CESR Consultation Paper Standardisation and exchange of OTC derivatives. Daimler AG, Stuttgart, Germany

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1 CESR Consultation Paper Standardisation and exchange of OTC derivatives Response from Daimler AG, Stuttgart, Germany Daimler as an export oriented European automaker uses financial derivatives to mitigate financial risks arising from its underlying business. As such we depend on functioning financial markets and therefore take the opportunity to answer on the CESR consultation paper, even though we are not part of the regulated banking industry to whom the paper is addressed. In our financial risk management process we adhere to the standard organisational principles of segregation of functions, we use a standard treasury system application that allows for Straight Through Processing (STP) and we confirm all our financial transactions (derivative transactions) prior to settlement to our counterparties. More than 70% of the confirmations are done electronically via SWIFT with the remainder done via automatically generated faxtransmissions. All incoming confirmations are matched, and we only do settlements via predetermined standard settlement instructions. As our financial risk management process has been organized with priorities on limiting operational risk and on efficiency from standardisation, we do agree with the positions of CESR outlined in the consultation paper to a large degree. However we would like to stress that standardisation has a limit with regard to uniform products. As rightfully pointed out in the CESR consultation paper, corporate hedgers need to have a high degree of flexibility in their financial instruments in order to exactly match the financial risk profile of the underlying business. As much as standardisation and the increase of exchange trading is called for, there is also a need to differentiate between market participants and the nature of their financial transactions. The corporate end users should not be forced on the outlined path towards standardisation and exchange trading. This would otherwise undermine the effectiveness of the derivatives to hedge the risk and many smaller corporates would not be equipped to cope with the complex requirements to deal with STP. Another important aspect is not to automatically link exchange trading with clearing through a centralized counterparty with the requirement to post initial and variation margin. The increased transparency, the reduction of operative risks and the ease of access for market participants could be achieved by trading on electronic platforms and exchanges without the mandatory clearing through a Central Counterparty (CCP). Daimler AG is therefore welcoming the efforts to standardize the OTC derivative business and supports the drive towards more exchange trading but is very much opposed to enforce the mandatory collateralization of derivatives along with this initiative. We have outlined our concerns in our statement to the Public Consultation on Derivatives and Market Infrastructure. We are grateful for the opportunity to comment on the consultation paper and have subsequently answered the questions posted.

2 Yes, we agree with CESR s assessment of standardisation degree, in our opinion there is no further element open. We also agree with the benefits and limitations of standardisation. An important aspect which has to be considered in the discussion of limitation is the differentiation between dealer and corporate end users. There should be no obligation for standardisation for corporate end users for the reason outlined in paragraph Yes. The goal for standardisation should be the contractual certainty. This means that clear definition parameters for legal and contract terms have to be defined. A higher degree of standardisation with this respect also is an enabler for STP as well as the feasibility of trade repositories that would add more transparency to avoid systemic risk. The possibility for the industry to give response on consultation papers and the implementation of regular meetings and discussions between representatives of industry and regulators are important instruments. They ensure that the concerns of both parties are considered in the further regulation framework. No. The issue is that regulators must acknowledge the limitation of standardisation, as far as product uniformity is concerned, as this may be in conflict with the objectives of the derivative user (para. 40). They should prioritise focus on option a), i.e. legal uniformity (across different legislations) and process uniformity. These aspects are the basis for STP and transparency via trade repositories. 1) An electronic confirmation system should be mandatory for dealer/financial Service providers only. For industrial end users they should not be mandatory due to the high costs. 2) The one time costs are significant: Example Daimler: cost > 10mn to build a Treasury System landscape which allows for STP. Running costs are in excess of 1 mn p.a. 2

3 Yes, we agree. No additional compared to the outline in the paper. We do not see any significant impact on liquidity from increased transparency. The main issue is product uniformity and flexibility for derivative users, that inhibit exchange trading, as well as if coupled to CCP the need to post initial and variation margin. Yes No, there should be independence between exchange trading which would also include electronic platforms and the availability/mandatory use of CCP-clearing. CCPclearing only addresses the issue to counterparty risk. All other benefits (higher transparency, standardisation etc.) can be accomplished by exchange trading without CCP. There is a need for contract standardisation, however if there is no CCP, i.e. contracts are held bilaterally between counterparties there is no need for full fungibility. Almost any derivative could be dealt on electronic platform. This depends on the degree of product standardisation. Complex derivative transactions (structured equity, FX and interest rate products) cannot be traded on platforms/exchanges. (see above) 3

4 No regulatory action should be undertaken; however trading platforms may be useful with regard to STP and transparency. Yes, most electronic trading platforms provide market price information. They also provide STP and therefore require certain standardisation. Please refer to: as an example for a widely used platform in the corporate arena. No, as price information for interest and FX-derivatives is widely available. Any approach taken for the EU legislative framework that is more restrictive than the US framework now signed into law - would be the cause for regulatory arbitrage. In that respect it is important to also align with other legislations (e.g. in Asia). Otherwise the restrictions to exchange trading would only cause OTC-markets to move for example to other centres (e.g. Singapore). Yes, but it is important not to equate exchange trading with Central Counterparty Clearing. In essence exchanges provide important functions for infrastructure, such as price transparency, confirmation and settlement. The multilaterality with the aspect of clearing through a central counterparty is not necessarily a prerequisite for exchange trading and its benefits. Therefore many electronic platforms are equivalent to exchange trading, however still leaving the bilateral nature of a transaction. 4

5 Consequently electronic platforms that provide the following functions should be considered equivalent to exchange trading: - Price transparency - Pre and post trade transparency and - Easy market access Yes, (see above) there should be a reference to electronic platforms without the prerequisite of a mandatory Central Clearing Counterparty to qualify as an exchange for derivative trading. The regulators should be aware that market participants themselves have reasons to minimize their operative risks from dealing with derivative instruments and need to use the most economical processes. As a consequence larger corporates have implemented STP in their derivatives trading and also use electronic trading platforms. Therefore those efforts should be assessed and taken into consideration when regulations are drafted. The incentives reduction of operative risk and more efficient processes are sufficient to promote exchange trading. Wherever they do not result in a high degree of exchange trading, the exchange trading does not offer enough flexibility or do not contribute enough to risk reduction and process efficiency. There should be no forced incentives by legal requirements. No, reasons see above. Any regulation that enforces exchange trading that is not supported by respective benefits for users would result in regulatory arbitrage as long as the enforced rules do not apply globally. Stuttgart,