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
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, 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
Applicable Rules1. Central clearing of standardised OTC (continued)
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
Applicable Rules1. Central clearing of standardised OTC (continued)
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
Applicable Rules1. Central clearing of standardised OTC (continued)
• 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
18 months after the RTS enters into force.
• Category 4: NFCs that are not included in Category 1, 2 or 3
36 months after the RTS enters into force.
EMIR23
March 2015
PwC
Applicable Rules1. Central clearing of standardised OTC (continued)
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
Applicable Rules2. Reporting obligations (continued)
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
Applicable Rules2. Reporting obligations (continued)
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
Applicable Rules2. Reporting obligations (continued)
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
Applicable Rules2. Reporting obligations (continued)
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
Applicable Rules3. Risk mitigation
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
Applicable Rules3. Risk mitigation
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
Applicable Rules3. Risk mitigation
• 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
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, 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
Why clear OTC derivatives?
> 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
Why clear OTC derivatives?
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
What is client clearing? (2)
> 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
What is client clearing? (3)
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
What is client clearing? (4)
> 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
How will the clearing obligation be phased in? (2)
> 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
> Category 2 entities: 12 months after the RTS comes into force
> Category 3 entities: 18 months after the RTS comes into force
> Category 4 entities: 36 months after the RTS comes into force
52
How will the clearing obligation be phased in? (3)
> 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
How will the clearing obligation be phased in? (4)
> 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
How will the clearing obligation be phased in? (5)
* 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?
RTS in force + 12 monthsQ4 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?
RTS in force + 36 monthsQ4 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
Will you be affected by frontloading? (2)
> 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
Will you be affected by frontloading? (3)
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
What account structures are on offer? (2)
> 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
What account structures are on offer? (3)
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
How do you document a clearing arrangement? (2)
> 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
How do you document a clearing arrangement? (3)
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
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
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
“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
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
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
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
www.febelfin.be
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