EU margin requirements for non-cleared derivatives: What do hedge fund managers need to know? Adam Jacobs-Dean Lucian Firth Allan Yip

Transcription

1 EU margin requirements for non-cleared derivatives: What do hedge fund managers need to know? Adam Jacobs-Dean Lucian Firth Allan Yip 20 September 2016

2 Adam Jacobs-Dean Global Head of Markets Regulation AIMA 1 / L_LIVE_EMEA1: v1

3 Three pillars of global OTC derivatives regulations Reporting Clearing Risk mitigation for uncleared trades 2 / L_LIVE_EMEA1: v1

4 EMIR Refresher Do the EU margin rules apply to your funds? Dealer FC Hypothetical FC FC/NFC+ In-scope In-scope Fund Hypothetical FC/NFC+ In-scope Out-of-scope* NFC Out-of-scope Out-of-scope Hypothetical NFC Out-of-scope Out-of-scope * Unless direct, substantial and foreseeable effect in the EU or necessary as anti-avoidance 3 / L_LIVE_EMEA1: v1

5 EMIR Refresher In practice EU/non-EU AIF, EU AIFM UCITS EU AIF, non-eu AIFM + above clearing threshold Non-EU AIF, non-eu AIFM + above clearing threshold EU/non-EU AIF, non-eu AIFM + not above clearing threshold JPMS, GSI, MSIP, BBPLC, DB, CSSEL In-scope In-scope In-scope Out-of-scope UBS AG, CS AG In-scope In-scope Out-of-scope* Out-of-scope 4 / L_LIVE_EMEA1: v1 * Unless direct, substantial and foreseeable effect in the EU or necessary as anti-avoidance

6 US Refresher (from a non-us lawyer) Do the US margin rules apply to your funds? Broadly yes, where dealer is SD, MSP, SBSD or MSBSP And where your fund is: SD, MSP, SBSD or MSBSP (unlikely) Financial End User with Material Swap Exposure (maybe) Financial End User without Material Swap Exposure (likely) Unless: PR rules: none of: (i) the dealer; (ii) your fund; and (iii) any guarantor (on either side) is organised under US law, a US branch, a branch of a US entity, a subsidiary of a US entity; or CFTC rules: (i) dealer is not a US person, not guaranteed by a US person, not a US branch, not a consolidated subsidiary of a US person; and (ii) your fund is not a US person and is not guaranteed by a US person 5 / L_LIVE_EMEA1: v1

7 When do the rules apply? Variation margin EU US Where both parties have uncleared AANA* for March, April, May 2016 of over USD/EUR 3 trillion One month after RTS entry into force 1 September 2016 Otherwise Later of 1 March 2017 and one month after RTS entry into force 1 March 2017 * EMIR takes month-end average; US rules take daily average 6 / L_LIVE_EMEA1: v1

8 When do the rules apply? Initial margin Where both parties have uncleared AANA for March, April, May in relevant year of: Over EUR/USD 3 trillion EU One month after RTS entry into force EUR/USD 2.25 trillion 1 September 2017 EUR/USD 1.5 trillion 1 September 2018 EUR/USD 0.75 trillion 1 September 2019 EUR/USD 8 billion* 1 September 2020 US 1 September 2016 USD threshold only available for Financial End User. USD amount determined over June, July August of preceding year 7 / L_LIVE_EMEA1: v1

9 What do the rules require? Variation margin Daily VM calculation and delivery within the business day of calculation (EU) or on next business day (US) very limited scenario of 2 business day delivery period in EU No minimum threshold amount; minimum transfer amount (including IM) of up to EUR/USD 500,000 permitted Prescribed eligibility and valuation (haircut) requirements EMIR captures deliverable FX forwards (but delayed start), FX swaps and exchange of principal on currency swaps US rules exempt deliverable FX forwards and swaps entirely 8 / L_LIVE_EMEA1: v1

10 What do the rules require? Initial margin IM to be calculated using standardised approach or IM model developed by parties IM to be calculated within 1 business day of certain events and at least every 10 business days (EU) or on each business day (US) Delivery within business day of calculation (EU) or on next business day (US); no offsetting of IM between two parties Threshold of EUR/USD 50 million permitted; minimum transfer amount (including VM) of up to EUR/USD 500,000 permitted Prescribed eligibility and valuation (haircut) requirements Physically-settled FX forwards, FX swaps and principal on currency swaps exempted 9 / L_LIVE_EMEA1: v1

11 What do the rules require? Operational and documentation requirements Focus on EU rules, which can apply directly to FC/NFC+ funds Risk management procedures required to include prescribed details To be reviewed and updated as necessary and at least annually To be tested at least once a year Written trading and exchange of collateral documentation required, which must include prescribed terms ISDA master agreements will satisfy independent legal review of legal enforceability of netting 10 / L_LIVE_EMEA1: v1

12 What do the rules require? Segregation of initial margin Both EU and US rules require segregation of initial margin Further requirements under EMIR: to be available to posting party in timely manner following default of collecting party must offer individual segregation away from assets of other posting parties independent legal review of segregation arrangements provide documentation to NCA and establish policies ensuring continuous compliance upon request no rehypothecation, repledging or reuse permitted 11 / L_LIVE_EMEA1: v1

13 What do you need to do? Big picture Focus on variation margin requirements now; initial margin is for another day Analyse what rules apply to your funds/managed account clients Prepare for re-documentation exercise for CSAs (next slide) CSA for each fund, with each counterparty to be amended by March 2017 Consider what operational changes needed Review current risk procedures for compliance Conduct independent legal reviews of trading agreements 12 / L_LIVE_EMEA1: v1

14 What do you need to do? Re-documentation exercise Margin rules apply only on going forward basis one VM CSA vs two VM CSAs Amend, Replicate-and-Amend, New CSA Bilateral amendment: best approach from a control and transparency perspective, but dealers may not like it from their own document management perspective ISDA 2016 Variation Margin Protocol: Adherence + Questionnaire exchange (+ Supplemental Questionnaire) much more complicated than bilateral, but potentially easier from document management perspective What about portfolio/cross-product margining from prime brokers? 13 / L_LIVE_EMEA1: v1

15 Thank you Allan Yip Partner Simmons & Simmons LLP Telephone: Lucian Firth Managing Associate Simmons & Simmons LLP Telephone: / L_LIVE_EMEA1: v1

16 EU margin requirements for non-cleared derivatives: What do hedge fund managers need to know? Adam Jacobs-Dean Lucian Firth Allan Yip 20 September 2016

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