OTCS Master - Stockholm 24th - v5.PPTX...
Transcript of OTCS Master - Stockholm 24th - v5.PPTX...
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
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
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NASDAQ REPO CLEARING
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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?
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)
Exposures to QCCPs14
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
Exposures to QCCPs15
• 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
Exposures to QCCPs16
• 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.
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?
Choosing a Clearing Broker
Moderator: Bill Hodgson, Editor of The OTC Space
• 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
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)
EMIR: Category 2 to start mandatory
clearing [RTS + 12 months] (expected May)
EMIR: Frontloading period begins for
Category 1 [RTS+2 months] (expected July)
EMIR: Category 3 to start mandatory
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
Has Collateral Management Become a Front Office Function ? Reasons to Invest in Collateral Management
Moderator: Bill Hodgson, Editor of The OTC Space
• Ted Allen, Vice President for Collateral Management, SunGard
• John Lund, JXL Consulting• Diana Higgins, Crediten
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
© Swedbank Client Breakfast Meeting in Helsinki 14 May 2014
"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
© Swedbank Client Breakfast Meeting in Helsinki 14 May 2014
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
© Swedbank Client Breakfast Meeting in Helsinki 14 May 2014
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
© Swedbank Client Breakfast Meeting in Helsinki 14 May 201443
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
© Swedbank Client Breakfast Meeting in Helsinki 14 May 2014
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
Do New Regulations Change the Business Case for Outsourcing?
Moderator: Bill Hodgson, Editor of The OTC Space
• Ted Allen, Vice President for Collateral Management, SunGard
• Maria Leontiou, FX/MM and Collateral Operations Manager, Eurobank
• Henrik Nilsson, Head of Business Development, TriOptima
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