Natixis Asset Management Legal Department address:

Size: px

Start display at page:

Download "Natixis Asset Management Legal Department address:"

Gordon Baldwin
6 years ago
Views:

1 Internatinal Organizatin f Securities Cmmissins C/Oquend Madrid Spain Sent by t wgmr@isc.rg Natixis Asset Management Legal Department address: service.juridique.structuratin.et.peratins.de.marche@am.natixis.cm Paris, 28 th September 2012 Re: Cnsultative Dcument n Margin Requirements fr Nn-Centrally-Cleared Derivatives Natixis Asset Management (NAM) thanks the Basel Cmmittee n Banking Supervisin and the Internatinal Organizatin f Securities Cmmissins fr giving it the pprtunity t respnd t the Cnsultative Dcument n the Margin Requirements fr Nn-Centrally- Cleared Derivatives. With assets under management f 293 billin Eurs (31/03/2012), NAM ranks amng the leading Eurpean asset managers. It ffers a wide range f effective management slutins, based n extensive expertise in Eurpean and specialized asset management including mandates, UCITS and AIF. NAM prvides services t a diverse client base: institutinal investrs, large cmpanies, distributrs, and clients f Banque Ppulaire and Caisse d Epargne. Fr mre infrmatin abut NAM, please visit NAM has actively participated in discussins with the Assciatin Française de Gestin (AFG) and the Eurpean Fund and Asset Management Assciatin (EFAMA) n the Cnsultative Dcument, but wishes t express its wn views separately. In additin t its respnses t the specific questins set ut in the Cnsultative Dcument, NAM has sme general cmments which are set ut belw. 1

2 GENERAL COMMENTS: NAM is cncerned that the prpsal fr payment f initial margin will be extremely cmplex and difficult and cstly t implement. Hwever, if payments f initial margin are retained, we believe that regulated funds (fr example, UCITS and AIF) shuld either be exempt frm paying initial margin, r if they are nt exempt, be treated as "prudentiallyregulated entities" with a high threshld amunt, as fr banks. Our analysis is as fllws: Payments f initial margin We are nt cnvinced that the system f payments f initial margin prpsed in the Cnsultative Dcument is wrkable, fr the fllwing reasns: Initial Margin is nt currently market practice. In general, cunterparties nly require the payment f variatin margin. The amunt and frequency f payments f variatin margin may need t be adapted, but cunterparties are generally satisfied that variatin margin prvides a sufficient level f prtectin. In additin, many cllateral management systems have been set up nly t managed variatin margin: requiring payments f initial margin wuld mean significant adaptatins and additinal cst; An autmatic requirement fr bth parties t pay initial margin makes n sense fr certain transactins, such as ptins, given that there is n cunterparty risk fr the buyer; If bth parties are required t pay independent amunts, the payments wuld ptentially cancel each ther ut; In practice, it may be difficult t ensure that the nn-defaulting party actually recvers the margin paid t the defaulting party. This culd invlve lengthy delays and legal actin; It will be difficult t calibrate the threshlds f initial margin psted by cunterparties f very different creditwrthiness; If certain market participants are exempt, this wuld give rise t incngruus situatins, such as a majr internatinal bank making a neway payment t a small, risky crprate. It is likely that banks wuld simply stp trading in such situatins, thus preventing the crprate frm apprpriately hedging its risk. Obviusly, initial margin is intended t cver cunterparty risk and variatin margin is intended t cver market risk. Hwever, if the philsphy is t prvide fr reasnable, nt perfect, cverage it wuld be far simpler and almst as effective t reinfrce the variatin margin requirements. Initial Margin with respect t regulated funds Funds which have limits n their glbal expsure t derivative instruments relative t their ttal net asset value, as is the case fr regulated funds, d nt present any systemic risk. Mrever, Net Asset Values (NAV) are calculated n a marked t market basis with a daily publicatin. Thus, regulated funds are mre transparent than mst financial institutins. 2

3 Regulated funds are subject t very stringent rules that ensure that they will nt default, thus prviding a very high level f investr prtectin. Fr example, the fllwing rules apply: - Diversificatin rules fr investments and limits n the underlying assets fr derivatives; - Cunterparty risk limits (e.g. a regulated fund shall nt have an expsure n derivative transactins f mre than 10% f its assets t a single cunterparty); - assets f regulated funds are separate frm the management cmpany s balance sheet; - an independent custdian/depsitary versees the activity f the manager and safeguards the assets; - the manager is required t develp risk management prcesses with respect t cnflicts f interest and prcesses fr managing liquidity risk in rder t ensure that the funds it manages are able t meet redemptin requests frm investrs. As a result f these prudential rules, cunterparties t derivatives have very little cunterparty risk n regulated funds. Histrically, defaults by regulated funds have been extremely rare and such funds therefre pse very little systemic risk. Please nte that current market practice is nt t require that regulated funds pst an independent amunt; they pst variatin margin nly. This reflects the extremely lw risk f default f regulated funds and NAM believes this shuld be taken int accunt in the prpsed regulatin. Fr these reasns, we believe that regulated funds shuld be exempt frm psting initial margin. If, hwever, initial margin is t be psted by regulated funds, we believe that such funds shuld be cnsidered t be Prudentially Regulated Financial Cunterparties (PRFC) and that cnsequently a higher threshld amunt (similar t the threshld applied t banks) fr initial margin shuld apply. Regulated funds tend t use derivatives fr hedging rather than fr taking psitins. Applying a high minimum threshld amunt wuld allw these funds t cntinue t engage in this activity withut incurring excessive cst and wuld limit the negative impact f initial margin requirements n their liquidity. Last but nt least, requiring that they pst large amunts f initial margin wuld have a direct effect n their perfrmance as assets used fr cllateral cannt be invested elsewhere. It is imprtant t remember that many f these funds are pensin funds, mutual funds r life insurance prducts which are ultimately held by retail investrs. Is the best use f the assets f the fund t be psting cllateral fr defaults which rarely ccur, and which have very little impact n the financial sectr, r t imprve perfrmance fr investrs? Mre specifically amng regulated funds, structured funds present different specificities that make them even mre eligible t an exemptin r, at least, t a higher threshld amunt. First, they are guaranteed by a bank r a banking rganizatin that is itself cnsidered t be a PRFC. In additin t all the arguments set ut abve stressing the fact that 3

4 regulated funds pse very little systemic risk, structured funds can rely n the bank guarantee in wrst case scenaris. Secndly, the majrity f these funds are 100% guaranteed, s the OTC instruments in which they invest t present a near zer risk fr the cunterparts and therefre make Initial Margin, and even Tw Way Variatin Margin in sme cases, irrelevant. Secndly, the majrity f these funds display a 100% capital guarantee. This 100% guarantee is explicit, as mentined befre, but als implicit. Thus, the OTC instruments in which they invest bear this implicit guarantee making the risk highly asymmetric between thse funds and their cunterparts. Indeed the valuatin f thse instruments is in average and in majrity psitive, ften with n cap and in prfit f the fund. In the minrity cases in which this valuatin is negative, the dwnside is limited. Therefre these funds present a very lw risk fr the cunterparts, making thus Initial Margin, and even Tw Way Variatin Margin in sme case, irrelevant. IMPLEMENTATION AND TIMING OF MARGIN REQUIREMENTS Q1: It is wrth nting that the refrm regarding clearable derivatives will change ur current practice cnsiderably. We will have t adapt all ur derivative agreements, ur calculatin and valuatin mdels and ur IT systems in rder t cmply with EMIR and Ddd-Frank. The wrklad n firms fr clearable derivatives is already substantial and a number f departments are heavily invlved in this prject. Therefre, we feel strngly that margin requirements n nn-cleared derivatives shuld cme int frce after the majrity f clearable derivatives have been incrprated int clearing systems. Furthermre, with respect t nn-cleared derivatives, all cllateral agreements will need t be negtiated r amended. As all firms wuld be required t amend their agreements at the same time, timeframes need t be reasnable in rder nt t create a bttleneck which might particularly penalise smaller firms. We wuld als like t see margin requirements fr nn-cleared derivatives phased-in, depending n the risk, type, maturity and cmplexity f the transactin. We wuld als like t draw yur attentin t the need fr a grandfathering clause: - fr existing cntracts, as such cntracts were entered int withut taking int accunt additinal capital csts r margin requirements; - fr transactins entered int by structured funds in rder t avid any negative effect n the perfrmance guaranteed t the unit hlder when the fund was launched. Indeed, the ecnmic balance f thse funds is calibrated at inceptin, leaving n rm fr additinal/ exceptinal csts withut lwering expected return fr clients. 4

5 ELEMENT 1: SCOPE OF COVERAGE INSTRUMENTS SUBJECT TO THE REQUIREMENTS Q2: freign exchange swaps A distinctin shuld be made between: - initial margin: freign exchange swaps and frwards shuld be exempt frm initial margin requirements regardless f maturity. Fr NAM s prtflis using freign exchange swaps, systematic exchange f IM wuld lwer the perfrmance by apprximately 3 bps. It is als wrth nting that such transactins are usually hedges. Frm a financial pint f view, this exemptin wuld save Eur 240 millin f initial margin fr the prtflis f NAM, representing a decrease f 88%. This exemptin culd represent fr all ur industry a substantial saving f liquidity, especially if re-use f cllateral is nt allwed, as is the case fr rep and security lending transactins. - variatin margin: variatin margin shuld apply t freign exchange swaps and frwards with a maturity f mre than a three mnth. These transactins d nt present significant cunterparty risk t market participants and are nt likely t be a surce f systemic risk. Variatin margin is already paid n these transactins, and we d nt believe it is advisable t change this practice. Fr this type f transactin, settlement risk can be mitigated thanks t the use f apprpriate platfrms. Fr instance, CLS allws real-time settlement between cunterparties fr each pair f matched instructins by matching the crrespnding debit and credit entries acrss Settlement Members. The develpment f such platfrms ffers an alternative t systematic exchange f Initial Margin. Q3: Other exemptins In ur pinin, the exemptin shuld be extended t all transactins fr which the payment is made upfrnt and nt during the life f the transactin r at maturity. Fr example, the buyer f an ptin shuld be exempt frm initial margin. Otherwise, the buyer wuld be required t pay the premium and, even thugh the seller has zer risk n the buyer, als initial margin, thus adding cunterparty risk where there was nne. As mentined abve, transactins entered int by structured funds shuld als be exempt frm psting initial margin. First, these funds are guaranteed by a bank r a banking rganizatin that is itself cnsidered t be a PRFC. In additin t all the arguments set ut abve stressing the fact that regulated funds pse very little systemic risk, structured funds can rely n this entity in wrst case scenaris. Secndly, mst f these funds benefit frm a 100% capital guarantee. This guarantee is bth explicit, as mentined abve, and implicit. The OTC instruments in which they invest benefit frm this implicit guarantee making the risk highly asymmetric between thse funds and their cunterparties. The valuatin f thse instruments is n average and mst f the time psitive, ften with n cap and t the benefit f the fund. In the very few cases where the valuatin is negative, the dwnside is limited. As a result, these funds present a very lw risk fr cunterparties, making Initial Margin, and even Tw Way Variatin Margin in sme cases, irrelevant. 5

6 ELEMENT 2: SCOPE OF APPLICABILITY Q4: Scpe f applicability As set ut abve, current practice is t pst variatin margin nly, and we d nt believe this shuld change. With respect t initial margin, ur psitin is different, as explained abve in ur general cmments. We d nt think that initial margin shuld apply at all because it will be t cmplicated t implement, in particular fr the asset management industry. If it is t apply, the exchange f initial margin shuld nt be mandatry fr regulated funds such as UCITS but shuld be negtiated n a case by case basis taking int accunt the risk f default f each cunterparty. In additin, it is vital that the methds fr calculating and valuing initial margin be harmnised (please refer t ur answer t questins 13 t 15 belw). It wuld be easier fr cunterparties t pst and cllect initial margin based n a standardised mdel f calculatin and threshld. Q5/Q6/Q7/Q8: Threshld We believe that regulated funds and specifically UCITS and (at least after the AIFM directive is implemented) AIF shuld be cnsidered as Prudentially Regulated Financial Cunterparties (PRFC) and that a higher initial margin threshld shuld apply, as it des fr banks. Mrever, regulated funds generally use derivatives fr hedging rather than fr taking psitins. A higher threshld wuld allw such funds t cntinue their activities withut incurring additinal csts and wuld limit the negative impact f initial margin requirements n their liquidity. Therefre, we prpse a threshld f 500 millin eurs f Initial Margin fr all transactins entered int between each fund and its cunterparties. We believe that a threshld calculated n the basis f ntinal amunt creates an incentive fr riskier prducts such as Equity r Cmmdity derivatives cmpared t a threshld based n Initial Margin requirements. Indeed, the margin amunt calculated n the basis f Initial Margin required wuld be far higher fr extic prducts than fr vanilla prducts. Q9: On tw-way margin The capital requirements fr many financial institutins will be reduced if they receive initial margin. Universal tw-way margin will als have a psitive effect n systemic risk by ensuring that the risks assciated with nn-cleared OTC transactins are cvered if a cunterparty defaults. In rder t ensure a higher degree f prtectin, we suggest investigating whether cllateral culd be psted t a third party, in rder t avid the prblem f recvering cllateral frm a cunterparty in default. The clearing huses culd be well psitined fr ffering such a service, independent f their clearing business. The csts f having a third party custdian culd be ffset by reducing the initial margin fr bth parties. Hwever, we wish t stress that universal tw-way margin wuld be far frm neutral fr markets participants in terms f liquidity, peratinal impact and cst. 6

7 On liquidity, universal tw-way margin will have a majr impact n mst market participants. Surcing margin will be a majr issue fr UCITS, as structurally they d nt have access t large pls f cash and are required t invest mst f their assets. Especially if the practice f cllateral re-use received under ther transactins is frbidden. Frm an peratinal perspective, implementing universal tw-way margining will cnstitute a challenge fr all cncerned entities as internal systems, tls and prcesses will need t be altered r even replaced in rder t take int accunt new wrkflws, calculatin mdels etc. Depending n the existence f ne r several calculatin mdels and n hw accurate definitins f haircuts, threshld etc. will be, the risk f dispute between parties may rise significantly. Als, we need t cnsider the csts entailed by the implementatin f universal tw-way margining. As this stage, it is difficult t evaluate these csts but we can anticipate: An pprtunity cst with a decrease in perfrmance fr final investrs, reaching up t 14 basis pints fr investments in structured funds An peratinal cst with a vlume f Margin Calls multiplied by 2, invlving majr peratinal csts fr the funds and thus final investrs. Q 10 /Q 11/Q12: Regulated entities nn regulated entities The prpsal by which regulated entities pst initial margin t unregulated cunterparties wuld give rise t incngruus situatins, such as a majr internatinal bank paying initial margin t a small, risky crprate. It is likely that banks wuld simply stp trading in such situatins, thus preventing the crprate frm apprpriately hedging its risk. In additin, when nn-prudentially regulated entities start t experience difficulties, this prpsal wuld accelerate their default by increasing their margin. ELEMENT 3: BASELINE MINIMUM AMOUNTS AND METHODOLOGIES FOR INITIAL AND VARIATION MARGIN It is stated that the methdlgies must ensure that all expsures are cvered fully with a high degree f cnfidence. Hwever, the VaR prpsed by IOSCO is significantly mre nerus than the VaR prpsed by ESMA fr the CCPs. Thus, we are cncerned that the margin system being prpsed is intended t cver all risk that market participants have with their cunterparties. Indeed, the IOSCO cnsultatin prpses a mdel-based apprach cnsistent with a netailed 99 percent cnfidence interval ver a 10-day hrizn. These parameters are nt cnsistent with the ESMA cnsultatin paper, published n June 25 th and entitled Draft Technical Standards fr the Regulatin n OTC Derivatives, CCPs and Trade Repsitries, in which the ESMA suggests Eurpean CCPs set up a ne-tailed 99.5 percent cnfidence interval ver a 5-day hrizn fr their mdels. Fr mre cnsistency, the Initial Margin cmputatin shuld use the same parameters fr a mdel-based apprach whether the cntract is cleared r nt. We suggest an alignment with the parameters applicable t Eurpean CCPs. In ur view, the philsphy shuld be t aim fr reasnable, nt perfect, cverage, fr the reasns set ut belw: 7

8 Capital requirements have been r will be significantly reinfrced, thus reducing default risk fr a large number f market participants (particularly banks under Basel III and insurers under Slvency II); It wuld be preferable fr the ecnmy, particularly in times f recessin, fr assets t be used in financing the ecnmy instead f lying drmant in cllateral accunts; Cllateral requirements are likely t have a significant impact n market liquidity; If margin requirements are t nerus, we are cncerned that market participants will be less likely t prudently hedge their risks. Q13 à Q18: Methdlgies f IM and VM We believe there shuld be a single mdel fr calculating initial margin which is apprved generally by the market, fr a number f reasns: If cunterparties t the same trade have different mdels, there will be cntinuus disputes abut the amunt f initial margin t be psted; Regulatrs d nt necessarily have the resurces t apprve different internal mdels: this has been a prblem with Slvency II, fr example; Regulatrs in different jurisdictins are likely t have different appraches t internal mdels, thus exacerbating the differences between crss-brder cunterparties t the same trade; There is n incentive fr market participants t develp internal mdels if they must be at least as cnservative as the standard mdel. In ur view, the best apprach wuld be t prmte an industry initiative that wuld invlve markets participants glbally in rder t prpse and sign-ff methdlgy n a set f standard mdels fr varius types f nn-cleared OTC prducts. This culd be similar t ISDA effrts t prvide standard prcedures, determinatins and mdels fr credit derivatives t the industry. The methdlgies prpsed fr calculating variatin margin cmply with regulated funds rules which require calculating the NAV daily, n a MtM basis. Q19: Minimum Transfer Amunt Current market practice n bilateral OTC trades is t have a Minimum Transfer Amunt. The MTA fr NAM s funds is currently 150 k and reduces the number f margin calls by 70% cmpared t an MTA f zer. In accrdance with EMIR, MTAs are still allwed by the regulatr. The current MTA level used by NAM (150 k ) ffers a gd balance between risk cverage and peratinal efficiency and shuld be maintained. ELEMENT 4: ELIGIBLE COLLATERAL FOR MARGIN Q20/Q21: Eligible cllateral We strngly agree with the BCBS and IOSCO prpsal f increasing the types f eligible cllateral. If nly a small pl f assets is eligible, the cllateral requirements culd have an impact n their price and availability. Parties shuld be allwed t negtiate their wn list f eligible cllateral, taking int accunt lcal regulatins and their in-huse prudential plicy. Fr instance, units f mney market funds and ther similar funds culd als be included. 8

9 The delivery timeframe and the settlement rules f the securities shuld be an additinal cnditin f cllateral eligibility. ELEMENT 5: TREATMENT OF PROVIDED MARGIN Q22/23/24: In ur pinin, initial margin shuld be exchanged n a grss basis rather than net basis and shuld be held in segregated accunts with a third party custdian. This is the best prtectin frm a cunterparty s default. If it is decided that initial margin shuld be exchanged n a net basis, it is fundamental t define the rules n interest cnflicts, n liabilities, n applicable law, n risk management prcess Mrever, we believe that re-use shuld nt be banned but shuld be mre strictly regulated. Indeed, liquidity wuld dry up and wuld have a negative impact n the ecnmy. It wuld be preferable, particularly in times f recessin, fr assets t be used in financing the ecnmy instead f lying drmant in cllateral accunts. ELEMENT 6: TREATMENT OF TRANSACTIONS WITH AFFILIATES Q25 & 26: Given that UCITS and AIF structures are nt cncerned by cnslidated supervisin, we are nt in a psitin t respnd t the prpsed requirement t adapt margin requirements fr derivatives between affiliates. Hwever, perhaps the prpsal fr affiliates culd be extended t apply t transactins between a fund and its custdian. In such a case, the exchange f initial margin wuld nt be apprpriate as the custdian wuld hld bth the assets f the funds and the initial margin. We believe that in such circumstances, either n initial margin shuld be psted r that it shuld be psted t a third party. ELEMENT 7: INTERACTION OF NATIONAL REGIMES IN CROSS-BORDER TRANSACTIONS Q27: We understand that, unless the hst-cuntry margin regime is nt cnsistent with the hme-cuntry margin regime by the hme-cuntry supervisr, hst-cuntry margin rules shuld apply. We agree with the prpsed apprach; in additin, it cmplies with the territriality rules set frth in the cleared derivatives rules. Hwever, this rule might in certain circumstances lead t situatins where, when the hst-cuntry margin regime is nt apprved by the hme-cuntry supervisr, ne party wuld be required t pst margin under its hme-cuntry regime while the ther party wuld be exempt frm such bligatin, under its wn regime. As a cnsequence, it may be mre apprpriate t refer t the lex situs i.e. the law f the jurisdictin where the cllateral is registered, which wuld ensure that a single regime applies t bth parties in rder t avid discrepancies. This treatment wuld be cherent with the treatment f bth the validity and the enfrceability f cllateral, t which the lex situs (lex rei sitae) als applies; this principle is recgnized under private internatinal law. It wuld be preferable t refer t a single applicable law with respect t margin requirements such the lex situs in rder t avid a cnflict f laws. 9

An Analysis of the Coalition for Derivatives End- Users Survey on Over-the-Counter Derivatives

An Analysis of the Coalition for Derivatives End- Users Survey on Over-the-Counter Derivatives An Analysis f the Calitin fr Derivatives End- Users Survey n Over-the-Cunter Derivatives Prepared Fr: Calitin fr Derivatives End-Users Prepared By: Keybridge Research February 11, 2011 K E Y B R I D G