Client Newsletter. MiFID II & MiFIR: Impact on F&O and OTC clearing and F&O execution clients

Transcription

1 Client Newsletter MiFID II & MiFIR: Impact n F&O and OTC clearing and F&O executin clients This regulatry briefing has been prduced by Freshfields fr J.P. Mrgan. Target audience What is MiFID II and when is it cming int frce? Key area (1) Derivatives clearing bligatin Key area (2) Electrnic trading rules, including direct electrnic access and algrithmic/high frequency trading Key area (3) Rules fr general clearing members, including rganisatinal requirements and clearing limits Key area (4) Cmmdities psitin reprting Key area (5) Transactin reprting (executin) Key area (6) Interperability and market access Key area (7) Indirect clearing Target audience This briefing is intended fr J.P. Mrgan s Glbal Clearing clients, i.e. clients f J.P. Mrgan Securities plc s F&O Executin and F&O and OTC Clearing businesses ( clients ). What is MiFID II and when is it cming int frce? A key bjective f the recast Markets in Financial Instruments Directive (MiFID II) and the new accmpanying Regulatin (MiFIR) is t imprve the functining and transparency f financial markets in the EU. This is t be achieved partly thrugh a series f new r amended bligatins in relatin t the clearing f derivatives, including requirements in relatin t indirect clearing, clearing limits, psitin and transactin reprting, and market access. All f these are cvered in this newsletter and have been gruped int seven key areas. The g-live date fr full cmpliance with MiFID II and MiFIR is 3 January Hwever, because f peratinal lead times fr J.P. Mrgan, central What shuld clients d nw? Plan fr implementatin f new requirements Obtain an LEI. Clients will need this fr bth MiFID II and the Eurpean Market Infrastructure Regulatin (EMIR) Expect and cnsider regulatry ntificatins and enhancements t cntractual terms and cnditins cunterparties (CCPs) and clients, clients shuld be planning fr implementatin nw. Many f the substantive rules in relatin t the impact n clients are cntained in Regulatry Technical Standards (RTS) and Implementing Technical Standards (ITS), mst f which have been published in final r near final frm. Key area (1) Derivatives clearing bligatin Under MiFIR, all derivatives traded n EU regulated markets must be cleared by a CCP (see RTS 26 made under Article 29 f MiFIR). 1

2 In additin, EU trading venues, Clearing Members (CMs) and CCPs are required t have systems and prcedures in place in relatin t cleared derivatives t ensure trades are submitted and accepted fr clearing as sn as technically practicable using autmated systems. In this cntext, cleared derivatives means all derivatives which are t be cleared pursuant t the abve mentined clearing bligatin applicable t regulated markets, pursuant t the clearing bligatin under EMIR r accrding t an agreement between the parties. Except in the case f certain autmatically cleared trades (see bxes belw), specific timeframes will apply fr the transfer f infrmatin depending n whether the trade is cncluded n a trading venue r n a bilateral basis, with tighter timeframes applying t n-venue trades. In respect f trades cncluded bilaterally, a CM must btain evidence frm its client f the cnclusin timeframe f the trade submitted fr clearing and ensure that cunterparties send the CCP the infrmatin prescribed in the CCP s rules within 30 minutes f the cnclusin. Althugh this bligatin applies t the CM, it is nt able t cntrl the time at which a client submits the infrmatin t the CCP, and s J.P. Mrgan will require clients t cmply with these timeframes. J.P. Mrgan will be fllwing ISDA best practice in this regard, and may prvide ntices t clients requiring them t prvide the relevant evidence and t submit all ff-venue trades t specific middleware platfrms. Where a CCP declines t clear the trade, the trading venue will be required t vid any n-venue trades. Hwever, where a bilateral trade is declined fr clearing, its treatment will be determined accrding t: The rules f the trading venue if the trade is submitted fr clearing in accrdance with the rules f the trading venue; r The agreement between the cunterparties in all ther cases. The rules als require pre-trade screening f trades executed n a trading venue against clearing limits set by the CM fr its client, except in respect f certain autmatically cleared trades (see bx). Fr this purpse, trading venues will be required t prvide tls t ensure pre-trade screening n an Trading venues Regulated markets; Multilateral trading facilities (MTFs); and Organised trading facilities (OTFs) Exemptin frm timeframes fr transfer f infrmatin fr bilateral transactins The timeframes fr CCPs t send infrmatin t the CM and t accept/decline clearing, as well as the timeframe fr CMs t accept/reject a transactin, shall nt apply where: the rules f the CCP ensure the setting and maintenance f clearing limits n a regular basis; and the rules f the CCP prvide that a trade within the limits is cleared autmatically within 60 secnds f receipt f infrmatin frm the cunterparties. Exemptin frm timeframes fr transfer f infrmatin fr transactins cncluded n a trading venue and frm pre-trade screening where: the rules f the trading venue require each member which is nt a CM f a CCP thrugh which the trade is cleared t have a cntractual arrangement with a CM f the CCP under which the CM autmatically becmes the cunterparty t the trade; the rules f the CCP prvide that the trade is cleared autmatically and immediately, with the CM becming the cunterparty t the CCP; and the rules f the trading venue prvide that the member f the trading venue r its client becmes cunterparty t the trade after the trade is cleared, pursuant t direct r indirect clearing arrangements with the CM. 2

3 rder-by-rder basis by the CM. When the rder is nt within applicable limits, the trading venue must infrm the client and the CM that the rder cannt be cncluded. There are prescribed time limits fr the actins required t cnclude trades that are subject t the derivatives clearing bligatin. These are summarized in the fllwing table: Required actin On-venue trades Bilateral trades Pre-executin validatin f rders against limits by trading venue Trade cncluded electrnically: within 60 secnds Trade cncluded nnelectrnically: within 10 minutes n/a Ntificatin by trading venue t CM and client fr rders failing the limit check Trade cncluded electrnically: real-time Trade cncluded nnelectrnically: within 5 minutes n/a Trading venue (fr n-venue trades) / cunterparty (fr bilateral trades) t send infrmatin t CCP Trade cncluded electrnically: within 10 secnds f trade cnclusin Trade cncluded nnelectrnically: within 10 minutes f trade cnclusin CM t ensure cunterparties send infrmatin t CCP within 30 minutes f trade cnclusin CCP t send infrmatin t CM n/a Within 60 secnds frm receipt f infrmatin CM t accept/reject trade fr clearing n/a Within 60 secnds frm receipt f infrmatin CCP t accept/reject trade fr clearing CCP t ntify f accept/reject decisin CM/trading venue t ntify f CCP reject decisin Resubmissin f rejected trade if due t a technical r clerical issue Within 10 secnds f receipt f infrmatin CCP t infrm CM and trading venue f any nn-acceptance n real-time basis CM and trading venue t infrm cunterparty f any nn-acceptance as sn as infrmed by CCP Within 60 minutes frm previus submissin Within 10 secnds f receipt f CM accept/reject CCP t infrm CM f any nn-acceptance n realtime basis CM t infrm cunterparty f any nnacceptance as sn as infrmed by CCP Within 60 minutes frm previus submissin 3

4 Key area (2) Electrnic trading rules, including direct electrnic access and algrithmic/high frequency trading Several new bligatins are being intrduced in relatin t electrnic trading, including detailed rules fr direct electrnic access (DEA) and algrithmic and highfrequency trading (see RTS 6 made under Article 17 f MiFID II). Direct electrnic access Several new bligatins are being intrduced in relatin t electrnic trading MiFID II intrduces an enhanced regime gverning direct electrnic access t trading venues (see bx). These requirements build n existing EU guidelines regarding autmated trading. DEA prviders must have in place effective systems and cntrls which ensure: a prper assessment and review f the suitability f DEA clients; that clients using the service are prevented frm exceeding apprpriate pre-set trading and credit threshlds; that trading by clients using the service is prperly mnitred; and that apprpriate risk cntrls prevent trading that culd create risks fr the firm, r that culd cntribute t a disrderly market r be cntrary t the Market Abuse Regulatin r the rules f the trading venue. As a result, DEA clients will be subject t enhanced mnitring f trading and pre-trade checks, due diligence assessments and peridic reviews, as well as clearing limits (see belw). Due diligence will cver the gvernance and wnership structure f the client as well as type f strategies t be undertaken and its peratinal set-up, systems and pre- and psttrade cntrls (amng ther matters). Peridic reviews will be annual, risk-based assessments f the adequacy f the client s systems and cntrls, tailred t the particular client (e.g. they will take int accunt the scale and cmplexity f its activities, regulatry status and financial psitin). DEA an arrangement where a member f a trading venue permits a persn t use its trading cde t transmit rders directly t the venue includes arrangements invlving use by a persn f the infrastructure f a member ( direct market access ) and arrangements where such infrastructure is nt used ( spnsred access ) Obligatins n clients cnducting algrithmic and high frequency trading Clients applying a high frequency algrithmic trading technique will need t be authrised as investment firms under MiFID II even if they are nly dealing n wn accunt. They will als be subject t a number f specific bligatins, including t: establish and mnitr their trading systems and algrithms thrugh clear and frmalised gvernance arrangements, having regard t the nature, scale and cmplexity f their businesses; ensure that their cmpliance staff have at least a general understanding f hw the algrithmic trading systems and trading algrithms f the firm perate; and establish clear methdlgies t develp and test algrithms and strategies, including thrugh cnfrmance and stress testing. Orders generated by algrithmic trading, the different algrithms used fr the creatin f rders and the relevant persns initiating thse rders will need t be flagged by members r participants f EU trading venues and, upn request, will be made available t regulatrs. 4

5 Finally, trading venues will be allwed t impse higher fees n thse perating a high frequency algrithmic trading technique t reflect the additinal burden n system capacity. Key area (3) Rules fr general clearing members, including rganisatinal requirements and clearing limits General clearing member rganizatinal requirements Certain rganizatinal requirements are impsed n CMs, including in relatin t systems and cntrls, due diligence f prspective clearing clients and disclsure f infrmatin abut the services prvided (see Articles 24, 25 and 27 f RTS 6 made under Article 17 f MiFID II). Systems used by the CM must be subject t apprpriate due diligence assessments, cntrls and mnitring. Prspective clearing clients must be assessed against a number f criteria, including their credit strength, internal risk cntrl system and intended trading strategy. This assessment is repeated annually and there must be a binding written agreement in place setting ut the cnsequences fr clearing clients wh d nt cmply with the criteria. CMs must als publish the cnditins under which they ffer clearing services, tgether with infrmatin n the levels f prtectin, the csts assciated with thse different levels and any legal effects. Clearing limits CMs are required t set clearing limits fr all clients (see Article 26 f RTS 6 made under Article 17 f MiFID II). In particular, they are required t: set and cmmunicate apprpriate trading and psitin limits t clients, in rder t mitigate and manage the CM s wn cunterparty, liquidity, peratinal and ther risks; mnitr their clients psitins against these limits as clse t real-time as pssible; have apprpriate pre-trade and pst-trade prcedures fr managing the risk f breaches f limits, by way f apprpriate margining practices and ther means; and dcument such prcedures in writing and maintain recrds f cmpliance. The clearing limit will be set and applied by J.P. Mrgan as fllws: the limit will be mnitred real-time, n a pst-trade, pst-clear basis by the CM; the limit will apply t all activity cleared by the CM fr a client, acrss all executin venues and cunterparties; and the limit will be set as an initial margin (IM) number, calibrated in line with a client s histrical IM usage, such that it des nt disrupt a client s trading practices. The limit, and any changes t it, will be cmmunicated t clients via a ntice. Key area (4) Cmmdity psitin limits and reprting MiFID II impses a number f specific rules in relatin t cmmdity derivatives. These include narrwer exemptins frm authrisatin requirements fr cmmdity derivatives dealers and a new psitin limits and reprting regime (see RTS 20 made under Article 2(4) f MiFID II, RTS 21 made under Article 57 f MiFID II and ITS 4 made under Article 58 f MiFID II). 5

6 EU cmpetent authrities will be required t impse psitin limits n the size f net psitins persns can hld in cmmdity derivatives Narrwed exemptins frm authrisatin The exemptins frm the requirement t be authrised pursuant t MiFID II fr entities trading cmmdity derivatives are being narrwed as cmpared with the current regime. Hwever, clients f J.P. Mrgan wh are cmmdity derivatives dealers and wh deal n wn accunt (excluding thse executing client rders) will cntinue t be exempt, prvided that: this activity is ancillary t their main business when cnsidered n a grup basis; their main business is nt the prvisin f investment r banking services r acting as a market maker in cmmdity derivatives; and the dealer des nt apply a high frequency algrithmic trading technique. Clients wh wish t benefit frm the cmmdity derivatives dealers exemptin must annually ntify the regulatr that they make use f the exemptin and, if requested, prvide details f the basis n which the activity is cnsidered t be ancillary. Detailed criteria fr establishing when an activity is t be cnsidered ancillary t the main business at a grup level are set ut in RTS 20 (made under Article 2(4) f MiFID II). Psitin limits EU cmpetent authrities (CAs) will be required t impse psitin limits n the size f net 1 psitins persns can hld in cmmdity derivatives traded n EU trading venues and ecnmically equivalent OTC cntracts. The limits will apply n the basis f all psitins held by a persn and thse held n its behalf at an aggregate grup level, including by its parent undertaking. There will be a limit fr the spt mnth perid, and an ther mnths psitin limit applied acrss all maturities ther than the spt mnth. CAs will set a baseline limit fr mst cntracts, which may then be adjusted up r dwn. The CAs will take int accunt varius factrs, including the liquidity f the cntracts, when setting the limits. Psitin limits will nt apply t psitins held by r n behalf f a nn-financial entity that are bjectively measurable as reducing risks directly relating t the cmmercial activity f that nn-financial entity. A nn-financial entity will need t apply t the relevant CA in rder t be granted an exemptin and the CA is able t reject the applicatin. A separate exemptin will be needed fr each cmmdity derivative. Psitin reprting requirement Key business impacts T supprt enfrcement f the psitin limits and rderly pricing and settlement thrugh enhanced transparency and versight, MIFID II intrduces a new psitin reprting requirement. The psitin reprting rules applicable t EU trading venues and firms require reprting t CAs f psitins f any underlying clients (and any clients f thse clients until the end client is reached) 2 in cmmdity derivatives r emissin allwances r Significant burden n market participants in managing cmpliance with psitin limits Psitin management cntrls will be impsed by peratrs f trading venues n which cmmdity derivatives are traded The intentin is t prevent market abuse thrugh building and expliting dminant psitins and t supprt rderly pricing and settlement cnditins whilst enabling cmmdity derivatives t cntinue t supprt CAs will have pwers t intervene and sanctin breaches f psitin limits the functining f cmmercial activities in the underlying cmmdity market. 1 Lng and shrt psitins shuld be netted ff against each ther. 2 There is cnsiderable industry discussin arund the meaning f end client. 6

7 derivatives theref traded n EU trading venues and ecnmically equivalent OTC cntracts. Reprting f trades dne utside a trading venue will be dne by firms t CAs directly. Reprting f trades dne n an EU trading venue will be dne by venue members r participants t the venue itself, which will then reprt t the relevant CA. Territrial scpe The psitin limits apply t cmmdity derivatives traded n EU trading venues and ecnmically equivalent OTC cntracts. Any client which hlds psitins in cmmdity derivatives traded n an EU trading venue r ecnmically equivalent OTC cntracts will be in scpe f the psitin limit requirements regardless f where it is based. One f the mst significant requirements in relatin t transactin reprting is ne f the simplest: t btain an LEI Key area (5) Transactin reprting (executin) MiFIR extends the scpe f current transactin reprting requirements (see RTS 22 made under Article 26 f MiFIR). In particular, it expands the scpe f financial instruments t which transactin reprting applies (see bx), as well as the details which need t be reprted. Wh is impacted by the reprting bligatin Investment firms and credit institutins which execute transactins in certain financial instruments must submit a cmplete transactin reprt t their CA as quickly as pssible, and n later than the clse f the fllwing wrking day. The bligatin will apply t J.P. Mrgan Securities plc and its clients which are investment firms (i.e. persns whse regular ccupatin r business is the prvisin f ne r mre investment services t third parties and/r the perfrmance f ne r mre investment activities n a prfessinal basis) r credit institutins (i.e. banks). Imprtance f LEIs fr cunterparties and ther data required Current reprting applies t financial instruments admitted t trading n a regulated markets, whilst MiFIR extends this t financial instruments: One f the mst significant requirements in relatin t transactin reprting is ne f the simplest: t btain an LEI. In rder t enable J.P. Mrgan Securities plc t cmply with its requirements, clients will be required t prvide certain infrmatin when trading with J.P. Mrgan Securities plc. Imprtantly this includes the need t btain a legal entity identifier (LEI) in time, failing which the legislatin will nt permit us t trade with yu. In additin, we will als require ther infrmatin frm yu, including whether a cmmdity derivative is entered int fr hedging r speculative purpses. Key blcks (cllectins f fields) in the transactin reprt template include buyer and seller identificatin, executin venue and trading date and time, as well as trader, algrithms, waivers and indicatrs. This last categry includes a field in which reprting entities must include a cde used t identify the persn r algrithm within the investment firm r credit institutin respnsible fr the investment decisin. admitted t trading r traded n a trading venue r fr which a request fr admissin has been made; with an underlying financial instrument traded n a trading venue; r with an underlying index r a basket f financial instruments traded n a trading venue. Key area (6) Interperability and market access CCPs may be requested t clear financial instruments n a nn-discriminatry and transparent basis regardless f the trading venue n which a transactin is executed, althugh the CCP may require the trading venue t meet peratinal and technical 7

8 requirements and can in certain circumstances deny access (see RTS 15 made under Article 35 f MiFIR). A trading venue request fr access must be submitted t the CCP, its CA and the trading venue s CA. A CA shuld nly grant a trading venue access t a CCP where such access: wuld nt require an interperability arrangement, in the case f derivatives that are nt OTC derivatives pursuant t EMIR; r wuld nt threaten the smth and rderly functining f the markets, in particular due t liquidity fragmentatin, r wuld nt adversely affect systemic risk. Hwever, the need fr an interperability arrangement wuld nt prevent access where the trading venue and all CCPs party t the prpsed interperability arrangement have cnsented t the arrangement and the risks t which the incumbent CCP is expsed arising frm inter-ccp psitins are cllateralised at a third party. On the ther hand, a trading venue may be required t prvide trade feeds t a CCP n a nn-discriminatry and transparent basis upn request by a CCP that wishes t clear transactins in financial instruments cncluded n that trading venue, althugh the trading venue can deny access in certain circumstances (see RTS 15 made under Article 36 f MiFIR). A request fr access must be submitted t the trading venue, its CA and the CA f the CCP. Similar t the psitin fr CCP access abve, a CA shuld nly grant a CCP access where such access: wuld nt require an interperability arrangement, in the case f derivatives that are nt OTC derivatives pursuant t EMIR; r wuld nt threaten the smth and rderly functining f the markets, in particular due t liquidity fragmentatin and the trading venue has put in place adequate mechanisms t prevent such fragmentatin, r wuld nt adversely affect systemic risk. Hwever, the need fr an interperability arrangement wuld nt prevent access if the parties have cnsented t the arrangements in the same circumstances as thse referred t fr CCP access abve. Open access is a market infrastructure pprtunity which requires trading venues and clearing huses t cme t an agreement n ffering chice f trading r clearing venues n listed derivatives prducts. T date we are nt aware f any significant interperability fferings by cre clearing huses r trading venues, but we are keeping a clse watch n develpments in this space. Market demand, cst f service, risk and peratinal supprtability will factr int a decisin t supprt pen access prducts n a cmmercial basis. Key area (7) Indirect clearing Indirect clearing bligatins fr exchange traded derivatives (ETDs) are new and will impact CCPs, clearing members, clients f clearing members and their nward clients (indirect clients). In rder t knw which categry applies t them, it is imprtant that clients examine their clearing arrangements t ascertain whether their clearer is itself a direct clearing member f a CCP r accesses a CCP thrugh a direct clearing member. MiFIR prvides that indirect clearing arrangements (see bx belw) with regard t ETDs are permissible prvided that they d nt increase cunterparty risk and ensure the assets and psitins f the cunterparty benefit frm prtectin with equivalent effect t that referred t in EMIR with regard t segregatin and default management. 8

9 We have set ut key bligatins and impacts fr participants in indirect clearing arrangements belw, based n the Eurpean Securities and Markets Authrity s (ESMA) draft RTS (made under Article 30 f MiFIR). The draft RTS are awaiting finalisatin, althugh the industry is wrking n the assumptin that there will be n majr changes t the draft RTS. Key bligatins and impacts fr market participants CMs: CMs will be required t supprt new accunt structures fr clients with indirect clients. In particular, they must allw clients the chice between a Net Omnibus Segregated Accunt (NOSA) r a Grss Omnibus Segregated Accunt (GOSA). Bth a GOSA and a NOSA will cntain the psitins and assets f the client held fr its indirect clients; hwever, where the client chses a GOSA, the CM must ensure that the psitins f ne indirect client d nt ffset the psitins f anther indirect client and that the assets held fr the accunt f ne indirect client cannt be used t cver the psitins f anther. The CM must therefre, n the basis f infrmatin it receives frm the client n a daily basis, furnish the CCP with all necessary infrmatin t identify the psitins held fr the accunt f each indirect client. In rder t d this, J.P. Mrgan may maintain separate psitin accunts in its bks and recrds fr each indirect client. Indirect clearing arrangements A set f cntractual relatinships between the CCP, the CM (J. P. Mrgan 3 ), the client and the client f the client (the indirect client f the CM, r nward client f the client) that allws the client t prvide clearing services t an indirect client Applicable rules aim t ensure that arrangements d nt increase cunterparty risk and that the assets and psitins f the indirect client benefit frm prtectins equivalent t the enhanced segregatin and default management prvisins under EMIR CMs must als maintain rbust default management prcedures in rder t manage any default f a client prviding indirect clearing services. In respect f a NOSA, this will invlve prmpt liquidatin f the assets and psitins f indirect clients and the return t the client fr the accunt f the indirect clients f any balance wed frm that liquidatin. Where a GOSA has been chsen, the prcess may instead invlve the CM taking steps t transfer the assets and psitins held by the defaulting client fr the accunt f its indirect clients t anther client r t a clearing member (prting). Alternatively, a liquidatin f assets and psitins may take place, but with the payment f the prceeds being made directly t the indirect clients (where this is pssible in accrdance with applicable law). The CM must cntractually cmmit itself t trigger prting t anther client r clearing member designated by all the indirect clients whse assets and psitins are being transferred n the request f the relevant indirect clients. The cnsent f the defaulting client will nt be required. Hwever, that ther client r clearing member will nly be required t accept the prting if it has entered int a cntractual relatinship with the relevant indirect clients cmmitting itself t d s. In the event that the assets and psitins in the GOSA are liquidated and the CM is unable t identify the indirect clients r t cmplete the payment f the prceeds t them, the CM must return the prceeds t the client fr the accunt f the indirect clients. The draft RTS recgnise that ne example where the CM wuld be unable t cmplete the direct return f prceeds wuld be where the inslvency regime f a nn-eu jurisdictin was invlved that des nt allw the direct return f liquidatin prceeds. 3 Please nte that in certain limited circumstances, J.P. Mrgan may nt be the CM but a client f the CM, in which case J.P. Mrgan s client wuld be an indirect client f the CM 9

10 Clients: Clients must ffer indirect clients a chice f a NOSA r a GOSA and ensure indirect clients are fully aware f the risks assciated with these accunt types. If the nward client des nt respnd, the client must decide n a default accunt ptin, which is likely t be the NOSA. Where a GOSA is selected, the client will need t prvide the CM n a daily basis with all necessary infrmatin t identify the psitins held fr the accunt f each indirect client. In rder t d this, J.P. Mrgan may maintain separate psitin accunts in its bks and recrds fr each indirect client. The client must keep separate recrds and accunts t distinguish its wn assets and psitins frm thse held n behalf f indirect clients. It must als prvide the indirect client with sufficient infrmatin t identify the CCP and clearing member used t clear its psitins. In the event f a default f the client, arrangements shuld be in place t ensure infrmatin in respect f the indirect clients is made immediately available t the CM. Where a GOSA has been chsen, this shuld include details allwing the CM t identify the indirect clients s that it can determine which psitins are held fr the accunt f each indirect client (see Annymity f indirect client belw fr mre detail n hw this will be achieved). CCPs: CCPs will be required t pen and maintain NOSAs and GOSAs at the request f the CM. Where assets and psitins in a GOSA are managed by the CCP in respect f multiple indirect clients, the CCP will need t keep separate recrds f the psitins f each indirect client, calculate the margins in respect f each f them and cllect the sum n a grss basis. The CCP will base its determinatins n the infrmatin received frm the CM n a daily basis abut the psitins held fr the accunt f each indirect client. Indirect Clients: Indirect clients will be asked by the client t make a selectin f a NOSA r a GOSA fr their psitins. They shuld cnsider the disclsures they receive carefully befre making their selectin. Indirect clients that chse a GOSA may als wish t cnsider whether t put back-up arrangements in place t allw fr prting in the event f a client default. Annymity f indirect client The RTS preserve the annymity f the cmmercial relatinship between clients and their nward clients. Hwever, upn a default f a client prviding clearing services, infrmatin in respect f indirect clients shuld be made available t the CM t allw the default management prcedures t take effect. J.P. Mrgan intends t achieve this by making use f an industry-develped tl where indirect client details are stred in a lcked bx which nly becmes accessible upn the default f the client. J.P. Mrgan will seek t ensure that its clients have an bligatin t maintain the indirect clients details in this tl. Lng chains ESMA has taken the view in the draft RTS that indirect clearing chains shuld be restricted t fur layers except when tw layers are affiliates within the same grup and certain cnditins are met. In rder t meet the bjective nt t increase cunterparty risk, the additin f entities in the permissible indirect clearing chains are nly accmmdated fr indirect clients that have made the infrmed chice f the least segregatin and prtectin f the accunt structures ffered, i.e. the NOSA. 10

11 Accunt Structure Diagram Impacts n agreements and disclsures Changes will be required t client agreements (between the CM and the client and between the client and the indirect client) and t risk disclsures prvided by the CM and the client. The terms f the agreement between the client and the indirect client must clearly recrd the scpe f the indirect clearing arrangement and be agreed upn after cnsultatin with the CM n the aspects that can impact the CM s peratins. The agreement must require the client t hnur all bligatins f the indirect client t the CM with regards t transactins arising frm the indirect clearing arrangement. In additin, it must cntain terms t facilitate the prmpt return by the CM f prceeds frm a liquidatin f psitins and assets in the case f a client default. CMs must publicly disclse the general terms n which they are prepared t facilitate indirect clearing services, including minimum financial resurces and peratinal capacity requirements fr clients prviding indirect clearing services. As nted abve, CMs must als cntractually cmmit themselves t trigger the prting prcedures in respect f GOSAs where relevant. Fr such accunts, they must als cmmit themselves t trigger prcedures fr payment f liquidatin prceeds directly t indirect clients where apprpriate. CMs will be required t include additinal infrmatin abut the segregatin ptins available t clients prviding indirect clearing in respect f ETDs when cmplying with their current bligatin under EMIR t publicly disclse levels f prtectins and csts assciated with different levels f segregatin. The indirect clearing requirements will apply regardless f where the indirect client is based Mrever, the client s disclsure t the indirect clients must include details f the different levels f segregatin available and the risks assciated with each f these. Extra-territriality The indirect clearing requirements will apply regardless f where the indirect client is based. There are als indicatins in the RTS that clients f CMs will be caught by the regime even thugh they may be established in a third cuntry. ESMA has nted that it is mindful f the fact that many indirect clearing arrangements include nn-eu entities. The primary example is the ptential cnflict f law with a third cuntry inslvency regime applying t a client prviding clearing services, which the EU legal framewrk cannt verride. This has been addressed by recgnising that a CM wuld 11

12 nt be required t make a payment f liquidatin prceeds directly t indirect clients in the event f a client default where the third cuntry inslvency regime wuld nt permit this. Whilst EU authrised CCPs are clearly in scpe f the indirect clearing requirements, ESMA has nted that when a third cuntry jurisdictin is assessed as having equivalent requirements t EMIR fr CCPs, the recgnised third cuntry CCPs wuld nt need t cmply with the requirements n indirect clearing. Specifically, this means that recgnised third cuntry CCPs wuld nt necessarily ffer the same segregatin ptins as the nes required under MiFIR. ESMA has als indicated in industry meetings that nn-eu CMs are nt exempt frm the RTS and that they are therefre in scpe f the requirements. In particular, this will be the case if they prvide clearing services t an EU entity. Hwever, it is nt yet clear whether a clearing chain in which a nn-eu CM prvides clearing services t anther nn-eu entity will be caught by the requirements. 12

13 Published by Freshfields fr: J.P. Mrgan freshfields.cm This material is prvided by the internatinal law firm Freshfields Bruckhaus Deringer LLP (a limited liability partnership rganised under the law f England and Wales) (the UK LLP) and the ffices and assciated entities f the UK LLP practising under the Freshfields Bruckhaus Deringer name in a number f jurisdictins, and Freshfields Bruckhaus Deringer US LLP, tgether referred t in the material as Freshfields. Fr regulatry infrmatin please refer t The UK LLP has ffices r assciated entities in Austria, Bahrain, Belgium, China, England, France, Germany, Hng Kng, Italy, Japan, the Netherlands, Russia, Singapre, Spain, the United Arab Emirates and Vietnam. Freshfields Bruckhaus Deringer US LLP has ffices in New Yrk City and Washingtn DC. This material is fr general infrmatin nly and is nt intended t prvide legal advice. It is nt a substitute fr seeking legal advice abut specific circumstances and any reliance placed upn it is at the recipient s wn risk. Receipt f this material des nt create a lawyer/client relatinship with Freshfields. Freshfields Bruckhaus Deringer LLP, May