Key changes affecting the NOS Clearing Members following the NASDAQ OMX acquisition

Transcription

1 NOS CLEARING ASA Key changes affecting the NOS Clearing Members following the NASDAQ OMX acquisition - NASDAQ OMX as your counterparty - Clearing model and trade-flow - IT changes - Default Fund - New Collateral and Settlement solution - Change of Rulebook and agreements - Technical interfaces - Migration timeline 12 th February 2013

2 Contents Introduction... 3 NASDAQ OMX as your counterparty... 5 The clearing house... 5 Clearing Membership... 5 Account structure... 5 Products cleared by NASDAQ OMX Stockholm AB... 6 EMIR and upcoming regulatory changes... 6 IT changes... 8 Clearing Reports... 8 Applications... 8 System Integration... 8 Default Fund Changes to Collateral Management Current NOS Model New Model Cash Collateral Securities as Collateral Bank Guarantees Cross Market Collateral Changes to the Settlement Solution Current NOS model New model Changes to the Rulebook and Agreements NOS members that are not members OF NASDAQ OMX NOS members that are members of NASDAQ OMX Migration Timeline and contact details

3 INTRODUCTION Following the NASDAQ OMX Group, Inc acquisition of NOS Clearing ASA ( NOS ) 2nd July 2012, the process of integrating NOS into the acquiring entity, NASDAQ OMX Stockholm AB ( NASDAQ OMX ), is starting now. The objective is that NOS will be merged into NASDAQ OMX by the end of 2013 and the integration will be completed at the same time. The integration of NOS will allow NASDAQ OMX to move forward with the global strategy of NASDAQ OMX Commodities to grow in new markets. NASDAQ OMX and NOS will strengthen its offering to the global commodity markets and continue to develop the clearing services. This document is published to introduce and prepare the members for the migration process and the regulatory changes due to European Market Infrastructure Regulation ( EMIR ). The information is aimed at those responsible for and involved in adapting NOS member organizations to the changes. The changes described in this document are necessary in order to continue as member with NASDAQ OMX and to comply with the new regulations. All changes will take place during Q with the migration date currently planned to last week of November This document describes changes in the following areas for NOS members: NASDAQ OMX as your new counterparty Changes to the Default Fund Changes to the Collateral and Settlement Solution Changes to the Rulebook and Agreements Changes to the Technical interfaces and client applications Migration timeline Relevant information is included for readers representing following categories: Legal/compliance information about changes to merger, new Rulebook, agreements etc. Strategy/management information about changes that may affect business models and customer offerings Operations information about changes that will affect the operational processes and interfaces IT information about changes affecting systems and access to NASDAQ OMX systems This document is being sent to a large range of contacts at the member firms. Please feel free to distribute the information further within your organization to anyone affected by the changes. Please also refer to our website for updated and more detailed information: 3

4 In addition to the printed material and information on the website, NOS will be organizing meetings with our members, in order to present the upcoming changes and answer questions. Each member s Key Account Manager will assist with additional information to make the process as smooth as possible. The changes and proposal in the enclosed document are subject to regulatory consent or approval, as necessary. 4

5 NASDAQ OMX AS YOUR COUNTERPART Y THE CLEARING HOUSE NOS Clearing ASA will merge with NASDAQ OMX Stockholm AB, a wholly-owned subsidiary of NASDAQ OMX Nordic Oy, which itself is a wholly owned subsidiary of OMX AB. NASDAQ OMX Stockholm AB is authorized by the Swedish Financial Supervisory Authority (the SFSA ) as a stock exchange and to conduct clearing operations. As a consequence of EMIR, NASDAQ OMX will have to carry out its clearing operations as a central counterparty ( CCP ), in an independent legal entity. The intention is therefore to demerge all operations not related to the CCP, i.e. mainly the stock exchange operations and transfer them to a separate entity. NASDAQ OMX Stockholm AB will apply for a new EMIR clearing license from SFSA and NOS Clearing ASA will be merged into the EMIR compliant clearing house, after the approval is received from SFSA. According to the current time schedule the application will be submitted in Q2 and approval is planned for Q CLEARING MEMBERSHIP All NOS members will be migrated to and become members of NASDAQ OMX provided that the criteria for NASDAQ OMX membership and other criteria for migration are fulfilled at the time of migration. This document will describe the criteria for migration and how to fulfill them. NASDAQ OMX has several types of memberships, but the most relevant memberships for existing NOS members are Clearing Member or General Clearing Member. For NOS members that are already members of NASDAQ OMX, the integration process will be easier, as the existing membership can be used for the NOS products after migration. NASDAQ OMX has two structures within the CCP, one for clearing financial products and one for clearing commodities. The rulebooks and memberships are different but the clearing model is to large extent harmonized. It is important to point out that members of NASDAQ OMX s financial market have access to commodities, while NASDAQ OMX Commodity members do not have access to the financial market More details on the required documents to sign for the different membership categories are found in the Rulebook section in this document. There will be no annual membership fee for members clearing freight, iron ore, fuel oil, or seafood products with NASDAQ OMX. ACCOUNT STRUCTURE The current NOS account structure is supported in the NASDAQ OMX clearing model and all NOS members will be able to replicate the current account setup when it comes to position accounts, margin accounts and information accounts. The collateral and settlement account structure will be changed as a 5

6 consequence of the regulatory changes and the new setup is described in the Changes to Collateral Management section of this document. NASDAQ OMX clearing model is designed to comply with the requirements in EMIR and offering structures that are efficient from the perspective of segregation, portability, operations and capital requirements. NASDAQ OMX offers segregation of positions, collateral and settlement. EMIR requires CCPs to enable clearing members to segregate positions and collateral on a house/clients basis (omnibus client segregation) and on a client-by-client basis (individual client segregation). Clearing members are in turn required to segregate on a house/clients basis and to offer segregation on a client by client basis. PRODUCTS CLEARED BY NASDAQ OMX STOCKHOLM AB NASDAQ OMX currently offers clearing of equities derivatives and index derivatives on Swedish, Norwegian, Finnish, Danish and Baltic instruments; fixed income derivatives on Swedish, Norwegian and Danish underlying; commodity derivatives on Nordic power, emission rights, gas, German and Dutch power. After the merger with NOS, the NASDAQ OMX offering will include derivatives on freight, iron ore, fuel oil, electricity certificates and seafood. All NOS members migrated into NASDAQ OMX will have access to clear all commodity products offered by NASDAQ OMX, given that the appropriate agreements and arrangements for collateral and settlement are in place. EMIR AND UPCOMING REGULAT ORY CHANGES EMIR will support the mitigation of systemic risk related to the OTC derivatives market by mandating CCP clearing for contracts with a certain degree of standardization and impose additional risk mitigation standards for non-ccp cleared contracts. There will also be reporting requirements that needs to be developed by the members. The clearing obligation will apply both to financial counterparties and non-financial counterparties who exceed certain thresholds, and will apply broadly to OTC derivatives, including commodity derivatives. EMIR came into force on August 16, However, the implementation consists of several steps with technical standards as the second step. The technical standards on various topics regarding the clearing obligation, central counterparty requirements and trade repositories were finalized by the European Securities and Markets Authority (ESMA) and the other European supervisory authorities on September 30, 2012 and put forward to the European Commission for adoption. Once the technical standards have been finally adopted, all CCPs must apply for reauthorization, and once a CCP has been authorized under EMIR, ESMA will consider whether to apply a clearing 6

7 obligation to the derivatives cleared by the CCP. More information regarding the time schedule is available on NASDAQ OMX is anticipating that the re-authorization will be concluded before end of 2013 and NOS will be merged in to an EMIR compliant CCP. 7

8 IT CHANGES As part of the merger of NOS into NASDAQ OMX there will be IT changes and system replacements. The NOS Qepta Clearing system will be replaced by the NASDAQ OMX Genium INET system and all NOS products will be migrated to Genium INET. This means that the existing members of both NOS and NASDAQ OMX will be able to clear a broad range of products in several asset classes in the same technical system. Support personnel will be available before, during and after the migration period to ensure a smooth transition from the old to the new systems. CLEARING REPORTS There will be changes to the clearing reports. All information in the current reports will be available in the new reports. However, the structure and layout will be slightly different. A new comprehensive user s guide will be made available in April The NOS application that used to read or download reports will also change, however the functionality for report retrieval and download for reconciliation will be kept. There will also be a solution for retrieving historical clearing reports dated prior to the migration. APPLICATIONS The current NOS applications such as the Clearing Online Application, Broker Application and Clearing reports on web will be replaced by the NASDAQ OMX Clearing Workstation 1 and 2 (CW1 and CW2) application. The CW1 and CW2 will be extended with some of the additional functionality from the current NOS applications. An updated user s guide will be available before the migration. The NOS web based trade affirmation application will be kept with minor layout changes, as will the NOS Option Calculator. SYSTEM INTEGRATION NASDAQ OMX offers a wide range of possibilities for system integration, already used by several NOS members, brokers and 3 rd party software vendors. There will be changes from the current NOS integration in the following areas: The various NOS APIs will be discontinued and must be replaced by one of the Genium INETs industry standard FIX protocol or the proprietary OMNet API, depending on members and 3 rd party software vendors (ISV) preferences, which will be extended to cover the NOS products and processes. FIX is the recommended solutions for members and ISV without 8

9 previous experience from OMnet. An updated programmer s guide will be available in May The NOS End of Day files Version 3 will be kept and will be available at the NASDAQ OMX FTP site. Updated documentation will be available in May. Members currently using Version 1 or 2 must upgrade to the Version 3 format prior to the migration, preferably as soon as possible. The NOS Download Files as described at the MyNOS web site will be kept and available at the NASDAQ OMX FTP site. Updated documentation will be available in May. The current NOS SPAN file, available at the CME web site, will be replaced by the NASDAQ OMX Power Delta Hedge SPAN file available at the NASDAQ OMX FTP site. Any existing interfaces will have to be adjusted. Updated documentation will be available in May. An external test system will be available in June. Details and documentation will be available in May. Please see the migration timeline later in this document for planned test system availability and the market wide acceptance test (MWAT) periods. Details on the MWAT periods will be updated shortly. 9

10 DEFAULT FUND NOS introduced the Mutual Base Contribution for the clearing members in November 2011, a guarantee fund or a default fund to which clearing members contribute, and consequently enforce a loss-sharing scheme among the clearing members. The idea behind a default fund is to provide capital, in addition to the margins posted by participants. A default fund is a safeguard against extraordinary losses that might occur in connection with e.g. a financial crisis in the market or the simultaneous defaults of several large members. EMIR requires all clearinghouses to have member sponsored default funds. Due to the merger with NASDAQ OMX and new regulatory requirements, there will be changes to the current default fund structure for all NOS clearing members. THE N EW DEFAULT FUND NOS members will after the merger be part of the existing NASDAQ OMX default fund setup. NOS members clearing freight, iron ore, fuel oil and el-certificates will be contributing to the NASDAQ OMX Commodity Fund while NOS members clearing Seafood will contribute to a separate Fund for Seafood. The current NOS default fund has a flat rate contribution of 150,000 USD per member in the Freight Market and 150,000 NOK per member in the Seafood market. The new default fund will have a minimum contribution per member per market. The minimum contribution for the Commodity Fund covering freight, iron ore, fuel and e-certificates are set to 120,000 EUR. The minimum contribution for the Seafood Market has not been decided yet but will be set in accordance with regulatory requirements. The members new default fund contribution will be proportional to the members exposure in the market(s) where they are active. The minimum default fund contribution has to be posted by all members at any time. The individual clearing member s share of the total default fund will be based on its initial margins relative to the total amount for all counterparties initial margin. The calculations are based on 3 month averages. These criteria ensure that each clearing member s contribution is proportional to the CCP s exposure towards the clearing member. The size of the commodity and seafood default fund will be set in accordance with regulatory requirements and shall be calculated by the clearinghouse to enable the clearinghouse to withstand, under extreme but plausible market conditions (as determined by the clearinghouse), default losses in respect of either the largest, or of the second and third largest relevant participants combined if the sum of their combined exposure is larger. All members will have a Default Fund Custody Account with NASDAQ OMX for each market it participates in and sign a corresponding Default Fund Custody Account Agreement. The Default Fund Custody Account Agreement sets out to govern the establishment and maintenance of a Custody Account on behalf of 10

11 each Default Fund Participant, including rights and obligations of each Default Fund Participant and the Clearinghouse in relation to each Custody Account (on a bilateral basis), and how security interests are created in the Contributed Assets. NASDAQ OMX provides the possibility to view and administrate their Default Fund contributions through a web based application for collateral management. The application provides the members with the following functionality: View of collateral and cash transactions View of accrued and capitalized interest on cash contribution View cash balance View and edit Standing Settlement Instructions ( SSI ) View instruments eligible as Default Fund Contribution The Commodity Default Fond will consist of members participating in the NOS freight, iron ore and fuel oil market and the NASDAQ OMX commodity markets. A list of the current members of NASDAQ OMX could be found here: Below is the current default fund structure (waterfall) from top to bottom: Disclaimer: The size of the resources indicated above may be subject to change. NASDAQ OMX retains the right to adjust and refine its capital model. The size of the resources is also affected by the market dynamics and the exposures the CCP has in respect of its counterparties. 11

12 CHANGES TO COLLATERAL MANAGEMENT CURRENT NOS MODEL In the current NOS collateral model, the members may choose between cash and bank guarantee. The standard bank guarantees must be issued by an approved bank. Cash is deposited in banks approved by NOS. For USD the cash accounts are all with DnB New York, in a client account set-up. For other currencies, accounts are held with a number of banks. Both client accounts and pledged accounts in the members name are used. Members have to use the same collateral currency as the relevant currency for the cleared products in their portfolio. If a member trades USD denominated freight contracts, USD cash collateral must be used. The member must open a bank account for each currency. The same cash accounts are used for settlements initiated by NOS. NEW MODEL Due to the merger with NASDAQ OMX and the regulatory changes, there will be a number of changes to the current collateral and settlement offerings. The aim is to give NASDAQ OMX prompt access and direct control of the collateral posted, in accordance with the new regulatory requirements and to accommodate for full segregation and portability of client assets. The changes will increase capital efficiencies and will add flexibility for the members. The changes will also support the one stop shop clearing services offered by NASDAQ OMX and the members will be able to use securities as collateral. In the new model, all collateral will be posted directly to Collateral Custody Accounts that the member will have to open with NASDAQ OMX as account provider. CASH COLLATERAL Cash amounts will be transferred on a transfer-of-title basis to NASDAQ OMX, which means that members will have an unsecured claim on NASDAQ OMX for such cash amounts. Members will transfer cash to their Collateral Custody Account by making a deposit on a designated NASDAQ OMX bank account in a commercial bank. Such deposit will be reflected on the members Collateral Custody Account. The cash collateral is invested in accordance with NASDAQ OMX s EMIR compliant investment policy and an interest is calculated on the posted cash collateral. The members may choose a mix of several approved currencies when posting cash collateral. This will add flexibility and may reduce the members currency risk. There will be haircuts when using currencies other than the currency of the traded products. 12

13 The members will be able to access the new collateral management system using the Collateral Management web application, the Genium INET API or the Clearing Workstation 1 and 2. SECURITIES AS COLLATERAL NASDAQ OMX opens up for the use of securities, e.g. bonds and equities, as collateral. Securities posted to the member s Collateral Custody Account will remain the property of the member but will be pledged in favor of NASDAQ OMX. NASDAQ OMX will in turn hold posted securities in securities accounts in the name of NASDAQ OMX on behalf of clients, with Central Securities Depositories (CSDs) or International Central Securities Depositories (ICSDs) appointed by NASDAQ OMX. NASDAQ OMX will secure the members voting and financial rights, and correctly handle any relevant tax issue. There will be a haircut of 30% when using securities as collateral. BANK GUARANTEES Non-financial institutions will still be allowed to cover their collateral requirements with on-demand bank guarantees. The EMIR regulations currently describe this as a 3 year temporary solution, which means that the use may be disallowed at a later stage. CROSS MARKET COLLATERAL NASDAQ OMX is offering trading and clearing in a wide range of financial and commodity markets. The aggregated margin requirement across markets, may be covered by a mix of approved collaterals; cash in different currencies, bank guarantees and securities. To efficiently manage collateral, all members must choose a base currency. The base currency is used to present the total net collateral surplus/deficit in a single currency. Margin requirement is measured against posted collateral in each currency before being converted to a chosen base currency. There will be haircuts when using collateral with currencies other than the currency of the traded products. For more details regarding the new collateral management service, a detailed description will be provided on the website in February

14 CHANGES TO THE SETTLEMENT SOLUTION NASDAQ OMX offers a settlement solution that differs from the current solutions used by NOS. CURRENT NOS MODEL Today NOS has two different settlement procedures, USD with t+0 settlements and other currencies with settlement t+1 settlement. All settlement procedures are based on the same account set up where the same cash accounts are used for both collateral and settlements. All settlements are done by DnB, on NOS instructions. Interest is set and paid to the members by NOS, except for the pledged NOK deposit accounts. NEW MODEL The new model separates the handling of cash collateral and cash settlement. As described above, cash collateral will be transferred to NASDAQ OMX on a transfer-of-title basis. Settlements will be done through a method where NASDAQ OMX is given a direct debit mandate on members settlement accounts in approved settlement banks. Each member must open one settlement account per settlement currency. Settlements are executed in the cleared products denominated currencies. The settlement account will be in the members name. The interest rate will be negotiated between the member and the settlement bank. The settlements will be executed according to a settlement schedule. For most currencies, the debit transactions will be executed by NASDAQ OMX at CET through the use of SWIFT communication with all settlement banks. After controlling all incoming payments, members with a positive settlement will have their account settled with same day value. In order to avoid cash calls and defaults due to lack of funds on their settlement accounts, all members should keep a cash buffer or a credit facility on their settlement accounts. Approved settlement banks are published on the NASDAQ OMX website: texpirationdelivery. Settlement banks for USD will be added to the list in Q2. For more details regarding the new settlement solution, a detailed description will be provided on the website in February

15 CHANGES TO THE RULEBOOK AND AGREEMENTS In connection with the migration of NOS Clearing ASA into NASDAQ OMX Stockholm AB, all NOS cleared derivatives products will be subject to the Clearing Rules of NASDAQ OMX Commodities as well as the Rules and Regulations of NASDAQ OMX Financial Derivatives Markets. The main differences between the NOS Clearing Rules and the NASDAQ OMX rulebooks are related to the following areas: - Choice of law and arbitration. The NOS Clearing Rules are subject to UK law and arbitration in London while the Clearing Rules of NASDAQ OMX Commodities are subject to Norwegian law and arbitration in Oslo and the Rules and Regulations of NASDAQ OMX Financial Derivatives Markets are subject to Swedish Law and arbitration in Stockholm. - Transfer of title of cash collateral. Collateral in the form of cash will be transferred to NASDAQ OMX Stockholm AB by way of security (transfer of title). - Choice of law for the Collateral and Default Fund accounts. Default Fundand Collateral Custody Account Agreements are subject to Swedish law. The Clearing Rules of NASDAQ OMX Commodities will be updated to reflect the implementation of the new NASDAQ OMX Collateral Management System (CMS) and the implementation of NOS cleared derivatives products (freight, iron ore, fuel oil, seafood and el-certificates). The updated NASDAQ OMX Commodities Rules and Agreements will be available and distributed to all NOS members by the end of April. 1 Various documents will need to be signed by migrating members in preparation for the merger of NOS Clearing ASA into NASDAQ OMX Stockholm AB. NOS MEMBERS THAT ARE NOT MEMBERS OF NASDAQ OMX Agreements between NASDAQ OMX and the clearing member/general clearing member: 1. Clearing Membership Agreement or General Clearing Membership Agreement The Clearing Membership Agreement/General Clearing Membership Agreement will set out the right and obligations of NASDAQ OMX as the Clearinghouse and each clearing member/general clearing member in relation to commodity derivatives clearing activity. 1 The Rules and Regulations of NASDAQ OMX Financial Derivatives Markets will be updated to reflect CMS in March. 15

16 2. Collateral Custody Account Agreements The Collateral Custody Accounts are used to post collateral to NASDAQ OMX and the Collateral Custody Account Agreement will set out the right and obligations of NASDAQ OMX Stockholm AB as a Custodian and each clearing member/general clearing member in relation to the Collateral Custody Accounts. Each clearing member/general clearing member will need to sign and submit two (2) signed copies of the Collateral Custody Account Agreement with NASDAQ OMX for each Custody Account (for example one house account and one client account). 3. Default Fund Custody Account Agreement The Default Fund Custody Account is used to post funds and assets to NASDAQ OMX Stockholm AB Default Fund. The Default Fund Custody Account Agreement will set out the rights and obligations of NASDAQ OMX and each clearing member/general clearing member in relation to the Default Fund Custody Account. Each clearing member/general clearing member will need to sign and submit two (2) signed copies of the Default Fund Custody Account Agreement with NASDAQ OMX. 4. Mandate (settlements) In the Mandate the member authorizes NASDAQ OMX to issue payment instructions to the clearing member/general clearing member s settlement bank. Agreement between the settlement bank and the clearing member/general clearing member: 1. Power of Attorney (settlements) In the Power of Attorney ( PoA ) the member authorizes its settlement bank to rely and act on payment instructions from NASDAQ OMX and debit the clearing member/general clearing member s account on behalf of NASDAQ OMX. Each clearing member/general clearing member will need to issue PoA(s) to settlement banks in respect of all currency it settles in. Additional documents: List of authorized signatures, including the appointment of a Contact Person. Standing Settlement Instruction for each Custody Account and each currency intended to use with the collateral management system (CMS), including the Default Fund Custody Account. Clearing system user access forms. 16

17 NOS MEMBERS THAT ARE MEMBERS OF NASDAQ OMX Agreements between NASDAQ OMX and the clearing member/general clearing member: 1. Default Fund Custody Account Agreement - only applicable for members required to contribute to a new Default Fund 2. Mandate (settlements) only applicable for members using a new settlement bank Agreement between the settlement bank and the clearing member/general clearing member: 1. Power of Attorney (settlements) - only applicable for members using a new settlement bank Agreements and forms will be available and distributed to all NOS members by the end of April

18 MIGRATION TIMELINE AND CONTACT DETAILS Below is the current timeline for the migration: Please contact NOS Clearing ASA for any questions regarding the migration process: Phone: