Position Paper. Public cconsultation on Derivatives and Market Infrastructures

Transcription

1 Position Paper Public cconsultation on Derivatives and Market Infrastructures Contribution of the German Insurance Association (GDV) ID-Number German Insurance Association Wilhelmstraße 43 / 43 G, D Berlin Postfach , D Berlin Tel.: Fax: , avenue de Cortenbergh B Brüssel Tel.: Fax: Ansprechpartner: Dirk Schlochtermeyer Head of Asset Management d.schlochtermeyer@gdv.de

2 Thank you very much for giving us the opportunity to take part in the consultation on Derivatives and Market Infrastructures 1. We warmly welcome the introduction of a Central Counterparty (CCP) for the clearing of OTC derivatives. We believe that the inclusion of Credit Default Swaps into central clearing will only be the first step and that in the medium term more types of derivatives are to follow. The investment portfolio of European insurers is above bn Euro. It is therefore crucial that the costs of central clearing are proportionate to the risks and merits. Insurance companies are long term investors who use derivatives only for hedging and risk reduction. Unlike banks and hedge funds insurance companies are not allowed to trade with derivatives which means that their positions bear much lower risks and their netting possibilities are limited. The probability of default in the insurance sector is much lower compared to other financial institutions. If the Commission prescribes mandatory clearing of certain derivatives the calculation of initial and variation margins should reflect the systemic risk of CCP clients as well as the long term investment horizon of insurance companies and pension funds. This is even more important because end users will have no influence on the corporate governance and fee structure of CCPs. Finally, it is also crucial that asset segregation will work in the event of a CCP default. This includes that national insolvency law can not interfere with the rules and regulations of the CCP. Concerning the four specific issues we have the following remarks. I. Clearing and Risk Mitigation We support the idea of central clearing for standardised derivatives; however, it will be crucial to define when a derivative is considered "standardised". The proposed approaches to determine the eligibility for clearing 1 The German Insurance Association (GDV) is the umbrella organisation for private insurers in Germany. Its 469 member companies, with about employees and trainees, offer comprehensive coverage and provisions to private households, trade, industry and public institutions, trough more than 430 million insurance contracts. As a risk taker and major investor (with an investment portfolio of about billion EUR), the insurance industry has outstanding significance in connection with investments, growth and employment in our economy. Seite 2 / 5

3 obligation seem to be reasonable. Ideally this process should be coordinated closely with CCPs outside the EU. However, we believe that certain derivatives are not suitable for standardisation. This is for example true for insurance derivatives on cat bonds. Access to CCPs must be guaranteed, otherwise uncertainties about the handling could influence the derivatives market. We support thresholds for "non-financial counterparties"; however thresholds must be based on standardised, objective criteria. As outlined above we also ask to acknowledge the lower systemic risk of insurance companies. German insurance companies already have a mandatory risk management in place. This will include assessments and ongoing monitoring procedures. These provisions should be taken into consideration otherwise further costs will arise for bilateral OTC derivatives. II. Requirements for CCPs We support the setup of risk committees within CCPs. We strongly recommend their advice be to compulsory in "emergency situations". The risk committee (and other committees) should be composed of members and users of CCPs. If central clearing will be mandatory the Commission should also consider the possibility of user-owned CCPs. Regular supervision and continuous reporting should be implemented to monitor CCPs. The supervisory requirements have to be standardised (ESMA). With regard to outsourcing, the requirements of 16 German Investment Act (InvG) and/or 25a German Banking Act (KWG) and the corresponding BaFin regulation could be used as the benchmark for CCPs. These principles are also stated in the UCITS directive at EU level. Transparency and reporting requirements of CCPs to clients of the clearing member should have the same scope as towards clearing members. For the buy-side it is essential that segregation is not only legally binding at CCP level but also for all clearing members offering their services to the buy-side. Furthermore it is crucial that there is a strict and immediate singling out mechanism in place if a CCP and/or a clearing member becomes insolvent. At all times it has to be possible to transfer positions and deposits to other CCPs. Seite 3 / 5

4 With regard to the initial capital of a CCP, a percentage of the actual clearing amount would be better than a fixed amount. This is of particular relevance for CCPs with a large clearing amount (e.g. 10% of the clearing amount). This ensures that CCPs with big clearing volumes are treated equally in proportion to smaller CCPs. This would not be the case with a fixed amount of initial capital. Margin requirements of CCPs vis-à-vis the clearing member should be determined by the EU within strict framework conditions. As outlined above the calculation of the margins should acknowledge the type of business model a member or client has. A default fund should not be formed at the level of an individual CCP, but at overall CCP level and be strictly binding for all CCPs. Furthermore, as suggested, reserves should also be made at individual CCP level, in order to be able to balance out potential losses. A CCP should only accept collateral which meets the high requirements on minimal credit and market risks. If the underlying does not meet these requirements, the CCP must not accept it as collateral. The results of the regular review of the models, stress testing and back testing should at least be published to the relevant supervisory authority (ESMA). III. Interoperability Identical EU-wide legislation for all CCPs is desired. This would ensure that there are standardised rules for CCPs in the EU. It would also be probable that other CCPs outside the EU would adjust to this standard, which should minimise any operative differences. We favour the concept of interoperability. IV. Reporting Obligation A restriction to EU derivatives does not seem to make sense. Model A is preferred to ensure a comprehensive reporting of derivatives. It appears important that derivatives can (also) be entered into for hedging reasons, and hence the report of a derivative alone can lead to misinterpretations. However, this should not lead to all transactions being reported. As regards trade repositories (TR), we also support the EU taking the lead to ensure greater transparency of the financial market. If the EU chooses this option we are certain that other financial markets will support the im- Seite 4 / 5

5 plementation of TR. Thus, Option 2 appears preferable on the condition that the EU's regulative requirements are realised strictly. The recent events on the financial market support the view that no compromises should be entered into in the regulatory field. The demands on TR should be identical EU-wide. The same requirements should be required for providers domiciled outside the EU if they want to be recognised as TR within the EU. Fundamental from the buy-side point of view will be the confidentiality of all data transferred to a TR, as these are particularly sensitive financial data. For this reason, only supervisory authorities should be given access to the data. Berlin, July 2010 Seite 5 / 5