EMIR impacts and collateral best practices Lugano, 25 th November 2013 Name Surname Job title
Agenda Changing regulatory landscape Collateral challenges The buy-side s collateral equation Conclusion 2
Changing gregulatory landscape Banking Rules Investors Protection Prudential requirements Banking model Accounting rules Americas Dodd Frank Act Volcker (DFA) EMEA SIFI framework / Living wills CRD IV Vickers (UK) Solvency II Banking model (Liikanen group) IFRS review French Banking Law Asia Basel III implementation in local legislation Investor Information Conflicts of Interest Distribution Rules Asset protection / segregation / collateral Americas Dodd Frank Act. MIFIR EMIR UCITS V MIFIR EMEA Ucits IV / Prospectu s PRIPS AIFMD ESMA guidelines UCITS ETFs AIFMD SLD ICSD ESMA UCITS guideline IORP s VI Close out netting Asia Asian region fund passport (ARFP) Limits of UCITS distribution Shadow Banking Americas EMEA FSB work 5 workstreams Asia MMFs Securitisation Securities Lending & Repos Other SB entities Interactions betw. Banks / SB MMFs UCITS VI MMFs SLL? OTC derivatives Trading organisation Infrastructure regulation & org. Market Organisation Tax and Authorities Americas EMEA Asia Americas EMEA BCBS IOSCO Margin requirement Dodd Frank Act BCBS Recovery and Resolution FMIs EMIR MIFID II MIFID II EMIR CSDR T2S Local regulations implementing G 20 (HK / Japan leading) Asean Link (Sing. + Malay.+ Indo.) Regional Settlement Initiative (Asean +3) Pan Asian CSD (HK, Malay.) Asian Harmonisation group (ASEAN+3) Europe USA Asean +3 (Asean + Japan, Korea and China) Dodd Frank Act. New European Treaty FTT FATCA EU FATCA Asia Asean Bond market Forum (ABMF) Regional bond issuance Crisis Management Regulators cooperation 3
G20 Requirements Commitment on 4 principles at September 2009 G-20 Summit All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements. To secure the OTC market, the G20 has committed to : Build infrastructures and secured market processes for standardized OTC derivatives Clearing through CCPs that are regulated with capital requirements from clearing agents Organized execution on electronical platforms (SEF in the USA, RM / MTF / OTF in Europe) Promote the use of standardized OTC derivatives through operational and financial constraints on non-standardized products Operational: independent valuation, reduced confirmation timing, frequent reconciliation and compression Financial: systematic and conservative collateralization in IM & VM Capital: new capital charges on bilateral positions (Basel 3 stressed EEPE, CVA charge,...) Set an exhaustive reporting for all the positions on OTC derivatives through Trade Repositories 4
EMIR Key ypoints Mandatory clearing for standardised and liquid OTC derivatives Scope of products subjectto to the mandatory clearing defined by ESMA Clearing obligation procedure For uncleared contracts, risk mitigation techniques (collateralisation, daily MtM operational risk mitigation) Authorisation/ supervision of CCPs Recognition of third country CCPs Organisational requirements Conduct of business rules Prudential requirements Interoperability arrangements CCP requirements OTC derivatives EMIR Main provisions Reporting obligation to TRs Mandatory trading Business conduct & registration MIFID review Main provisions Mandatory reporting of all derivative contracts (including listed) Registration and supervision of TRs Relations with third countries Requirements for TRs Frequency and details of data to be reported to the TR All OTC derivatives subject to clearing obligation should be executed on an electronic platform Requirements on trading facilities Participants providing MIFID activities are to be approved by their competent authorities Main rules on suitability tests, best execution, conflicts of interests and dinvestor protection ti Transparency obligations extended to all products Entry into force of EMIR on 15 th March 2013 and obligations due to ramp-up until 2014 5
EMIR - Timeline 16 aug 2012 EMIR Entry into force 15 mar 2013 15 sep 2013 12 feb 2014 T3 2014 Timely Confirmation Daily Mark to Market Dispute resolution Portfolio reconciliation Reporting obligation to Trade Repositories Central Clearing for standard OTC derivatives A scaled calendar that requires important adaptations A flexible governance to be able to timely and promptly face new requirements Important investmens to be compliant with all the new obligations Dec 2015 Collateralisation for bilateral OTC derivatives 6
Your immediate challenge: Face the urgence March 2013 Sept. 2013 Feb. 2014 Sept. 2014 Timely Confirmation Daily Mark to Market Dispute Resolution Portfolio Reconciliation Reporting to Trade Repositories Central Clearing To which infrastructure should I connect? Whichh are the implementation ti date? Portfolio Reconciliation Reporting to Trade Repositories LEI, UTI, UPI*, which identifier should I retrieve and use? What are the procedural and operational impacts? * LEI : Legal Entity Identifier UTI : Unique Trade Identifier UPI : Unique Product Identifier New processes to implement in a very short time 7
EMIR Portfolio reconciliation Content Perimeter Implementation date Reconciliation modes Data Reconciliation frequency All OTC derivatives (FX fwd and swap included) Collateralised and non collateralised instruments Non cleared OTC derivatives 15 September 2013 Before entering in a OTC derivatives contract FC* and NFC** have to agree (written or electronically) with the counterparties procedure to reconcile bilateral derivatives portfolio Mark to market Key economical terms of the transaction Portfolio reconciliation have to be performed at different frequency according to the size of the current bilateral portfolio (at any moment of the due period) *FC : Financial Counterparty **NFC : Non Financial Counterparty 8
EMIR Reporting to Trade Repositories Content Perimeter Implementation date Reporting modes Data Reporting frequency All derivatives contrats: OTC and ETD All types of instruments (FX fwd and swaps included) Cleared and non Cleared derivatives 12 February 2014 for all contracts Both counterparties shall report Possibility of third party delegation (Full or partial) Part 1 Counterparty data: Valutation + Collateral Part 2 Common data: Transaction details Identifiers : LEI (or pre-lei), UTI, UPI Transaction should be reported within the following day after the conclusion, modification or termination of the contract Valuation and collateral must be reported daily 9
Your (next) challenge: Be prepared p on time March 2013 Sept. 2013 Feb. 2014 Sept. 2014 Timely Confirmation Daily Mark to Market Dispute Resolution Portfolio Reconciliation Reporting to Trade Repositories Central Clearing Select on or more Clearer(s) Choose the segregation model Central Clearing Implementation and management of interfaces and connections (Clearers, CCPs, Custodians, ) Adaptation of daily procedures especially for collateral management Anticipation is key, implementation may take very long time 10
BCBS IOSCO - Margin requirements for non-centrally cleared derivatives Systematic margining for all non centrally cleared derivatives entered into by financial firms and systemically important non-financial firms Bilateral Initial Margins if outstanding gross notional of non cleared derivatives is above a 8 billion EUR threshold (at consolidated group level) likely exemption of physically-settled fx forwards, swaps and notional exchange on cross-currency swaps IM threshold of 50 million EUR at consolidated group level is possible Full VM must be exchanged (zero threshold) on a regular basis and minimum transfer amounts not to exceed EUR 500 000 Eligibility rules limited to Cash, High quality government, corporate and covered bonds, Equities of major stock indices and Gold IM calculation Table based standard approach OR quantitative model approved by relevant authority, without cross-margining between asset classes Specific arrangements (incl.third-party custody) that protect the margin should be implemented Cash and non cash collateral collected as IM should not be re hypothecated, re pledged or re used except under specific circumstances 1 st December 2015 for variation margin and from 2015 to 2019 for initial margin 11
EMIR and Non- EU countries: Today s situation Technical advices on third countries regulatory equivalence under EMIR Final Report on contracts with direct, substantial and foreseeable effect within th Union and non-evasion: 18 November 2013 Technical advice of Equivalance for third countries under the mandate ( 9 countries) Definition of Guarantee and quantitative thresholds OTC Derivatives contracts between Union branches and third countries entities Evasion prevention cases The Switzerland EQUIVALENCE current status 12
Agenda Changing regulatory landscape Collateral challenges The buy-side s collateral equation Conclusion 13
Upcoming challenges for all industry yplayers Increase of collateral l needs Operational complexity (higher volumes and frequency) Collateral scarcity Safety of collateral Segregate collateral Dual processing Anticipate requirements Counterparty/ Custodian / CCP Cleared OTC Bilateral OTC Collateral optimisation Rules on eligibility / haircuts Connectivity to market infrastructures Adapt bilateral processes Collateral transformation Limits on re use (ESMA guidelines) Selection of brokers/ clearers Management of buffers & timely same day transfers to clearers Daily independent valuation/portfolio reconciliation Anticipation will be key 14
1 st challenge Increase of collateral amounts On OTC derivative activities stable around $ 3.7 trillion of collateral But uncovered credit exposures still significant: $2.1 trillion (1) Higher collateral requirements but how much? Clearing of OTC Derivatives : 610 billion EUR collateral l in the short term (3) Initial Margin requirements on uncleared derivatives : estimate of 700 billion EUR (4) Collateralization of deliverable Fx Swaps and Forward: no estimate yet Additional encumbrance of HQLA due to new prudential rules (LCR, Solvency 2 ) Estimates by markets and research/policy institutions of new collateral requirements and asset encumbrance vary between 1 to 4 trillion due to combined effects of upcoming regulations Relative increased scarcity : collateral demand increases faster than supply of HQLA Rating agency action : 63% decline in AAA govt debt availability since 2007 (1)Source bis.org (2) source isda.org (3)ESMA report on Trends Risks Vulnerabilities February 2013 (4)QIS under BCBS IOSCO s consultation Q1 2013 15
2 nd challenge Increase of operational complexity On cleared trades Multiplication of processes (cleared OTC / bilateral OTC ) and volumes of collateral transfers (no thresholds or MTAs) Manage netted payments (collateral, swap coupons, credit events settlements ) Manage same-day payments or pay funding costs Distinction of eligibility clauses according to the type of collateral (initial margins, variation margins) Interface / reconcile with clearers And on non-cleared Timely confirmation, daily MtM, portfolio reconciliation, compression, dispute resolution Reporting of trades, valuation and collateral to Trade Repositories Systematic variation and initial margins???!!! 16
3 rd challenge Manage collateral protection Theoretically under EMIR each CCP must provide two forms of segregation Full client segregation Client omnibus Practically : multiplication of CCPs = multiplication of segregation models (10+ currently) LSOC, OSA Net, OSA Gross, ISA, LSOC with excess Waterfall considerations in case of default (use of other client s margins, default fund, CCP capital ) On cleared trades, assessment of costs vs benefits of segregation models On non cleared trades, use of third party custodians to protect independent amounts 17
Agenda Changing regulatory landscape Collateral challenges The buy-side s collateral equation Conclusion 18
The buy-side s collateral equation (1) Achieve performance Higher collateral requirements? Reuse and reinvestment limitations Asset Protection Manage higher complexity 19
The buy-side s collateral equation (2) Increase the use of securities to remain fully invested Optimize inventory before transformation (clearer s LCR costs likely to be passed to clients) Focus on velocity For UCITS, hold eligible assets or push counterparty to enlarge their eligibility matrix Achieve performance via forwards or CFDs and keep cash for margins? Implement specific tools and processes to monitor rules on concentration, reuse and reinvestment on a transversal basis Implement new processes on Implement custody frameworks cleared and bilateral trades to secure collateral, in function of supervisory authority s Centralized and transversal constraints collateral organisation is key to consolidate view over assets and requirements 20
Agenda Changing regulatory landscape Collateral challenges The buy-side s collateral equation Conclusion 21
Conclusion Tsunami of regulations impacting collateral-related activities Investor protection is emphasized Centralized collateral function is key for optimization and costeffective infrastructure We are here to help and support 22
Custodian: A key role Timely confirmation Daily Mark to Market Bilateral counterparties/ ti OTC Clearers Dispute resolution Portfolio reconciliation Reporting to Trade Repositories i Custodian Platforms / Infrastructures Central Clearing for standard d OTC Derivatives Collateralisation of bilateral OTC Derivatives Trade Repositories 23
BNP Paribas Securities Services: Collateral Access Stand alone or integrated. The choice is yours. Our solution is available on a stand alone basis or as part of our complete range of post-execution OTC derivatives services. From middle-office, valuation and collateral l management services, Collateral Access is integrated, yet modular. Robust, yet flexible. 24
BNP Paribas Securities Services: Listed derivatives global execution and clearing services A comprehensive suite of services Exchange membership Direct memberships to the clearing houses Global multi asset classes electronic and desk execution access Single clearing account Global l client relationship management Central client onboarding team Near real-time reporting on GCM markets Risk & collateral management Full asset & collateral protection set up available Cash sweeping facilities Online portal (Neolink) Same day FX -Autoforex Local/global custody services Combined with OTC clearing Dedicated clearing systemstem Global platform with advanced technology and high volume capacity One entry point One clearing account with BNP Paribas Securities Services, providing trading and clearing access on all global exchanges Real-time risk management system Intraday risk monitoring solutions( V@R simulations) Margin computation on open positions Monitors margin use vis-à-vis collateral available Comprehensive clearing services Account management/position keeping Give-up management Confirmation management Intraday break management Exercise & assignments Margin call management Collateral management optimisation facilities Flexible reporting` 25 2 5
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