Repo s and Securities Lending

Transcription

1 Repo s and Securities Lending This course is presented in London on: 14 September The Banking and Corporate Finance Training Specialist

2 Course Overview This Repo and Securities Lending course provides full coverage of the important aspects of repo trading and the pertinent issues involved in Securities Lending. It is relevant for inhouse lawyers and private practice lawyers alike as well as bankers and repo traders involved in anything from the day to day business as usual plain vanilla repos to the more complex heavily negotiated repo trades involving structured securities or unusual assets. This course will also be relevant to the Operations and Documentation teams involved in repo transactions from time to time, structurers, compliance personnel as well as Course Overview accountants who advise clients on repo trades. The first part of this course sets the scene by giving an introduction to repos; the development of the repo market in Europe, the legal and economic characteristics of repos, the definitions and terminology 'jargon' that is commonly used in the repo market and the uses and benefits of repos. We then go through the various types of repo products in the market and discuss the risks, mitigants and distinguishing characteristics of repos. The second part of the course covers the architecture of the GMRA documentation framework. Here we will go through the key provisions of the GMRA and discuss topical issues relating to and affecting the repo market. We will go on to discuss the 3 levels of activity in the repo market and go through an analysis of repos in the US market. This will be followed by a detailed step by step analysis of how a repo trade is negotiated and executed. We then cover the pertinent issues in the regulation of the repo market in Europe. The third part of the course will cover an overview of Securities Lending; what it is, the reasons for it, the parties involved in it and the advantages and disadvantages for using it. We will discuss the legal structure and the various risks involved in Securities Lending. We will then go on to analyse the GMSLA documentation and the key provisions. We will undertake an analysis of the relevant case law in this area following which we will discuss the regulations effecting Securities Lending and the upcoming regulatory changes and considerations to be aware of. Please note that the sections on regulations are subject to change depending on the time of the year this training course is delivered as per the regulations and guidance that are published from time to time. Complimentary materials including content filled presentation slides, the GMRA and relevant articles will be provided to all participants.

3 Course Content INTRODUCTION: REPOS OVERVIEW The Development of the Repo Market The Legal and Economic Characteristics of Repos Definition of a Repo True Sale title transfer Enforcement Substitution Similarities to secured loans Cashflows Definitions and Terminology Used: Haircuts Manufactured Payments Equivalent Securities Purchased Securities Purchase and Repurchase Prices Income Payments Repo Rates Voting Rights Fungibility issues Uses of Repos: 4 basic functions: Safe Investment Long positions Short positions Yield enhancement Secured lending with haircut provisions Monetary policy instruments Central Banks Benefits of Repos: For lenders For borrowers To the financial markets Types of Securities used in Repos: Government bonds High grade bonds Credit Repos: Private sector assets Corporate bonds ABS Asset Backed Securities MBS Morgage Backed Securities Covered Bonds CPs Commercial Paper Bank Loans Mortgage Loans (in the US) Gold Participants in the Repo Market Buyer's side Seller's side Types of Repos and similar transactions Classic Repos Agency Repos GC Repos Term Repos On-demand Repos or Open Repos Forward Repos Reverse Repos

4 Tri-party Repos Synthetic Repos Cross-currency Repos Credit Repos Floating-rate Repos Bonds trading 'on special' Securities Lending Buy/Sell- Backs Distinguishing Characteristics of Repos Risks in a Repo Counterparty credit risks Collateral risks Transferability Collateral Management Legal Certainty Mitigation of Counterparty Credit Risks Margin Ratio Margin Collateral Set off REPO DOCUMENTATION Introduction The GMRA Reasons for the GMRA Recharacterisation risks Margining Event of Default Procedures Netting Rights Other Risk Mitigation measures Basel III Capital Requirements Operational Benefits Harmonisation Use in Structured Transactions Legal Opinions Architecture of the GMRA documentation Versions: The 1992 original version The 1995 version The 2000 version The 2011 version Annexes Supplemental Terms or Conditions Equity Annex Bills of Exchange Annex Agency Annex Buy/Sell-Back Annex Confirmation Market Protocols and Guidelines 2011 GMRA Protocol ICMA ERC Guide July 2015 Securities Borrowing and Lending Code of Guidance ESMA Guidelines on repo and reverse repo agreements for UCIT Funds

5 The GMRA Key Provisions and Considerations: Collateral Selection Credit Risk Valuations Liquidity Risk Adjustments Margining Events of Default Consequences of Failure to Deliver: at start of a repo at end of a repo Standard Events of Default Default Notices Close-out: 3 stages Valuation Procedures Consequential Losses Negative Repo Rates Circumstances when this occurs Definition and illustration of a Negative Repo Rate situation Problems caused by Negative Repo Rates Repo Rate Indices STOXX GC Pooling Indices The GCF Repo Index Gov PX The RepoFunds Rate The Repo Overnight Index Average (RONIA) Accounting Treatment of Repos Balance sheet treatment not aligned with legal form Lehman Brothers' Repo 105 MF Global's repo to maturity under US GAAP IFRS Regulatory Reforms under consideration Short-selling What is it? Essential functions Risks and costs of short-selling Uncovered short-selling and market abuse EU Short Selling Regulations Shadow Banking What is shadow banking? Reasons why repos are viewed as riskier by regulators Risk mitigants The Central Clearing Counterparties (CCPs) The functions of the CCPs Benefits of using CCPs Drawbacks of using CCPs The Principal CCPs in Europe Repo trading systems Pro-cyclicality What is it? Gorton-Metrick Hypothesis Run on the repo market and the financial crisis Securitised banking

6 CSD Regulation (CSDR) Application Exemptions Benefits Impact on Eurozone Repo Market Levels of Activity in the European Repo Market Trading How repos are trades are negotiated and executed Direct trading Automated Trades ATSs The ATSs operating in Europe Clearing Netting by repo parties Uncleared trades Bilateral cleared trades Multilaterally cleared trades The Principal CCPs in Europe Collateral Management Delivery and Maintenance Bilateral Tri-party The Principal Tri-party Agents in Europe Repos in the US The Repo Market in the US Main Participants Assets used in US Repos The Legal and Economic Characteristics Main distinctions of US Repos Term limitation Bankruptcy code section 559 safe habor Back-up Security Interest US Repo Documentation: The SIFMA MRA Key Provisions Margin maintenance Income Payments Segregation Representations Events of default Tax Event Confirmation Additional Provisions to add to SIFMA MRA Step by Step Process of How a Repo Trade is Done Establish identity of counterparty Legal Entity Identifier (LEI) Establish whether parties dealing as principal or agent Key economic terms and post-trade checks How to quote repo rate How to work out Purchase Price dirty price inclusive of haircut Fixing Purchase and Repurchase Dates For non-forward repos CSDR T+2 Requirement For forward repos 2 Methods: Method 1 Constant Date Method Method 2 Sequential Date Method

7 For floating-rate repos For open repos Allocating collateral and agreeing pricing Negotiating rights of substitution Interest rates and charges on late payments Post-trade verification process Confirmation The essential terms Affirmation if necessary Partial Delivery Exercising Mini-Close Outs Dealing with Negative Repo Rate issues Reinvestment rate on Manufactured Payments Interest on Cash Margin Calculating Floating-rate Repo interest Method 1 Illustration Method 2 - Illustration Calculating Open Repo interest Margining: Fixing Haircut or Initial Margin Calculating Margin Calls Calculating Net Exposure The Price used to Value Collateral Margin Thresholds Deadlines for Margin Calls and Delivery Applying haircuts to Margin Securities Interest Payments on Cash Margin Repricing and Net Exposures Margining Forward Repos Consequences of non-delivery of Margin Margin Parameters Manufactured Payments Resetting Coupon on Floating Rate Collateral Exercise of Substitution Rights Termination Notices Amendments Post-Trade REGULATION OF THE REPO MARKET IN EUROPE EU Financial Collateral Directive Short Selling Regulations Capital Requirements Directive implementing the Basel III Regime EMIR MiFID and MiFIR Bank Resolution and Recovery Directive CSD Regulation Securities Law Directive Crisis Management Directive Financial Stability Board's considerations on the 'shadow banking' issues SECURITIES LENDING OVERVIEW What is Securities Lending? Reasons for Securities Lending The Parties Involved Case law: AP-Fonden v Bank of New York Mellon SA/NV & Ors Benefits of Securities Lending Disadvantages of Securities Lending

8 Legal Structure Title Transfers Voting Rights Lender's risk exposure Risks Legal Risks Capacity Netting/Set-off Opinions Recharacterisation Governing Law Insolvency Laws Regulatory Risks Change of law Mitigants in GMSLA Short selling Credit Risks Counterparty Collateralisation CCPs Market Risks Price fluctuations Pricing considerations DOCUMENTATION The ISLA The Global Master Securities Lending Agreement (GMSLA) versions Guidances: SLRC Securities Borrowing & Lending Code of Guidance ISLA EU Agency Lending Best Practice Paper UK Agency Lending Code of Guidance Checklists for Lenders Key Provisions Capacities of the Parties Title Transfer Payments and Rights Events of Default Case law: Savings Bank of the Russian Federation v Refco Securities LLC REGULATION OF THE STOCK LENDING MARKET IN EUROPE The Stock Exchange Rules RAO under FSMA The Disclosure and Transparency Rules Financial Collateral Arrangements Shadow Banking concerns FSB Recommendations Proposals to regulate Securities Financing Transactions (SFTs) Pension Protection Fund

9 9:30-17:00 London 695+VAT ( 834) Discounts available for multiple participants: 3-4 participants: 15% discount per participant 5-6 participants: 20% discount per participant 7-8 participants: 25% discount per participant 9 or more participants: 30% discount per participant Delivering this course in-house for you to a number of participants could be very cost effective. enquiries@redcliffetraining.co.uk +44 (0)