variation/initial margin and clearing · an nfc is only subject to the clearing obligation if the...

Variation/initial margin and clearing

Lessons learned and looking ahead to the new derivatives market

Jonathan QuieJason ValotiSimon McKnight

15 March 2017

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

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Variation/initial margin and clearingConsiderations for the sell side and buy side in APAC How the market implemented variation margin in

key jurisdictions for APAC?

Initial margin – timetables, thresholds and implementation

Can increasing derivatives clearing reduce the burden of complying with OTC margin obligations?

What we will be looking at today


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Regulatory developments in OTC Derivatives

Clearing Risk mitigation for uncleared

OTC derivatives

Reporting

Timely confirmation

Processes to manage/identify

risks

Exchange of Margin

Portfolio compression


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Variation Margin

Jonathan Quie


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Variation/initial margin and clearingConsiderations for the sell side and buy side in APAC Background to VM rules

VM rules in the EU– parties directly/indirectly in-scope– timing for implementation– Key requirements

Buy-side perspectives on the implementation of the VM Rules in Asia

Focus on Variation Margin


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Variation/initial margin and clearingBackground to VM Rules

“Variation margin” means the collateral collectedby a counterparty to reflect the results of the dailymarking-to-market of outstanding OTC derivativecontracts.

Collection of margin is intended to reduce thecounterparty credit risk taken by parties that are“in-the-money” under an OTC derivative contract.

VM reduces counterparty credit risk as, upon anydefault of the collateral-provider, the marginreceived by the collateral-taker is used todischarge the amount due from the collateral-provider under the derivative position.

Focus on Variation Margin


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Covered Entities – Directly Covered

EU

Financial Counterparties (FC)

Non-Financial Counterparties above threshold (NFC+)

Certain exemptions apply.


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EMIR Rules: FC/NFC+/NFC-

Entity Type Details

FC A financial counterparty (FC) includes:- a MIFID investment firm - a credit institution - a UCITS (and, where relevant, its management company)- an alternative investment fund (AIF) managed by an alternative investment fund

manager (AIFM) which is authorised or registered in accordance with AIFMD - certain other EU regulated bodies such as insurance undertakings and institutions

for occupational retirement provision.

NFC + / NFC - A non financial counterparty (NFC) is any undertaking established in the EEA which is not a financial counterparty or a CCP (as defined in EMIR).

An NFC is only subject to the clearing obligation if the average of the gross notional value of its OTC derivative positions over a rolling 30 day period (excluding hedging contracts) exceeds the relevant threshold (this kind of NFC is referred to as an NFC+). An NFC which does not exceed the relevant threshold is referred to as an NFC-

Hypothetical FC/NFC+

an entity established outside the EEA which would be subject to the clearing obligation if it were established in the EEA (this is referred to as a “hypothetical” FC or NFC+).


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Relevant Thresholds (EMIR)Clearing thresholds refer to the gross notional value of OTC derivative positions.

Clearing thresholds for NFC+

Type of contract Clearing threshold

OTC credit derivatives €1 bnOTC equity derivatives €1 bnOTC interest rate derivatives €3 bnOTC foreign exchange derivatives €3 bnOTC commodity derivatives and other OTC derivative contracts not already mentioned

€3 bn


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Variation MarginTo whom do the EU VM rules apply?

Clie

nt

* Unless “direct, substantial and foreseeable effect” in the EU or necessary as anti-avoidance

Dealer

FC Hypothetical FC

FC/NFC+ In-scope In-scope

Hypothetical FC/NFC+

In-scope Out-of-scope*

NFC– Out-of-scope Out-of-scope

Hypothetical NFC– Out-of-scope Out-of-scope

Clie

nt

* Unless “direct, substantial and foreseeable effect” in the EU or necessary as anti-avoidance


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Variation MarginTiming

Both parties have uncleared AANA for March, April, May 2016 of over EUR 3 trillion

4 February 2017

Otherwise 1 March 2017


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Variation MarginImplementation timing – where are we now?

1 March 2017 deadline for documentation of VM compliant CSAs has passed.

Other regulators in key jurisdictions have extended compliance deadline by 6 months/issued “no-action” letters.

European Supervisory Authorities (the “ESAs”) have published a statement in response to industry requests relating to operational challenges in meeting the deadline

The statement does not provide or amount to the regulatory forbearance requested by the industry, and instead explicitly re-affirms the 1 March 2017 deadline for the obligation to exchange variation margin.


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Variation MarginImplementation timing – where are we now?

However, the ESAs state that they expect national competent authorities (“NCAs”) “to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation” including:– the NCA taking into account the size of exposure to the counterparty plus its

default risk– counterparties documenting the steps taken towards full compliance– counterparties putting in place alternative arrangements to ensure that the

risk of non-compliance is contained (with a specific example of continuing to use existing Credit Support Annexes to exchange VM)

– the NCA taking a “case-by-case assessment…on the degree of compliance and progress”.


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EMIR VM Margin Rules – Key Provisions

Specified types of eligible collateral include:– Cash – US Treasuries (subject to specified minimum haircuts) – Other highly liquid and high credit quality assets– No wrong way risk

Minimum Transfer Amount– Permitted but may not be higher than EUR 500,000 (or equivalent) – MTA is in respect of both VM and IM

Two-way exchanges of margin


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EMIR VM Margin Rules – Key Provisions (contd.)

8% FX Haircut Percentage in respect of non-cash collateral.– This is a statutory haircut aimed to address any FX risk to the extent such

non-cash collateral is posted in a currency other than the currency of the derivative transaction.

Daily collateral transfers

Settlement Period– EMIR provides for VM to be transferred generally on a same day basis– The European Commission has recently clarified, however, that this

requirement will be satisfied as long as collateral is provided on the same day (even if the transfer is not settled on the same day).


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How are the VM rules being implemented?Repapering exercise

Margin rules apply only on going forward basis (not to legacy trades)– One VM CSA or two CSAs (a VM CSA and a non-VM CSA)?

Bilateral amendment:– Preferred approach for buy-side

ISDA 2016 Variation Margin Protocol:– Adherence + Questionnaire exchange (+ Supplemental Questionnaire)– Amend, Replicate-and-Amend, New CSA, New ISDA– Much more complicated than bilateral, but potentially easier from document

management perspective


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Variation Margin: DocumentationComparison of Methods

MethodNumber of

CSAs/CollateralCalls

Treatment of Legacy Trades

Preservation of Negotiated Terms

Amend 1 Subject to marginregulations

Preserved, to the extent possible under

margin regulations

Replicate-and-Amend 2

Not subject to margin regulations

Preserved, to the extent possible under

margin regulations

New CSA2 Not subject to margin regulations Not preserved

1 Subject to marginregulations Not preserved


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Implementation of VM rulesBuy-side perspectives

Many buy-side firms in Asia indirectly affected by new margin rules in relevant jurisdictions even if they are not directly in-scope

Very significant repapering exercise but in general most CSAs already largely VM compliant (in terms of types of eligible collateral, haircuts on securities, MTAs etc.)

Observations included:– communication with buy-side: short notice of changes – over-compliance (e.g. same day settlement for margin transfers)– brokers systems/operations limitations– unnecessary amendments– changes to commercial terms not required by VM rules


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Implementation of VM rulesBuy-side perspectives

Different approaches adopted by brokers to implementing VM rules

Operational impact on funds (e.g. having two or more sets of operational procedures/margin calls if New CSA route elected).

Even greater impact on buy-side in Europe (e.g. London based fund managers) as directly in-scope


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Initial Margin

Jason Valoti


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Variation/initial margin and clearingConsiderations for the sell side and buy side in APAC IM versus VM

IM rules in the EU– in-scope entities– timing for implementation– IM requirements– documentation

Comparison between margin rules in US, HK, SG and EU– Key differences and similarities

Focus on Initial Margin


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Initial MarginWhat’s the difference between VM and IM?

“Variation margin” means the collateral collected by a counterparty to reflect the results of the daily marking-to-market of outstanding contracts.

“Initial margin” means the collateral collected by a counterparty to cover its current and potential future exposure in the interval between the last collection of margin and the liquidation of positions or hedging of market risk following a default of the other counterparty.– Although the valuation used to calculate the VM requirement will be

continually refreshed, there is always some risk that the market value of a particular contract increases and a default occurs before additional VM is delivered.

– The IM requirement creates an additional buffer that is intended to reduce the risk of a shortfall in that scenario.

– IM, where applicable, is posted by both parties and the amounts to be posted are not offset against each other.


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Initial Margin (IM) and Variation Margin (VM)

CounterpartyA

CounterpartyB

IM AIM BVM

±IM A±IM B

Segregated Account for

IM B

Segregated Account for

IM A

IM:- Not netted- Levels of

segregation (prop. or omnibus accounts)

- Rehypothecation generally not allowed

Not all counterparties

caught

Acceptable forms of margin

prescribed

IM: Protects against price movements between last collection and liquidationVM: Reflects current value of derivativesNetting set important


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Initial MarginIn-scope entities

The requirement to post and collect IM will only apply to transactions between:– two FCs or NFC+s; or– TCEs that would be FCs or NFC+s if established in the EUthat both (or whose groups both) have a notional amount of uncleared derivatives in excess of the prescribed limits.

The IM requirements are being phased in for transactions (see next slide).


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Initial MarginTiming – phased implementation

Where both parties have unclearedAANA for March, April, May in relevant year of:

Phase in

Over EUR 3 trillion 4 February 2017

EUR 2.25 trillion 1 September 2017



EUR 8 billion 1 September 2020


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Initial MarginHow is AANA calculated?

Aggregate Average Notional Amount (AANA) is:– the average of the total gross notional amount of all uncleared OTC

derivatives of an entity, – calculated across its group,– recorded on the last business day of the months March, April and May of the

relevant year.

The relevant days for the purposes of determining the AANA in respect of the first phase-in date were the last business day of March, April and May 2016.

This calculation includes all uncleared OTC derivatives in a counterparty’s group portfolio (including those not subject to IM or VM), but counting intra-group transactions only once.

Physically-settled FX forwards, FX swaps and currency swaps exempted


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Initial MarginIM Requirements

How is IM calculated?

How often is IM calculated?

Rules require segregation of initial margin

Exemptions

Prescribed eligibility and valuation (haircut) requirements– Haircut of 8% on cash and non-cash margin posted in a different currency


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Initial MarginHow is IM calculated?

IM calculation methods must assess both changes in the risk position and market conditions. The RTS provide a standardised method for calculating IM but parties may instead use an IM model developed independently, jointly or by a third party agent.

Where an IM model is used it must comply with the minimum requirements set out in the RTS. These are extensive and include:– initial independent validation of the model– the provision to the counterparty of all information necessary to explain the

determination of IM– ongoing performance monitoring to assess the IM model– recalibration of the model every 12 months

ISDA has developed a standard model (the SIMMTM) for use as an IM model with the aim of minimising disputes and discrepancies.


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Initial MarginHow often is IM calculated?

IM is not only ‘initial’. It must be calculated within one business day of certain events including:– the entry into a new uncleared OTC derivative– the expiry or removal of an OTC derivative from the netting set– a payment or delivery (other than margin) on an existing OTC derivative– on certain reclassifications where the standardised method is used, and in

any case where there has been no calculation in the preceding 10 business days.

IM must then be provided within the business day of calculation.

As in the case of VM, if the amount of IM required is disputed, the undisputed amount must be provided within the same timeframe.


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Initial MarginWhy is IM required to be segregated?

As both parties are required to exchange IM, if IM were posted on a title transfer basis, it would increase the exposure of each party to the other. The RTS therefore provides that IM must be segregated to protect the IM from the default or insolvency of the collecting party.

Equivalent protection is not required for cash IM. However, only central banks and certain regulated banking institutions are eligible to hold cash IM.

The rules include a prohibition on the reuse of collateral posted as IM with an exception allowing for the reinvestment by a third party custodian of cash IM.


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Initial MarginWhy is IM required to be segregated?

Diversification requirements apply where IM is posted and collected between systemically important institutions (SIIs) which mandate that no more than 20 per cent. of cash IM is held with a single third party custodian.

For transactions involving SIIs and other counterparties (other than pension schemes) that post/collect more than EUR 1 billion in IM, the excess over EUR 1 billion must be diversified, including by ensuring that no more than 50 per cent. is exposed to the credit risk of a single custodian.


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Initial MarginExemptions

If a party to a transaction has (or its group has) an AANA below the then-applicable threshold (which will be EUR 8 billion at the end of the phase-in period in 2020), IM will not apply.

If parties are subject to the IM requirements, the rules permit unrelated parties to agree that IM need not be collected where the total IM to be collected from a counterparty, at group level, does not exceed EUR 50 million. – Where the collateral required to be collected exceeds the threshold, this can

also be used to reduce the amount of IM to be collected by EUR 50 million. – As the threshold applies at group level, this threshold can be allocated

between group members.


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Initial MarginExemptions

The rules also provide for an equivalent EUR 10 million threshold on a counterparty basis for intra-group transactions where the intra-group exemption does not apply.

Parties can agree a maximum EUR 500,000 minimum transfer amount (or equivalent amount in another currency) in aggregate across IM and VM on a counterparty by counterparty basis.


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Initial MarginIM documentation

IM has necessitated new documentation for transactions subject to IM.

The requirement for segregation means that an English law ISDA CSA (which provides for full title transfer) is not appropriate.

Where a custodian is used, as is expected to be the case, custody agreements, security agreements and account control agreements will need to be negotiated.

N.B. Custodian backlog for Phase 1 IM.


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Collateral documents with VM and IM – example diagram

ISDA Master

Trans.Trans. Trans.

CSA (1995)

CSA for VM (2016)

Trans. Trans. Trans.

Pre-EMIR OTC margin implementation

Post-EMIR OTC margin implementation

CSD for IM (2016)


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Initial MarginWhat do I need to do now?

If not already affected by Phase 1 implementation, consider whether AANA will exceed the threshold for Phase 2 implementation of IM rules in September 2017 or subsequent phases.

If you may be affected by the Phase 2 implementation of IM rules in September 2017, consider legal and operational impact now.

Don’t leave it until August 2017…..


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Comparative analysis of margin rules in the US, the EU, HK and Singapore

Jason Valoti


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Covered Entities – Generally

EU US HK SG

Financial Counterparties(includes AIFs)

Swap Dealers

Security-Based Swap Dealers

FinancialCounterparties

MAS CoveredEntities

Non-Financial Counterparties above threshold (NFC+)

Major Swap Participants

Major Security-Based Swap Participants

Significant Non-Financial Counterparties

HKMA Designated Entities


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Covered Entities – Some Margin ExemptionsEU US HK SG

Exemptaltogether

Intragroup transactions*

Intragroup transactions

Intragroup transactions

Intragroup transactions*

Covered bonds Physically settled FX forwards and FX swaps

Physically settled FX forwards and FX swaps

Physically settled FX forwards / FX swaps.

Non-Financial End User hedging

Cross-currencyswaps associated with the exchange of principal

Uncleared AANA for March, April, May ofrelevant year is less than SGD 5 billion

Exempt from IM

Physically settled FX forwards and FX swaps

Cross-currency swaps

Limited exemptions

Minimum transferamounts (max EUR 500,000)

Minimum transferamounts (max USD 500,000)

Minimum transferamounts (max HKD 3,750,000)

Minimum transferamounts (max SGD 800,000)

* Regulatory approval needed


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IM Timings

Uncleared AANA for March, April, May ofrelevant year*

EU US HK SG

EUR/USD 3 trillionHKD 24 trillionSGD 4.8 trillion

4 February 2017 1 Sep 2016

1 Mar 2017 1 Mar 2017

EUR/USD 2.25 trillionHKD 18 trillionSGD 3.6 trillion

1 Sep 2017


1 Sep 2018


1 Sep 2019

EUR/USD 8 billion*HKD 60 billionSGD 13 billion

1 Sep 2020

* USD threshold only available for Financial End User. USD amount determined over June, July and August of preceding year.


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Hong Kong Rules – Entities subject to the Rules Entity Type Subject to Rules Details

Locally incorporated AI (including overseas branches)

Yes – Rules cover all branches

Trade must be with a Covered Entity

Foreign incorporated banking subsidiary of locally incorporated AI

No – subject to HKMAdetermination

Conditional on such entity (i) not transacting non-centrally cleared derivatives of a significant amount relative to the AI as a whole; and (ii) being subject to effective margin standards in the jurisdictions where it is incorporated.

AI incorporated outside of Hong Kong

Yes, in respect of trades booked in its Hong Kong Branch

Trade must be with a Covered Entity

For AIs incorporated outside of Hong Kong it may apply substituted compliance and either comply with (i) the foreign jurisdiction which margin requirement the Covered Entity is required to comply with (ii) the AI’s home jurisdiction, or (iii) in limited circumstances, a jurisdiction other than that AI’s home jurisdiction.

Intragroup Transactions No – subject to certain conditions (and subject to HKMA’s right to require compliance to avoid circumvention of the Rules)

Conditions include:(i) Group is subject to group-wide supervision by HKMA or authorities in other jurisdictions; and(ii) Group wide integrated risk management function is established


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Hong Kong Rules – Covered EntitiesEntity Type Details

Financial Counterparties

Includes, and in each case only where only where such entity has an AANA of non-centrally cleared derivatives exceeding HKD 15 billion:- AIs- SFC licensed entities (holding Type 1, 2, 3, 4, 5, 6, 8, 9, 11 and 12 licences)- Mandatory provident fund schemes - Occupational retirement schemes- Companies authorised by the Insurance Authority to carry on any class of insurance business- Licensed Money service operators- Licensed lenders- Special purpose entities as defined in section 227 of the Banking (Capital) Rules, except where the special purpose entity enters into non-centrally cleared derivative transactions for the sole purpose of hedging;- Collective investment schemes as defined in the Securities and Futures Ordinance- Private equity funds- an entity that carries on a business outside Hong Kong and is engaged

predominantly in any one or more of the following activities, (i) banking (ii) securities business (iii) management of retirement fund schemes (iv) insurance business (v) operation of a remittance or money changing service (vi) lending (vii) securitisation (except where and to the extent that the related special purpose entity enters into non-centrally cleared derivatives transactions for the sole purpose of hedging) (viii) portfolio management (including asset management and funds management), and (ix) activities that are ancillary to the conduct of these activities


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Hong Kong Rules – Covered Entities (Contd.)

Entity Type Details

Significant Non-Financial Counterparty

An entity other than a financial counterparty that for a one-year period from 1 September each year to 31 August the following year has an aggregate notional amount of non-centrally cleared derivatives exceeding HKD 60 billion

HKMA Designated Entity

An entity designated at the discretion of the HKMA and not covered by the above entity types


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Hong Kong Rules – Collateral Requirements Eligible Collateral IM – Requirements VM -

Requirements- Cash

- debt securities issued or fully guaranteed by a sovereign associated with a credit quality grade 3 or above

- debt securities issued or fully guaranteed by a multilateral development bank

- debt securities issued or fully guaranteed by a public sector entity associated with a credit quality grade 3 or above

- Other debt securities associated with a credit quality grade 3 or above

- Gold

- Publicly traded equities included in the Hang Seng Index or any other main index

Excluded: Securities issued by AIs or foreign banks, securities that would create wrong way risk and securities that would result in over concentration in terms of issue, issue type or asset type

Haircut:

Standardised schedule with 8% FX mismatch haircut

Timing for Calculation:

Every 10 business day or at the earliest possible time, and in no case later than T+1, after one of the following events:- execution of a non-centrally cleared OTC derivative transaction; - the non-centrally cleared OTC derivative transactions forming part of the netting set changes; or- the calculation methodology changes

Timing for Delivery:

Standard settlement cycle (by T+2)

Segregation:

IM should be segregated from collector’s proprietary assetsIf a third party custodian is used for IM, the AI must ensure that the custodian meets certain criteria regarding its financial qualityIM collector must provide posting party with the option of individually segregated IM

Rehypothecation:

Prohibited, save that IM collected in the form of cash may be reinvested by the collecting party or its custodian if: - Securities are properly segregated; - Funds are only invested in eligible collateral; and- Re-investment is based on an agreement between the parties

Threshold:

Where cumulative IM exposure from a counterparty is equal or lower than HKD 375 million, parties may agree in writing not to exchange IM


Daily (by T+1)


Standard settlement cycle(by T+2)

Segregation:

N/A

Rehypothecation:

N/A


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Singapore Rules – Entities subject to the Rules

Entity Type Subject to Rules Details

MAS Covered Entity Yes – provided conditions are met

Trade must be:

(i) with another MAS Covered Entity or Foreign Covered Entity;

(ii) booked in Singapore;(iii) the MAS Covered Entity has an AANA of uncleared

derivatives booked in Singapore for March, April and May in an amount greater than SGD billion

Non-MAS Covered Entity No

Intragroup Transactions No MAS Covered Entity need not undertake exchange of margins if the uncleared derivatives contract is entered into with a counterparty who is an entity belonging to the same consolidation group as the MAS Covered Entity


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Singapore Rules – MAS Covered Entities

Entity Type Details

MAS Covered Entities

Includes all entities regulated under the Securities and Futures Act:

- Banks licensed under the Banking Act

- Merchant banks approved as financial institutions under Section 28 of the Monetary Authority of Singapore Act

- Other licensed financial institutions

Foreign Covered Entity

A person operating outside of Singapore who, if operating in Singapore, would have been a person within the meaning of MAS Covered Entity


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Singapore Rules – Deemed Compliance

Entity Covered Entity Applicable Rules

MAS Covered Entity MAS Covered Entity or Foreign Covered Entity

Deemed compliance with SG Rules where (i) the margin requirements it is subject to in a foreign jurisdiction are assessed to be comparable to the SG Rules; and (ii) the MAS Covered Entity can demonstrate that it has complied with the margin requirements of that foreign jurisdiction.

Following the WGMR member jurisdictions, the following jurisdictions are deemed comparable: Australia, Canada, the European Union, India, Japan, Republic of Korea, Mexico, Russia, Singapore, Switzerland and the United States from the date these jurisdictions implement margin requirements.


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Singapore Rules – Collateral Requirements Eligible Collateral IM – Requirements VM -

Requirements- cash

- gold

- debt securities issued by central governments and central banks (rating requirement AAA and BB-)

- debt of other issuers (rating requirement AAA to BBB-)

- equity securities (including convertiblebonds) in a main index of a regulated exchange

- Unites in a collective investment scheme, subject to certain restrictions

Excluded: Securities that would not be liquid, securities that would create wrong way risk and securities that would result in over concentration in terms of issue, issue type or asset type

Haircut:

Standardised schedule with 8% FX mismatch haircut


Every 10 business day or at the earliest possible time, and in no case later than T+1, after one of the following events:- execution or termination of a non-centrally cleared OTC derivative

transaction; - significant market disruption occurs;- changes to the asset classification of existing trades ; or- the calculation methodology changes


Within the standard settlement cycle for the relevant collateral type but no than (T+3).

Segregation:

IM must be held with an independent third party on trustIM should not be mixed and must be held under distinguishable separate arrangements to that of the collecting party’s proprietary money and assets

Rehypothecation:

Non-cash IM may only be rehypothecated for the purposes of hedging the IM collector’s derivative positions arising out of transactions with the customer for which such IM was collected

Threshold:

IM only needs to be posed where the cumulative IM exposure from to counterparty exceeds SGD$80 million


At least daily


Within the standard settlement cycle for the relevant collateral type but no than (T+3).

Segregation:

N/A

Rehypothecation:

N/A


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Clearing

Simon McKnight


49 / B_LIVE_APAC1:2197809v1

Variation/initial margin and clearing

How central clearing works

Benefits and risks of clearing

Clearing rules in the EU– Who is in scope?– Timing for implementation– Which products are in scope?

Interaction with Margin Rules

Focus on Clearing


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Party A Party B

ISDA Master Agreement

Credit Support Agreement

Bilateral trade


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Party A Party B

Cleared trade

Clearing House

Client clearing model

Principal model (UK)

Bilateral trade remains (but subject to modified terms) (A)

Mirror trade executed between CM and the CCP (into a client account) (B)

Margin flows through the structure (initial margin retained at CCP)

Security Interest over initial margin in favour of client

CMClient

CCP

£

£

A

B


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Clearinghouse

Clearing Member Clearing Member

Party A Party B

Clearing House Rules Clearing House Rules

Customer Agreement or amended ISDA Agreement

Customer Agreement or amended ISDA Agreement

Execution of trade

↑novation of trade to

Clearinghouse

How central clearing works

Bank A Clearing member

CCPBank F Clearing member

Bank E Clearing member

Bank D Clearing member

Bank C Clearing member

Bank B Clearing member

Default Protected from direct losses due to clearing membership

Clearing House closes out positions & uses margins and/or default fund contributions to cover losses

It is vitally important that the Clearing House is financially robust


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The benefits and risks of central clearing

Potential benefits Risks

Reduced contagion Concentration Risk

Reduced Credit Risk Limited Liability of clearing members

Cleared trades will attract favourable risk weighting and hence reduce capital charge for most counterparties

(NB risk weightings against default fund)

Capitalisation issues

Better transparency

Orderly Default Management

Possibility of portability may reduce failure


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EMIR ClearingWho is in scope?

FCs, NFC+ and TCEs which are their hypothetical equivalents

Category Counterparty Type

Category 1 Clearing members for at least one of the classes of OTC derivatives subject to the clearing obligation, of at least one of the CCPs authorised or recognised to clear at least one of those classes

Category 2 • FCs (inc. UCITS and FC AIFs) and “hypothetical” FCs• NFC+ AIFs (ie EU AIF, non-EU AIFM + above clearing threshold) and

“hypothetical” NFC+ AIFs

which belong to a group whose AANA of uncleared derivatives for Jan, Feb and March 2016 is above EUR 8 billion

Category 3 Same entity types as Category 2 but below the EUR 8bn threshold

Category 4 Other NFC+ and “hypothetical” NFC+ not falling with categories 1 - 3


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EMIR ClearingPhase-in and Frontloading

** NB. 13 July ESMA CP proposing 2 year delay of start date for [FCs] in Cat 3

Category 1 Category 2 Category 3 Category 4

G4

IRS 21 June 2016 21 Dec 2016 [21 June 2017]** 21 Dec 2018

EEA

IRS 9 Feb 2017 9 Aug 2017 [9 Feb 2018]**

CD

S R

TS 9 Feb 2017 9 Aug 2017 [9 Feb 2018]** 9 May 2019

Fron

tload

ing

G4 IRS: 21 Feb 2016

EEA IRS / CDS: 9 Oct 2016

G4 IRS: 21 May 2016

EEA IRS / CDS: 9 Oct 2016

N/A N/A


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EMIR ClearingWhich products will be subject to mandatory clearing?

Class of derivative

Products within class

G4 Currency IRS:

• Basis swaps denominated in EUR, GBP, JPY, USD

• Fixed-to-float IRS denominated in EUR, GBP, JPY, USD

• FRAs denominated in EUR, GBP, USD

• Overnight index swaps denominated in EUR, GBP, USD

EEA Currency IRS:

• Fixed-to-float IRS denominated in NOK, PLN and SEK

• FRAs denominated in NOK, PLN and SEK

Index CDS: • Untranched iTraxx Europe Main Index, Series 17 onwards, 5 yeartenor

• Untranched iTraxx Europe Crossover Index, Series 17 onwards, 5year tenor


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What’s next: deregulation?


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High quality legal updates and current awareness alerts

Information on our suite of navigator on-line subscription services including – navigator: Derivatives and FX (which covers the key issues relevant to

entities looking to enter into derivatives and FX spot contracts with counterparties on a cross-border basis).

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Contact us

T +65 6831 5610E [email protected]

Jason Valoti, Partner, Singapore

Jason acts for international investment banks in relation to structured and OTCderivative transactions, synthetic and cash CDOs, CLOs and repackagedsecurities and other asset and fund backed structures, including Shariahcompliant transactions. Jason also advises international investment banks inrelation to equity and commodity linked note, warrant and certificate issues. Inaddition, he advises investment managers on structured debt capital marketstransactions.

Simon McKnight, Partner, Hong Kong

Simon is a derivatives and structured products specialist whose work spansa wide range of products, including equity, credit and commodity linkedproducts in OTC, loan and notes format. His most recent work has focusedon corporate equity derivatives such as margin loans and collar financings.Before that he worked on all forms of credit derivatives, equity derivatives,stock loans/repos and repackagings and spent a year working on theLehman administration.

T +852 2583 8268 E [email protected]


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Contact us

T +65 6831 5632E [email protected]

Jonathan Quie, Of Counsel, Singapore

Jonathan specialises in derivative and structured product transactions,advising a wide range of international financial institutions on complex,bespoke equity, index and credit-linked structures. Jonathan has a particularfocus on advising fund managers and other buy-side institutions on primebrokerage, derivative and other transactional documentation.


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variation/initial margin and clearing · an nfc is only subject to the clearing obligation if the...

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