Derivatives Markets not Leaving the Regulatory Spotlight yet Financial Markets Legal Update 18 May 2017 Rezah Stegeman
Programme EMIR for a minute Trading obligation (MiFID2) Post-trade transparency for a minute (MiFID2) CCP clearing obligation (MiFID2) STP (MiFID2) 1 / B_LIVE_EMEA2:906288v1
EMIR for a minute 2 / B_LIVE_EMEA2:906288v1
EMIR Clearing start dates for Category 3 counterparties postponed to 21 June 2019 G4 currency IRS, European index CDS and EEA currency IRS EC proposal for amendment of EMIR (04 May 2017) All AIFs captured by definition of FC Introduction of small financial counterparty (SFC) Removal of clearing frontloading obligation Clearing exemption for pension schemes to be extended by another 3 years CCPs to be responsible for reporting ETDs 3 / B_LIVE_EMEA2:906288v1
Trading obligation (MiFID2) 4 / B_LIVE_EMEA2:906288v1
MiFID2: Trading obligation Article 28, 33 and 34 MiFIR certain market participants should trade certain standardized derivatives on a regulated market, MTF, OTF or equivalent third country trading venue G20 Commitment (Pittsburgh Summit) Financial counterparties (FCs) and non-financial counterparties meeting the EMIR clearing threshold (NFC+s) Both counterparties should be caught by the trading obligation before a transaction is subject to the trading obligation Exemptions: Intragroup transactions Pension scheme arrangements 5 / B_LIVE_EMEA2:906288v1
MiFID2: Trading obligation Standard procedure: 1. Class of derivatives becomes subject to the EMIR clearing obligation 2. Class of derivatives becomes subject to MiFIR trading obligation RTS on Criteria for Determining Whether Derivatives Should Be Subject to the Trading Obligation Liquidity test Pretty granular COFIA approach Large in Scale (LIS) Venue test No venue-led approach (US) Phase-in per type of counterparty FCs and NFC+s Distinction in FCs (comparable with EMIR)? 6 / B_LIVE_EMEA2:906288v1
Post-trade transparency for a minute 7 / B_LIVE_EMEA2:906288v1
Post-trade transparency (ie publication) Why: Market transparency, efficient price formation and facilitate best execution Who: Trading venues + SI investment firms + investment firms trading otc What: Trade data (trade date, trade time, price, volume etc.) Which instruments: Also non-equities, including derivatives admitted to trading on an EEA trading venue (RM, MTF and OTF) (art. 21 MiFIR) When: Publication within 15 minutes of trade execution (reducing to 5 minutes from January 2020) How: Publication through an Approved Publication Arrangement ( APA ) 8 / B_LIVE_EMEA2:906288v1
CCP clearing obligation 9 / B_LIVE_EMEA2:906288v1
Central clearing by novation Original Buyer CCP Original Seller Multilateral netting benefit A 5 2 B A 2 5 B 9 4 7 CCP C 3 D C 2 5 D 10 / B_LIVE_EMEA2:906288v1
Direct and indirect clearing CCP CM CCP CM Client CCP CM Client/EB Indirect Client EB CCP CM Client Indirect Client 11 / B_LIVE_EMEA2:906288v1
Segregation at direct client clearing CM A house account CCP CM A house account client 1 (ISA) CM A client accounts ISA of client1 CCP assets client 2 (OSA) client 3 (OSA) client account OSA of client 2 and client 3 12 / B_LIVE_EMEA2:906288v1
STP obligation 13 / B_LIVE_EMEA2:906288v1
Clearing process of ETDs Client A Client B 3 1 1 4iii 5b EB 1 Trading Platform EB 2 2 2 3 3 4ii 5a CB (1) of EB 1 CCP CB (2) of EB 2 3 and of Client B 4i CB (3) of Client A 5b 14 / B_LIVE_EMEA2:906288v1
Clearing processs of OTC derivatives EB 1 Client 6a 2 3 Middleware 6 4 2 6b CCP 5 CB 6a 15 / B_LIVE_EMEA2:906288v1
STP Impose clearing, secure straight-through-processing ( STP ) (art. 29(2) MiFIR) STP is not defined: Execution and clearing almost simultaneous processes The quicker a trade reaches the CCP and the fewer people involved, the lower the risk of errors This ideally requires a seamless electronic transmission of information and thus full automation There are no regulatory timing requirments The market standard ISDA/FIA Europe Cleared Derivatives Execution Agreeement 150 minutes from execution to complete Step 2 (submission cut-off) 90 minutes after submission to CB (clearing member cut-off) CCP must reject/accept the transaction before 6 pm if executed before 4 pm 16 / B_LIVE_EMEA2:906288v1 (CCP cut-off)
STP Scope STP applies to cleared derivatives ; mandatorily (EMIR/MiFID2) of voluntarily One regime for derivatives traded on a trading venue (ie RM, MTF and OTF) Another regime for derivatives concluded on a bilateral basis ( real OTC) Exemption for automated clearing circumstances 17 / B_LIVE_EMEA2:906288v1
STP Cleared derivative concluded on a trading venue Predetermined information Pre-trade check by trading venue of orders against limit (provided by CM) Electronic order: 60 seconds vs Non-electronic order: 10 minutes Order not within limit: trading venue must inform client and CM real-time (if electronic order) vs 5 minutes (if non-electronic order) Trade information to be sent to CCP by trading venue post execution (10 seconds vs 10 minutes, depending on electronic execution) CCP must (i) accept/reject within 10 seconds post receipt trade information and (ii) inform CM and trading venue of non-acceptance on a real time basis Both CM and trading venue must inform client of a non-acceptance as soon as possible after being informed themselves 18 / B_LIVE_EMEA2:906288v1
STP Cleared derivative concluded on a bilateral basis CM must ensure that the counterparties (?) submit information to CCP within 30 minutes post conclusion [a reduction of 120 minutes compared to CDEA!] CCP must provide trade information to CM within 60 seconds post receipt CM must accept/reject within 60 seconds post receipt [a reduction of 89 minutes compared to CDEA!] CCP must (i) accept/reject within 10 seconds post receipt CM acceptance or non-acceptance and (ii) in case of non-acceptance inform CM on real time basis CM must inform client of a non-acceptance as soon as possible after being informed itself 19 / B_LIVE_EMEA2:906288v1
STP Trades not accepted by the CCP Cleared derivatives concluded on a trading venue electronically Since damages will be negligible due to limited time must be voided by the trading venue Cleared derivatives concluded on a trading venue non-electronically or on a bilateral basis Since market may have moved due to lengthy process parties must have in place contract to provide for consequences 20 / B_LIVE_EMEA2:906288v1
Contact Rezah Stegeman Partner T +31 20 722 2333 M +31 6 1007 8920 E rezah.stegeman@simmons-simmons.com 21 / B_LIVE_EMEA2:906288v1
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