1. FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCES Break out session: Client clearing explained MIG Seminar Financial Services Team Norton Rose LLP April 2013

2. 2 EU: client clearing in EMIR CCPs and clearing members must offer both: –Omnibus client segregation: Separate records / accounts distinguishing between clearing member's assets and positions and assets and positions of its clients –Individual client segregation: Separate records / accounts distinguishing between assets and positions of each client of clearing member and any excess margin posted to CCP CCPs must allow clearing members to open further accounts Requirement to distinguish involves recording in separate accounts, not netting across accounts and not exposing assets in one account to losses in another CCPs and clearing members must disclose levels of protection and costs - must be reasonable commercial terms CCPs must commit to trigger procedure for porting - if clearing member defaults and client requests, transfer client positions and assets to another clearing member that has agreed to step in - omnibus and individual accounts CCPs can actively manage their risks by liquidating positions and assets if this cannot be done within a pre-defined timeframe Client collateral can only be used to cover positions held for relevant client account and any surplus on a clearing member default should be returned to client or, if not possible, to clearing member for relevant client account Neutrality on principal to principal versus agent model: domestic issues are separate

3. 3 Client clearing Clearing Member CCP Client Alternative Clearing Member Back off contracts, clearing agreement, security interest in favour of the client, collateral Cleared contract, CCP rules, collateral OTC Counterparty OTC derivative trade, non-clearing master agreement Porting of positions and assets takes place on clearing member default

4. Account structures – Omnibus and Individual Segregation

5. 5 Omnibus Segregation Client 1 Client 2 Client 3 Clients 1, 2 +3 Clients, 1, 2 + 3 Clearing Member (books + records) CCP (books + records)

6. 6 Omnibus segregation Records and accounts kept at CCP which distinguish the assets and positions of the clients within the omnibus account from assets and positions within either the clearing members house account or any other client account Positions can be netted within an omnibus account but not across accounts Assets covering positions in an omnibus account are not exposed to losses on positions recorded in any other account but within the account, one clients assets may be used to cover another clients positions – so fellow client risk will exist Excess collateral can be held at the clearing member level

7. 7 Individual Segregation Client 1 Client 2 Client 3 Clearing Member (books + records) CCP (books + records) Client 1 Client 2 Client 3 Client 1 Client 2 Client 3

8. 8 Individual Segregation Positions and assets distinguished from the positions and assets of any other client and the clearing members house account Positions within the account can be netted but positions cannot be netted across accounts Assets covering positions recorded in the account cannot be used to cover losses connected to positions recorded in any other account, so no fellow client risk Any collateral called by the clearing member which is in excess of that called by the CCP must be passed to the CCP and not held by the clearing member

9. Legal documentation in Client Clearing structures

10. 10 A typical client clearing documentation map CCP Clearing Member Security Trustee OTC derivative counterparty Cleared Transaction CCP Rules Trust Deed Client Execution standard terms Non-clearing Master Agreement Transaction Clearing Master Agreement and collateral document Client Clearing Agreement Security interest

11. 11 Impact of default – Omnibus Accounts Omnibus segregation PartyIs the Client exposed to losses arising from that partys default? How does the exposure arise? Clearing Member (to the extent any excess collateral is posted to the Clearing Member by the Client: a big caveat on protection) Clearing Members may hold excess collateral posted by Clients who have selected omnibus segregation. Such excess collateral will not be part of the porting process at the CCP. Other Clients of the Clearing Member If another Client in the same omnibus account defaults, the loss may have to be borne by all of the Clients in that account. CCP Clearing Members are likely to make their obligations to Clients conditional on CCP performing its obligations (in both BAU and default situation). CCP default is a risk for Clients.

12. 12 Impact of default – Individual Accounts PartyIs the Client exposed to losses arising from that partys default? How does the exposure arise? Clearing MemberXClient clearing protections under EMIR should protect Client against Clearing Member default. Other Clients of the Clearing Member XN/A CCP Clearing Members are likely to make their obligations to Clients conditional on CCP performing its obligations (in both BAU and default situation). CCP default is a risk for Clients: full segregation options being looked at to deal with this

13. 13 Documentation checklist The types of issues that we would be looking at in the clearing documentation are: –What is each document doing – there are usually a number of documents, you need to understand what each one is doing and your obligations, rights and risks under each –Porting mechanism – what are the mechanics of this at each relevant CCP? What exactly will be ported or returned to the client on the default of the clearing member? Can the CCP claim any costs and expenses from the clients assets? Are there any registration requirements? When does the client need to appoint an alternative clearing member? Is there a security trustee involved? –Impact on existing OTC master agreements – how do the documents relating to cleared OTC derivatives interact with any existing master agreements relating to non-cleared OTC derivatives? E.g. are there any cross netting and set-off provisions? How will a default or termination under one of the agreements impact on the other? –Termination rights - in what circumstances can the client exercise its rights to terminate a cleared derivative or the back to back contract? What events at CCP and clearing member level will trigger termination of the clients contracts? What rights does the client have in each case?

14. 14 Documentation checklist cont/d –Liability and indemnity - is the client being asked to accept liability for anything which is really the clearing members responsibility? What indemnities is the client being asked to give? –Security, title transfer and the risks for the client - what quality of security is being provided to the client, on what terms are the securities transferred and what risks might these arrangements pose for the client? –Client money – does the client have client money protection? How does the client money regime interact with the client clearing structure being entered into? –Arguably the client money issue makes most difference either in relation to transfer risk in individual seg account or in relation to moneys held by the clearing member in the omnibus account –Structure is more complex as there are different documentation packages across the various clearing houses with varying degrees of discretion and mandating of terms –However, these are the key issues to be asking about

15. Indirect client clearing

16. Indirect clearing: The world of the second tier banks At clearing members request, CCP must keep separate records and accounts showing indirect clients position and assets No requirement to offer indirect clearing but if it does then must be on reasonable commercial terms: may include minimum operational terms for clients who participate Must give client choice between individual and ominous segregation options for indirect clients in its books and records Must have procedures to transfer indirect clients position and assets to a new client or clearing member or liquidate them if original client defaults: back up client or clearing member mechanism to be included Must be credit institution, investment firm or equivalent in third country Must keep records and accounts distinguishing its assets and positions from those of indirect clients Must offer indirect clients choice of account and disclose risks Must request clearing member to open segregated account at CCP for indirect clients Contract with indirect client must be consulted on with clearing member Must provide sufficient information to clearing member to identify, monitor and manage any risks. In event of default all information to be provided to clearing member. Politics of this compromise is to balance the interest of the second tier banks who do not wish to lose their client base against systemic stability issues CCP Clearing Member Client Indirect client

17. 17 Indirect client clearing CCP Clearing Member Client Indirect Client Cleared contract, CCP rules, provision of collateral Adopting Client Back off contract, clearing agreement, CCP mandated documentation, provision of collateral Possible for indirect client to move into position of client upon client default (subject to agreement with clearing member) Porting of positions and assets takes place on client default OTC derivative counterparty Back off contract, indirect clearing agreement, clearing member mandated documentation provision of collateral

18. 18 OTC Oracle: our EMIR online technical resource

19. 19 Disclaimer The purpose of this presentation is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Norton Rose LLP on the points of law discussed. No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any constituent part of Norton Rose Group (whether or not such individual is described as a partner) accepts or assumes responsibility, or has any liability, to any person in respect of this presentation. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of, as the case may be, Norton Rose LLP or Norton Rose Australia or Norton Rose Canada LLP or Norton Rose South Africa (incorporated as Deneys Reitz Inc) or of one of their respective affiliates.