1. IBA International Financial Law Conference – May, 2015
Access to clearing of OTC derivatives by non-members;documentation, asset protection and capital treatment
IBA International Financial Law Conference – May, 2015

2. Access to Clearing - Client Clearing

3. Access by non-members - focus on Client Clearing
To comply, a party must clear at a CCP authorised under EMIR Article 14 or recognised under EMIR Article 25 to clear that class of derivatives, and listed in the register in accordance with Article 6(2)(b) either by
becoming a clearing member
becoming a client of a clearing member
establishing indirect clearing arrangements with a clearing member
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4. Member clearing Catherine Tholstrup Law Firm Party A (CM) ISDA CSA
Party B (CM)
CCP
Party B/A
Party A (CM)
CCP Rules
CCP Rules
Party B (CM)
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5. Client Clearing – with Executing Broker
CCP
Party B/A
CCP cleared Transaction
(if EB is CM)
CCP cleared Transaction
CCP cleared Transaction
EB Clearing
Broker
Party B/A
Client Clearing
Broker
Party A/B
Client Transaction
Client Transaction
Client
Party B
Executing Broker
Party A
Bilateral Transaction (disappears once cleared transaction is registered with CCP)
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6. Indirect client clearing
Last minute introduction EMIR - indirect client clearing
Has not yet proven an effective means of access
Various hybrids being considered
EMIR Review expected to address
CCP
Party A/B
Clearing Broker (CM)
Party A/B
Executing
Broker (CM)
Party A
Client
Party B
Indirect Client
Party B
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7. Focus on access through Client Clearing - Documentation
ISDA/FOA (FIA Europe) Clearing Addendum
Central link between the Client and the CCP
A “client clearing agreement” to be entered into between Clearing Member and Client
to allow Client to access multiple CCPs through Clearing Member
to provide for margining from Client to Clearing Member
to protect Clearing Member from mismatch and other risks
to regulate Client’s ability to move positions to a back-up Clearing Member upon Clearing Member default (porting)
To regulate default situation
Miscellaneous relationship functions
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8. Clearing Addendum –Architecture
Clearing Broker
ISDA Master Agreement or Futures Agreement
Client
ISDA/FOA Client Cleared OTC Derivatives Addendum
Agreed CCP
Agreed CCP
Agreed CCP
Agreed CCP Service
Agreed CCP Service
Agreed
CCP Service
Agreed CCP Service
Agreed
CCP Service
Agreed
CCP Service
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9. Clearing Agreement – Key client considerations
Notices
Business Days
Business As Usual Porting
Timing for transfer of collateral
Optional termination rights
Clearing parameters/limits
Segregation
Criteria for Additional Collateral Amount
Collateral
Fees
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10. Clearing Agreement – Key client considerations - Notices
Play a role in respect of
Collateral calls
Calls for additional collateral
Exchanges
Business as usual porting
Amendments including: amendments to clearing parameters, and amendment of fees
Optional termination rights (including following modification)
Focus on number og days and kind of days
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11. Clearing Agreement – Key client considerations – Business As Usual Porting
Focus on
Ability
Conditions for
Timing (again notices)
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12. Clearing Agreement – Key client considerations – Events of Default
Focus on
Which ones, if any, apply to Clearing Member?
Amendment/removal of grace periods
Consequences of
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13. Clearing Agreement – Key client considerations – Transfer of collateral
Focus on
Timing
Business Days
Failures
Remedies
Prefunding
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14. Clearing Agreement – Key client considerations – Optional Termination Rights
Focus on
Terms under which
Mutuality
Timing
Business-As-Usual Porting in notice period
Conditions for BAU Porting in notice period
Calculation of close-out amount – who and what?
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15. Clearing Agreement – Key client considerations – Clearing limits
Focus on
Are there any?
What are they?
How may they be amended?
Is Clearing Broker obliged to clear within agreed limits?
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16. Clearing Agreement – Key client considerations - segregation
Focus on
What kind of segregation – ISA/OSA Value/Asset?
Position on default/insolvency of clearing broker
Position on default/insolvency of CCP
Position on default of clearing broker and other client
Cost
Capital treatment
Legal opinion available?
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17. Clearing Agreement – Key client considerations – Additional Collateral Amount and ”excess collateral”
Focus on
When can be called?
What can be called?
Cap?
Notices?
BAU-porting in notice period?
Holding of on segregated account?
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18. Client Clearing – Key client considerations – Collateral
What types?
Distinguish Initial Margin and Variation Margin
What is passed on and what is returned?
Substitution?
Interest?
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19. Client Clearing – Key client considerations - Fees
Size
Transparency
Additional Costs
Notices for amendment to
BAU Porting in notice period
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20. Clearing Collateral Agreement
Credit Support Annex (CSA) applies as separate CSA to each Cleared Transaction Set – i.e. where all Client Transaction-related CM/CCP Transactions are cleared on same Agreed CCP Service
Purpose:
to collateralise exposures related to each Cleared Transaction Set
to ensure Independent Amount (initial margin) is transferred by Client regardless of Exposure to match (+ add-on) CCP IM Call
to reflect that within Variation Margin may be “matching” or not
to reflect different margin types for VM and IM
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21. Client Clearing Agreement– contractual freedom, within regulatory and CCP framework
Client/CM relationship a bilateral arrangement, but must
respect EMIR requirements
respect CCP Rules
give client the right level of protection for its needs
at the right level of cost
lead to the correct capital treatment for client (and CM)
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22. Margin and Segregation - EMIR Article 39 and 41
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23. Client Protection - EMIR on margin and segregation – Article 39 and 41
CCP shall impose, call and collect margins from clearing members on intraday basis (NB! CM may call ACA)
CCP shall be able to distinguish clearing member assets from other clearing member assets and clearing member house account from clearing member client account (OSA)
CCP shall be able to distinguish members’ various client accounts (ISA)
Clearing member shall distinguish both in its CCP accounts and in its own accounts its own assets from client assets (and positions)
Clearing member shall offer clients individual segregation of assets and positions
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24. Client Protection - EMIR on margin and segregation – Article 39 and 41
EMIR Continued:
Clearing member shall ensure that if client opts for ISA, excess margin shall also be posted to CCP and segregated
CCP and clearing member shall disclose levels of protection and costs associated with different levels of segregation
CCP and clearing member shall offer services on reasonable commercial terms
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25. Default procedures – post default portability
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26. Client Protection - EMIR on Default Procedures – Portability – Article 48
CCP to have detailed procedures in place to deal with clearing members that don’t comply with participation requirements
CCP to verify that default procedures are enforceable
CCP to take all reasonable steps to ensure it has legal powers to 1) liquidate proprietary positions of clearing member in default and to 2) transfer or liquidate client’s position of the defaulting clearing member (porting)
CCP must as a minimum contractually commit itself to trigger procedures for porting to a back-up clearing member
NB Article 37(6):CCP may impose obligations on CMs such as participation in auctions of a defaulting clearing members positions
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27. Capital treatment of client cleared derivatives
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28. Capital Requirements Regulation
Reminder G-20: Contracts that are not subject to central clearing shall be subject to stricter capital requirements
CRDIV/CRR Purpose: contribute to reduction of systemic risk by motivating parties to clear OTC derivatives centrally if possible.
Accordingly
Institutions must set aside significantly more capital to cover counterparty exposure for bilateral – non-CCP cleared OTC derivatives
Institutions that CCP clear are let off with limited capital requirements and no CVA
Essential for institutions to get correct treatment
Exposures to CCPs by Clearing Members covered by more favourable treatment in CRR, but what about clients and indirect clients?
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29. Capital Requirements Regulation – CMs exposures to CCPs
An institution clearing as clearing member for clients may when calculating own fund requirements for exposures to the (Q)CCP apply a risk weight of 2% to the exposure values of all its trade exposures with the QCCP (Article 306.1(a))
Risk weighted exposure amounts are the sum of exposure values (which may under certain circumstances for CM/CCP Transactions be zero) multiplied by the risk weight
No CVA applies
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30. Application of Article 306 to clients as per Article 305 (”look-through”)
NB! Definition of ”client” covers indirect clients
As a starting point clients calculate own funds requirements for CCP-related transactions as any other exposure
Clients may calculate own funds requirements for QCCP-related transactions under Article 306 (favourable treatment) if
Segregation to create bankruptcy remoteness in the event of default or insolvency of CM or one or more of its other clients
Laws and contractual arrangements facilitate transfer of positions and corresponding collateral to a back-up CM
Client has ”available” a legal opinion concluding that client would bear no losses on account of CMs insolvency or any of CMs other clients under laws of: institution, CM and CCP, law governing transactions, law governing collateral or other
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31. What is required of local law of Clearing Member?
Requirement:
Laws …. facilitate transfer of positions and corresponding collateral to a back-up CM
Client has available a legal opinion concluding that client would bear no losses on account of CMs insolvency or any of CMs other clients under laws of … CM
Also remember requirement in Article 48 that CCP shall verify that its default procedures are enforceable.
Does this require CCP to get legal opinion that laws of each CM jurisdiction would support such default procedures, including obligation to trigger transfer to back-up?
Are such opinions made available to clients; e.g. on a ”non- reliance”-basis?
FIA Europe has commissioned, and is commissioning ”look-through” opinions for some jurisdictions
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32. FIA Europe CRR 305(2)”Look-through” opinions
Apply to prudentially regulated clients required to comply with CRD IV/CRR, and who clear contracts on LCH.Clearnet through an English Clearing Broker or a German clearing broker (new)
Apply to individually segregated account type of clients, as defined in EMIR
Documentation agnostic
Split into two opinions – one applicable to the CCP and one applicable to the clearing member
If clearing through an English or German broker at LCH and opted for ISA:2 % risk weight (if assumptions agreed)
What about other segregation types?
What about brokers from other jurisdictions?
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33. For further information please contact Catherine Kendal Tholstrup www
For further information please contact Catherine Kendal Tholstrup Tel:
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