OTCS Master - Stockholm 24th - v5.PPTX [Read-Only]

Comet 1March 24th

Stockholm

Start Session

10:00 Introduction

10:05 The State of the Clearing Market

10:20 CRD IV and The Impact on OTC Derivatives

10:40 The New Financial Ecosystem

11:30 Break

12:00 Choosing a Clearing Broker

13:00 Lunch

14:00 Has Collateral Management Become a Front Office Function? 10 Reasons to Invest in Collateral Management

14:50 Bilateral Margin for Un-cleared OTC Trades

15:45 Break

16:15 Do the New Regulations Change the Business Case for Outsourcing?

17:00 Conclusion & Cocktail Reception

The State of The Clearing Market

Fredrik EkströmPresident of Nasdaq OMX Clearing, Nasdaq OMX

NASDAQ CLEARING

March 31, 2015

NASDAQ CLEARING – WHO WE ARE

Document Title5

Fourth largest clearing house in Europe

First clearing house to obtain the EMIR license

and QCCP statusMulti asset offering

Offers one harmonized clearing model

regardless of products cleared

The aim is to create capital, legal and

operational efficiency both for Clients and Clearing members

CURRENT LANDSCAPE

Document Title6

Macro

• Low interest level enviroment• Declining listed derivatives volumes (Europe worst performer)• Growth in OTC volumes

Regulation

• Mandatory clearing of interest rate instruments in EUR, USD, YEN, GBP, with Nordic currencies intended for phase 2

• CRD-IV/ MiFID 2• Bilateral margin on non-cleared trades

CCPs

• Competition - all CCPs trying to get a share of the IRS market• Asia focus• Some industry consolidation started

DRIVERS FOR CLEARING IN THE NORDICS

Document Title7

Capital efficiencyMargin offset Listed

and OTC

Wide collateral list

Collateral optimization

Operational efficiencyInvestor protection/

Segregation

Increased automation/ STP

One harmonized clearing model

Local efficiency

Insolvency law/ Rulebook

Easy onboarding process

Local governance structures

NASDAQ SWAP CLEARING

Document Title8

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NASDAQ REPO CLEARING

Document Title9

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SUMMARY REMARKS

Document Title10

• We are in a new ecosystem• MIFID, EMIR, Basel-3, etc.

• Drivers for clearing and choice of where to clear will not only be driven by regulations• CCPs need to focus on the drivers for clearing to ensure a balance between

stability and costs

• OTC clearing will continue to grow

• Today we have 20 CCPs in Europe , how will it look in 5 years – what is the right balance between capital efficiency and systemic risk?

CRD IV and The Impact on OTC Derivatives

Adam Göransson Legal Counsel, Nasdaq OMX

EXPOSURES TO QCCPS

Adam Göransson, March 24, 2015

LEGISLATIVE FRAMEWORK

Exposures to QCCPs13

• Capital Requirements Directive and Capital Requirements Regulation

• Basel III ”interim rules” in force from July 2012• Basel April 2014 Proposals in force from 1 January 2017; CRD IV

expected to follow• CRR applies to derivatives and similar, but not to cash transactions• Applies to banks and investment firms; cover clearing members’

and clients’ exposures• Counterparty credit risk only – not market risk• CVA risk charge does not apply to exposures to CCPs• Rules only apply to qualifying CCPs (such as Nasdaq Clearing);

normal bilateral rules for non-QCCPs, but transitional rules• CRR is directly applicable in EU and in force from 1 January 2014

CLEARING MEMBERS’ EXPOSURES TO QCCP

House account

• 2% on trade exposures• 2% on cash initial margin (IM)• 0% on non-cash IM if

”bankruptcy remote”

Client Accounts

• CCP leg• No charge assuming no

obligation to reimburse client, otherwise as for House

• Client leg• Normal uncleared rules (i.e. risk

weight of client)


Default fund• Currently one of two methods; one complicated, the other simpler but expected to

be more expensive• Expected to be replaced, following Basel 2014 Proposal, by single, simpler approach

CLIENTS’ EXPOSURE TO CM AND QCCPTRADE EXPOSURES


• Possible to calculate as if uncleared, but… • Risk weight of 2% available, if portable and bankruptcy remote

• Portability: ”facilitate” but ”shall be transferred” unless client requests to close out.

• ”Ensured” was dropped in corrigenda.

• Within the applicable margin period of risk.

• Requirement to have actual back up clearing member arrangement in place?

• Positions and assets EMIR segregated at CCP and CM level.• ”Bankruptcy remote” in accordance with opinion in the event of insolvency of

the CM, the CM’s other clients or both. • Risk weight of 4%, if…

• portable and bankruptcy remote as above, but…• Client not protected if both CM and other clients insolvent.

• Otherwise treated as if uncleared• i.e. when client not protected where CM alone or other client alone insolvent.

CLIENTS’ EXPOSURE TO CM AND CCPMARGIN EXPOSURES


• If held at CCP and not bankruptcy remote then 2% or 4%• CM posts IM on a title transfer basis and client has prior recourse to CM’s

debt claim against CCP, so…• CM grants security to client over CM’s claim against CCP, or • Contractual claim of client against CCP, under contractual implementation of

EMIR art 48(7).• If ”bankruptcy remote” from the CCP, CM and other clients of CM,

then no capital requirement. • Requires direct posting/return?

• Otherwise, presumably normal risk weight of CM

• Default Fund exposure not relevant when acting through CM.

OTHER ISSUES


• Large Exposures

• Leverage Ratio

The New Financial Ecosystem

Moderator: Bill Hodgson, Editor of The OTC Space

• Jan Axelsson, Senior Advisor, Swedish Financial Supervisory Authority • Gabriel Vimberg, Clearing Sales & Head of Business Development,

SEB• Fredrik Ekström, President of Nasdaq OMX Clearing, Nasdaq OMX

The New Financial Ecosystem• What effect has clearing had on the Swedish OTC market?• Should pension funds and investment funds be excluded from being

required to clear?• Is it possible to say whether clearing has reduced systemic risk?• Has the FSA been using the data reported under EMIR on OTC

derivatives trades? If so how?• What areas of EMIR trade reporting could be improved?• We believe a review of EMIR is coming up, what would the feedback be

from the FSA?

Break

Back for 12:00 Please

Choosing a Clearing Broker


• Daniel Nordkvist, Danske Bank, , Head of Sales DSS Sweden• Magnus Olsson, Client Clearing & Third Party Collateral Management,

Swedbank• Maria Leontiou, FX/MM and Collateral Operations Manager, Eurobank

Central Clearing – Buy Side viewsMaria Leontiou

Key questions asked• Do key decision makers have a thorough

understanding of the complexities entailed?• How does/will central clearing impact our business?• Does any of those impacts challenge our business

model or strategy?• When should we be ready?• Build, buy or outsource? • What is our geographic reach?• What type of protection do we wish to achieve at a

CCP level ?• Will it just be our entity or will our decision be made

at a Group level?

Clearer selection factors under scrutiny

• Products coverage & CCPs connectivity • Financial strength and business model (systems

and reports)• Quality of relationship • Risk policy (intraday margining and credit limits)• Operational expertise/ support • Collateral transformation services• Fees and cost structure• Legal documents

Clearing Regulatory timeline

Significant dates in relation to OTC Derivatives Clearing

EMIR: enters into

force (August)

Japan: IRS and CDS clearing

becomes mandatory

for Japanese

Dealers (December) EMIR: Trade Reporting

begins (Feb)

Nasdaq becomes the first CCP authorised to clear

OTC Derivatives – this

triggers 6 months for ESMA

to define which of the authorised products will be

subject to mandatory

clearing

EMIR: ESMA release draft

Regulatory Technical Standards

(RTS) on clearing obligation for

both IRS and CDS trades for consultation (July)

EMIR: ESMA send first draft of IRS RTS

to the European Commission. ESMA will

wait until IRS RTS are approved before

submitting CDS RTS (October)

European Commission confirms

intension to endorse IRS RTS subject to

ESMA making some changes to entity categorisation and frontloading

(December)

ESMA launches consultation on NDF clearing (October)

Japan: Clearing of IRS becomes

mandatory for first phase of clients (banks)

EMIR: ESMA accept majority of EC

comments on IRS RTS but need to

finalise intra-group exemption (January)

2014

Q1

2015 20162012

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2013

Dodd-Frank: Mandatory clearing

starts

Category 1: March

Category 2: June

Category 3: Sept

EMIR: IRS RTS expected to be

published in the Official Journal. They

enter force 20 days after publication

(expected May)

EMIR: Category 1 to start mandatory

clearing [RTS + 6 months] (expected November)

Frontloading period begins for

Category 2 [RTS +3 months to define

category then +2 months to prepare

for frontloading (expected October)


clearing [RTS + 12 months] (expected May)

EMIR: Frontloading period begins for

Category 1 [RTS+2 months] (expected July)


clearing [RTS + 18 months] (expected November)

2017+

EMIR: Category 4 to

start mandatory clearing

[RTS + 3 year]

(expected May 2018)

• IRS proposed for mandated clearing

• Basis, Fixed-Float, IRS in EUR, USD, GBP (all to 50 yr) and JPY (to 30yr) and OIS and FRA in in EUR, USD and GBP (to

3yr)

• The categorisation and timeline of entities were as follows:

• Category 1 - direct clearing members - have 6 months from the entry into force of the RTS

• Category 2 - Financial entities above EUR 8bn in un-cleared derivatives (calculated as an average of the 3 month ends

after the RTS) are – 12 months after the RTS

• Category 3 – all other financial entities – 18 months after the RTS

• Category 4 – non-financial entities above the defined clearing threshold - 3 years after RTS

• Frontloading

• Will only apply to category 1 and 2 entities

• Trades executed after the RTS are in force but before the implementation date would be required to be cleared once the

implementation date is reached

• There is a 2 month preparation period before frontloading would apply

• Category 1 frontloading applies for trades executed between 2 months and 6 months after the RTS

• Category 2 frontloading applies from 5 months after the RTS (3 months to define if cat 2 or cat 3 then 2 months

preparation) and 12 months after the RTS

Key points of the ESMA RTS relating to the clearing obligation

ESMA Clearing obligation

Choosing a Clearing Broker

• Products to be cleared• IM Model / Segregation Models• Fees (Commercial, Collateral, Financing)• On-boarding Process & Timing• Commitment to Product & Updates• Front-loading• Stability of your CB

Lunch Kindly Provided by

&


Has Collateral Management Become a Front Office Function ? Reasons to Invest in Collateral Management


• Ted Allen, Vice President for Collateral Management, SunGard

• John Lund, JXL Consulting• Diana Higgins, Crediten

Collateral Management Trends 24th March 2015

What are the main market drivers?

COLLATERAL MANAGEMENT DRIVERS FOR

CHANGE

Advanced enterprise collateral technology solution from a trusted partner

TRANSFER PRICING Incentivise collateral providersAllocate cost of collateral

HOLISTIC COLLATERAL INVENTORY

Real time, multi entity, cross asset

COST OF COLLATERAL Optimization of collateral allocation, minimize cost of

collateral funding

VOLUME OF CALLS Automate operations processes,

cross-product STP standards, automate collateral allocation

INTEGRATED CLEARING AND COLLATERAL

Better client serviceOptimise balance sheet usage

REDUCE OVERALL TCO Lower infrastructure and

operational costs

MINIMIZE INITIAL MARGIN REQUIREMENTS

Margin optimization, margin analytics

REGULATORY COMPLIANCE Adhere to global framework for collateral processes and reporting

Trend 1: Centralised Profit Center to unlock the potential of collateral management

CENTRAL COLLATERAL/LIQUIDITY MANAGEMENT & TRADING UNIT

COLLATERAL MANAGEMENT(cross product collateralization)

LIQUIDITY MANAGEMENT(Repo / Reverse Repo)

ENTERPRISE COLLATERAL INVENTORYcross-asset, real-time

SECURITIES LENDING / COLLATERAL TRADING

COLLATERAL OPTIMISATION / COLLATERAL TRANSFER PRICING

INTEGRATED LIQUIDITY AND COLLATERAL TRADING AND MANAGEMENT(TIGHTLY COUPLED WITH TRADING, TREASURY, AND RISK)

BENEFITS

› Single view of collateral pool / liquidity› Efficient transfer pricing of collateral› Overcome inventory competition allows

optimized use of collateral› High operational efficiency (STP)

› Increased trading revenues through collateral trading

› Active management of regulatory ratios (LCR, NSFR and LR)

› Improved risk management (e.g. single customer / exposure view)

Trend 2 - Margin Analytics

IM Calculation & Validation

Pre-deal IM Calculations

Replicate exchange and broker IM calculations

SBA-SIMM for bilateral

Modelling & Forecasting

Modelling, forecasting, understanding risks – wrong way, sensitivities, liquidity, collateral stresses

Understanding the collateral implications of a new trade –deal pricing

Optimal counterparty selection

Minimize

Collateral

Costs

Maximize

Funding

Capacity

Reduce

Operational

Costs

Optimize

Funding

Operations

Minimize Collateral costs Allocate holisticaly the CTD positions to approriate

requirements Substitute of posted collateral

Trend 3 - Collateral Optimization

Apex Optimizer

Minimize Funding costs Identify optimal funding venues according

to IM and available collateral

Maximize Liquidity / Funding capacity Maximize the remaining funding capacity Maintain HQLA and liquidity buffers

Automate the allocation process Take into account all agreements and limit

constraints Fully automate the collateral trade creation

© Copyright SunGard 2015

Trend 4 Collateral Transfer Pricing

© Copyright SunGard 2015

DESK 3Collateral Asset 1

Transfer Price

Transfer Price

Cost of Asset 1

Exposure

COLLATERAL PROVIDERS

COLLATERAL MANAGEMENT

DESK

OTC DESK 1 OTM

OTC DESK 2ITM

EXPOSURE CONTRIBUTORS

CHARGE / INCENTIVISE EXPOSURE CONTRIBUTORS

Method 1 – Real Cost

Cost = Posted collateral cost

Exposure Contribution

X

Method 2 – Theoretical Cost

Option 1 (simple):

Disadvantages:• Difficult to link exposure with collateral held and

posted (how to distribute the netting effects?)• Collateral cost are not predictable and beyond the

control of the trading desks• Does not incentivize trading desks to choose a

favorable agreement

+Cost =Agreement

SpreadLiquidity Spread

+ IM Spread

Current Exposure

x

t

i

+ IM spread

+ Liquidity spread+ Agreement spreadBase Rate (i.e. unsecured funding – eligible secured funding rate

+Cost =Agreement

SpreadLiquidity Spread

+ IMSpread

Expected Exposure

x

Base Rate (1d) +

+Base Rate Exposure Term

Complexity vs. Option1:• Calculation of expected exposure

value and term• Early termination adjustments

• Easy to implement• Rate and fees predictable by trading desk• Keep collateral allocation loss/benefit to the central collateral desk

Option 2 (complex):

Has Collateral Management Become a Front Office Function?• Relationship with the Repo Desk / Collateral Trading• Financing the Assets / Transfer Pricing• Collateral Optimisation• Single Currency Margin• Cleared Margin Processing• Operational Demands / Call Timing

Bilateral Margin for Un-cleared OTC Trades

Moderator: Anna Iversen, Co-Founder, AoCE and NCMF Board Member

• Daniel Nordkvist, Head of Sales, Danske Bank• Silvia Devulder, Large Corporates & Institutions Legal, Swedbank• Henrik Nilsson, Head of Business Development, TriOptima• Bill Hodgson, Editor of The OTC Space

© Swedbank Client Breakfast Meeting in Helsinki 14 May 2014

Margining Requirements under EMIR

24th March 2015Swedbank, LC&I Legal, Silvia Devulder

Changing documentary landscape


"Written agreements"

40

New “EMIR compliant” collateral arrangements: in the near-term to comply only with Variation Margin requirements, Initial Margin compliance at later stage for most dealers. In EU required for post-compliance trades only.

Bilateral negotiation or adherence to the ISDA Protocol

Agreement not to exchange margin with exempt entities (EU NFC-s, sovereigns etc.), below the allowed agreed threshold and before the IM compliance thresholds kicks in for both parties (renew annually)

Self-disclosure document: exchange info necessary for compliance (NA figures, expected phase-in dates etc.)

24th March 2015


New ISDA documentation architecture

41

Legacy trades under existing CSA Post-VM compliance trades under VM CSA Post-IM compliance trades under VM and IM CSA

Operational impact Operational/system ability to capture several CSAs under a single ISDA (2 in

phase 1 legacy and VM/3 CSAs in phase 2 legacy, VM and IM) Track single trade to 2 CSAs in phase 2

24th March 2015


Post-compliance VM CSA: affected terms?

42

Scope: legacy v. post compliance trades, trades within the scope of regulations Threshold: zero Minimum transfer amount up to: EUR 500,000 (currency effects? split between

VM/IM?) Eligible types, Eligibility Conditions and Concentration Limits: ISDA standard

document incorporated by reference (plus monitoring routines) Haircuts: schedule based or own estimates + FX haircut Substitution rules Dispute Resolution Payment netting of several CSA flows under a single ISDA

2015 VM CSA to be published by ISDA for each English and New York law ISDA will also draft the IM CSA: English law based on Credit Support Deed form IA would continue under existing CSA

Basis for the ISDA Protocol

24th March 2015


Architecture still being discussed

“Questionnaire style” versus “adherence” style protocol

Standard set of provisions v. elective provisions subject to matching

Importing existing CSA terms to the extent not affected by the regulations and filtered through regulatory requirements

How much you can standardise, how much left to bilateral negotiation?

Not available to parties without having ISDA in place, but available in absence of existing CSA

WGMR Protocol

24th March 2015


ISDA Working Groups and projects

44

ISDA “WGMRs”

Risk and Classification Methodology: SIMM, associated risk modelling, identifiers, segregation

Legal and Doc: VM and IM CSA for no margin silos, self-disclosure document, protocol, segregation arrangements

Margin and Collateral Processing: Minimum Considerations Document, Confirmation changes

24th March 2015

4545

Reconciliation• Dispute prevention /

resolution

• Counterparty connectivity and buy-in

Collateral• Sourcing• Haircut schedules• Concentration/wrong way risk –

limit monitoring• IM Segregation –

custodians/depositories/accounts and connectivity

Margin Calculations

• VM - Increased volumes

• IM – Establish approved model

Complexity

• Silos of new trade VM & IM, legacy VM

• Collateral segregation increases messages to move collateral

Margin requirements – impact and considerations

Bilateral Margin for Un-cleared OTC Trades• New timeline (as of March 18th)• Highlights of the Requirements (VM, IM, Rehyp, Assets)• Document Architecture• Operational Demands• ISDA Activity

Break


Do New Regulations Change the Business Case for Outsourcing?


• Ted Allen, Vice President for Collateral Management, SunGard

• Maria Leontiou, FX/MM and Collateral Operations Manager, Eurobank

• Henrik Nilsson, Head of Business Development, TriOptima

Drivers• New products• New processes• New regulations

• Capital• Clearing• Reporting

Impacted Areas• Operations• Compliance• Collateral Management• Settlement• Front Office• Risk Management• Technology

Trade & collateral positions

ReconcileExposures &

Collateral

Establish Margin

Requirement

MarginCall

Exchange

Pledge/Accept Settlement

Centralized ServicesEnd to End Margin Process

Streamlined collateral process leveraging central services• Reducing costs for local resources and IT

Integrations between Central Service Providers (examples)• TriOptima triResolve• Acadiasoft MarginSphere• DTCC Margin Transit Utility• Custodians, TriParty Agents

Do New Regulations Change the Business Case for Outsourcing?• Drivers for Change• Impacted Areas• Centralised Services / Market Infrastructure• What should stay? What should go?• Risks and Issues

Cocktails

OTCS Master - Stockholm 24th - v5.PPTX [Read-Only]

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Transcript of OTCS Master - Stockholm 24th - v5.PPTX [Read-Only]