EMIR impacts and collateral best practices

Lugano, 25th November 2013

Name Surname

Job title

Agendag

Ch i l t l dChanging regulatory landscape

Collateral challenges

The buy-side’s collateral equation

Conclusion

2

Changing regulatory landscape…g g g y pInvestors ProtectionBanking Rules

EMEAAmericas Asia

PrudentialSIFI framework / Living wills

EMEAAmericas AsiaInvestor MIFIR

Ucits IV / ProspectuDodd Frank 

ActESMA guidelines Prudential

requirements

Banking model

Volcker (DFA)

CRD IV Solvency II

Dodd Frank Act

Banking model (Liikanen group)

Information

Conflicts of Interest

Distribution Rules

s

MIFIR AIFMD

PRIPS

Basel III implementation 

in local legislation

Asian region fund passport (ARFP)

Limits of UCITS distribution

Act. UCITS ETFs

model

Accounting rules

Vickers(UK)

(DFA)

IFRS review

(Liikanen group)

Asset protection / segregation / collateral

EMIR AIFMD

UCITS V

ESMA guideline

s

SLD

UCITS VI

Close out netting

distributionICSD

IORPFrench 

Banking Law

Americas

Tax and AuthoritiesMarket OrganisationEMEAAmericas Asia EMEAAmericas Asia

Europe

Shadow BankingEMEA Asia

FSB workBCBS – IOSCO Margin requirement

BCBS – Recovery and Resolution FMIs

OTC derivatives

Trading

MIFID II

Europe

USA

New European Treaty

FTT

FATCA

Local regulations implementing G‐20 (HK / Japan leading)

Dodd Frank Act

Asean Link (Sing

FSB work5 workstreams

• MMFs• Securitisation• Securities Lending & Repos• Other SB entities• Interactions betw. Banks / SB

BCBS – Recovery and Resolution ‐ FMIs

EU FATCA

EMIR

Tradingorganisation

Infrastructure regulation & org.

MIFID II

EMIR

CSDR

USA

Asean +3(Asean + Japan,

Asean Link  (Sing. + Malay.+  Indo.)

Regional Settlement Initiative (Asean +3)

Pan Asian CSD (HK Malay )

Asean Bond market Forum (ABMF)Regional bond 

Dodd Frank Act.

UCITS VIMMFs

/

MMFs

3

Asian Harmonisation group (ASEAN+3)

( p ,Korea and China)

(HK, Malay.)T2S issuanceCrisis Management – Regulators 

cooperation

SLL?

G20 Requirements

Commitment on 4 principles at September 2009 G-20 Summit

q

“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 derivativesClearing 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 pointsMandatory clearing for standardised and liquid OTC derivativesScope of products subject to the mandatory

All OTC derivatives subject to clearing obligation should be

d l i

y p

OTCderivatives

Mandatorytrading

Scope o p oducts subject to t e a dato yclearing def ined by ESMAClearing obligation procedureFor uncleared contracts, risk mitigation techniques (collateralisation, daily MtMoperational risk mitigation)

executed on an electronic platform Requirements on trading facilities

derivatives

Business

Authorisation/ supervision of CCPsRecognition of third

Participants providing MIFID activities are to be

MIFID reviewMain provisions

CCP requirements

Businessconduct

&registration

Recognition of third country CCPsOrganisationalrequirementsConduct of business rules

MIFID activities are to be approved by their competent authoritiesMain rules on suitability tests, best execution, conflicts of interests

d i t t ti

EMIRMain provisions

Reportingobligation

to TRs

Prudential requirementsInteroperability arrangements

Mandatory reporting of all derivative contracts (including listed)Registration and supervision of TRsRelations with third countriesRequirements for TRs

and investor protectionTransparency obligations extended to all products

Frequency and details of data to be reported to the TR

Entry into force of EMIR on 15th March 2013 and obligations due to ramp-up until 2014

5

EMIR - Timeline

16 aug 2012 EMIR – Entry into force

15 mar 2013 Timely Confirmation Daily Mark to Market

15 sep 2013 Dispute resolution Portfolio reconciliation

A scaled calendar that requiresimportant adaptations

A flexible governance to be able to

12 feb 2014 Reporting obligation to Trade Repositories

gtimely and promptly face newrequirements

Important investmens to be compliant

T3 2014 Central Clearing for standard OTC derivatives

with all the new obligations

Dec 2015 Collateralisation for bilateral OTC derivatives

6

Your immediate challenge: Face the urgenceg g

March 2013 Sept. 2013 Feb. 2014 Sept. 2014

To which infrastructure should Iconnect ?

Whi h th i l t ti

TimelyConfirmation

Daily Mark to Market

Dispute Resolution

Portfolio Reconciliation

Reporting to Trade

RepositoriesCentral Clearing

Portfolio Reporting to

Which are the implementationdate?

LEI, UTI, UPI*, which identifierPortfolio Reconciliation Trade

Repositories should I retrieve and use?

What are the procedural andoperational impacts?operational impacts?

* LEI : Legal Entity IdentifierUTI : Unique Trade Identifier

New processes to implement in a very short time

UPI : Unique Product Identifier

7

EMIR – Portfolio reconciliation

Content

Perimeter• All OTC derivatives (FX fwd and swap included)• Collateralised and non collateralised instruments• Non cleared OTC derivatives

Implementationdate • 15 September 2013

Reconciliation • Before entering in a OTC derivatives contract FC* and NFC** have to agree (written or electronically) with the counterpartiesmodes have to agree (written or electronically) with the counterpartiesprocedure to reconcile bilateral derivatives portfolio

Data• Mark to market• Key economical terms of the transactiony

Reconciliationfrequency

• Portfolio reconciliation have to be performed at differentfrequency according to the size of the current bilateral portfolio (atany moment of the due period)

*FC : Financial Counterparty**NFC : Non Financial Counterparty

8

EMIR – Reporting to Trade Repositoriesp g p

Content

Perimeter• All derivatives contrats: OTC and ETD• All types of instruments (FX fwd and swaps included)• Cleared and non Cleared derivatives

ImplementationImplementationdate • 12 February 2014 for all contracts

Reporting modes • Both counterparties shall report • Possibility of third party delegation (Full or partial)

Data• Part 1 – Counterparty data: Valutation + Collateral• Part 2 – Common data: Transaction details• Identifiers : LEI (or pre-LEI), UTI, UPI

Reportingfrequency

• 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 on time( ) g p p

March 2013 Sept. 2013 Feb. 2014 Sept. 2014

TimelyConfirmation

Daily Mark to Market

Dispute Resolution

Portfolio Reconciliation

Reporting to Trade

RepositoriesCentral Clearing Select on or more Clearer(s)

Choose the segregation model

Central Clearing

Choose the segregation model

Implementation and management of interfaces and connections (Clearers CCPs Custodians )Clearing (Clearers, CCPs, Custodians,…)

Adaptation of daily proceduresespecially for collateralmanagementmanagement

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

fIM 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 calculationTable based standard approachOR 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 yp p g punder specific circumstances

1st December 2015 for variation margin and from 2015 to 2019 for initial margin

11

EMIR and Non- EU countries: Today’s situationyTechnical advices on third countries regulatory equivalence under EMIRFinal Report on contracts with direct, substantial and foreseeable effect

Technical advice of Equivalance for third countries under the mandate ( 9 countries)

p ,within th Union and non-evasion: 18 November 2013

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

Agendag

Ch i l t l dChanging regulatory landscape

Collateral challenges

The buy-side’s collateral equation

Conclusion

13

Upcoming challenges for all industry playersp g g y p y

I f ll t l dIncrease of collateral needs

Safety of collateralCollateral scarcityOperational complexity Safety of collateral

Segregate collateral Counterparty/ Custodian /

Collateral scarcity

Anticipate requirements

(higher volumes and frequency)

Dual processing Counterparty/ Custodian / CCP

Rules on eligibility / haircuts

Anticipate requirements

Collateral optimisation

Dual processing

Cleared OTC Bilateral OTC

Limits on re use(ESMA guidelines)

CollateraltransformationAdapt bilateral processes

Daily independent

Connectivity to market infrastructures

Selection of brokers/ clearers

Anticipation will be key

Daily independent valuation/Portfolio reconciliationManagement of buffers & timely

same day transfers to clearers

14

p y

1st challenge – Increase of collateral amountsg

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 ?

Cl i f OTC D i ti 610 billi EUR ll t l i th h t t (3)Clearing of OTC Derivatives : 610 billion EUR collateral 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 assetencumbrance 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

15

(2) source isda.org(3)ESMA report on Trends Risks Vulnerabilities February 2013(4)QIS under BCBS IOSCO’s consultation Q1 2013

2nd challenge – Increase of operational complexityg p p y

On cleared tradesMultiplication 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 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… And on non-clearedTimely confirmation, daily MtM, portfolio reconciliation, compression, dispute resolution…

Reporting of trades, valuation and collateral to Trade Repositories

Systematic variation and initial margins ???!!!

16

3rd challenge – Manage collateral protectiong g p

Th ti ll d EMIR h CCP t id t f f tiTheoretically under EMIR each CCP must provide two forms of segregationFull client segregation

Client omnibusClient 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

Agendag

Ch i l t l dChanging regulatory landscape

Collateral challenges

The buy-side’s collateral equation

Conclusion

18

The buy-side’s collateral equation (1)y q ( )

Achieveperformance

?Reuse and

reinvestmentlimitations

Highercollateral

requirements

?ManageManage higher

complexityAsset

Protection

19

The buy-side’s collateral equation (2)y q ( )Increase the use of securities to remain fullyinvested

A hi f i f d CFD dOptimize inventory beforetransformation (clearer’sLCR costs likely to be passedto clients)

Achieve performance via forwards or CFDs andkeep cash for margins ?

Focus on velocity

For UCITS, hold eligible assets or push counterparty

Implement specific tools and processes to monitor rules on concentration, reuse andassets or push counterparty

to enlarge their eligibility matrix

concentration, reuse and reinvestment on a transversal basis

Implement new processes on I l t t d f k cleared and bilateral trades

Centralized and transversal collateral organisation is key to

lid t i t d

Implement custody frameworksto secure collateral, in functionof supervisory authority’sconstraints

20

consolidate view over assets and requirements

Agendag

Ch i l t l dChanging 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 cost-effective infrastructure

We are here to help and supportp pp

22

Custodian: A key roley

Bilateralt ti /

Timely confirmationDaily Mark to Market

counterparties/ OTC Clearers

Dispute resolution Portfolio reconciliation

Reporting to Trade R it i

Custodian Platforms / InfrastructuresRepositories

Central Clearing for t d d OTC D i ti

Infrastructures

Trade Repositories

standard OTC Derivatives

Collateralisation ofCollateralisation of bilateral OTC Derivatives

23

BNP Paribas Securities Services: Collateral AccessStand alone or integrated. The choice is yours.

Our solution is available on a stand alonebasis or as part of our complete range ofpost-execution OTC derivatives services.From middle-office, valuation and

ll t l t icollateral management services,Collateral Access is integrated, yetmodular. Robust, yet flexible.

24

BNP Paribas Securities Services:Listed derivatives global execution and clearing services

Global multi asset classes electronic and desk

A comprehensive suite of services

g gExchange membershipDirect memberships to the clearing houses

Dedicated clearing s stem

Single clearing account

Global multi asset classes electronic and deskexecution access

Gl b l li l i hi

Dedicated clearing systemGlobal platform with advanced technology and high volumecapacity

One entry point

Central client onboarding team

Near real-time reporting on GCM markets

Global client relationship management 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

Risk & collateral management – Full asset & collateral protection set up available

Near real time reporting on GCM markets Intraday risk monitoring solutions( V@R simulations)Margin computation on open positionsMonitors margin use vis-à-vis collateral available

Online portal (Neolink)

Cash sweeping facilities Comprehensive clearing servicesAccount management/position keepingGive-up managementConfirmation management

Same day FX -Autoforex

Combined with OTC clearing

Local/global custody services

gIntraday break managementExercise & assignmentsMargin call managementCollateral management optimisation facilities

25

25

Combined with OTC clearing Flexible reporting`

BNP Paribas Securities Services:Fund Services

Your partner in a challenging

i t

We support you in the primary funds

Funds structuringand set-up 1

Depositary bank and custody

Funds Services for asset managers2

environment

primary funds domicilesLegal structure: turnkey solution for regulated and unregulated vehicles

custodyTransfer agency and fund accountingRisk and performance measurementMarket and Finance unregulated vehicles

We cover all main asset types

Services (MFS)

Regional transfer agent and

Distribution Support and Services3

Regional transfer agent and Client WindowFunds representative and paying agentLocal transfer agentRegulatory support

26

Regulatory support

The information contained within this document (‘information’) is believed to be reliable but BNP Paribas Securities Services does not warrant its completeness or accuracy. Opinions and estimates contained herein constitute BNP Paribas Securities Services’ judgment and are subject to change without notice BNP Paribas Securities Services and its subsidiaries shall not be liable for any errors omissions orare subject to change without notice. BNP Paribas Securities Services and its subsidiaries shall not be liable for any errors, omissions or opinions contained within this document. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. For the avoidance of doubt, any information contained within this document will not form an agreement between parties. Additional information is available on request.

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