared to the fees impose by the CCP on the direct clearers themselves)

Collateral availability may not be an issue, but collateral management becomes more strategic (collateral optimalisation must be “engineered”)

transformation can lead to additional burdens and costs (repo agreements to swap low quality collateral)

The need to be prepared to post variation margin at short notice will require participants to hold more precautionary collateral (cash and/or securities)

Debate: some discussion points (2/2)

High concentration of the market linked to changes in market making practices may have a significant impact on the pricing and liquidity of OTC derivatives markets, particularly for local or regional markets

Correlation between market volatility and margining: if volatility rises, collateral requirements will increase, which may reduce the ability of some market participants to trade or maintain existing positions. Impact on pure hedging for NFCs

Changes in hedging practices due to reduced number of intermediaries still active in the OTC derivatives market dealing



Frédéric De Bleye


Etienne Dessy

15.40 Break




All speakers

17.15 Networking drinks

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