Post Trade Forum & Trade Show – 10 September 2015

Legal Hot Topics – Pierre Labuschagne

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Legal Hot Topics

Hindsight

Has the initial goal of bringing order to the financial markets been achieved?

Has there been an overreaction and new regulations have inhibited the free

market system and specifically liquidity?

What clarity of legal thought has now evolved which can be trace through the

various regulations and does it enhance established legal principles?

Is there now an emerging need for deregulation to re-dress the balance of new

regulations?

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New Era of relationship between Legal and Compliance

Deeper analysis of new regulations required

Grey areas

The role of Legal & Compliance is continuously evolving.

Business Prevention Officers?

Grey requires new partnership with Legal and Compliance

– Resources and using consultants/contractors and whether long term

expertise stays within a firm

– Early identification of possible regulatory violations

– Spotting potential business opportunities

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Legal Hot Topics

Mandated Clearing

Deadlines fast approaching

Complexity of clearing documentation not to be underestimated

Basel III – leverage ratio requirements are a disincentive for main clearers

Mitigating factor of segregation of funds not recognised

Main clearers will focus on platinum and profitable clients

Strong possibility that smaller Financial Counterparties will end up without

clearing ability

Predicted smaller building societies will battle to provide fixed mortgages

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Legal Hot Topics

Legal Hot Topics – Indirect Clearing

CCP

Clearing Member

Segregation Separate records

and accounts Portability

EMIR

Clearing Client

Indirect Client

Leapfrog Payment

Legal Hot Topics

Indirect Clearing

Intended to be simpler and cheaper because clearing client does not have to

contribute to default fund of the CCP

Clearing Member assumes same role as the CCP and the clearing client

assumes some of the rights and obligations of the Clearing member

Should be voluntarily

Leapfrog Payment

– How to avoid bankrupt estate of the clearing client.

Portability – Difference between EMIR and MiFIR

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Legal Hot Topics

Clearing Documentation

CDEA (Clearing Derivatives Executing Agreement)

Trades not cleared and set out various fall back positions

Calculation of early termination amounts

Originates through FIA US

Swapclear has own version

Relevance in the US due to SEFs?

MiFIDII/MiFIR impact

Frontloading

EU and Non-EU

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Legal Hot Topics

Clearing Documentation

NFC Representation

Non EU Counterparties

Problem: One NFC+ contaminates all NFCs in the group

Non EU-groups must do extensive due diligence exercise

Q&A – If NFC- representation not obtained treat as an NFC+

– Daily mark-to market

– Cleared non cleared pricing

– Portfolio reconciliation

ISDA NFC Protocol

– Over the top?

– Additional Termination Event

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Legal Hot Topics

Reporting agreements

ISDA Standard

Many firms have tailored versions

Indemnity

Remaining regulatory obligations for client

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Legal Hot Topics

Clearing Agreements

FOA/ISDA Clearing Addendum

ISDA Master Agreement

– Credit Support Annex

Prime Brokerage Agreement

Futures Agreement

Very detailed with definitions and drafted in working groups consisting of

both buy and sell side groups.

Legal Opinions

Detailed portability provisions

Can be used for different CCPs

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Legal Hot Topics

Clearing Agreements

SwapClear Clearing Agreement

Frontrunner of the FOA/ISDA Clearing Addendum

In conjunction with SwapClear Execution Agreement

Essentially same principles apply as the FOA/ISDA Clearing Addendum

Various different jurisdictional legal opinions.

FIA Europe module to Client Agreement

The European standard terms for exchange traded derivatives

OTC Derivatives module that facilitates trading of OTC Derivatives

Less complex and more scope for negotiations

Less detailed margin provisions

Legal Opinions

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Legal Hot Topics

Margin for Uncleared OTC Derivatives Trades

Mainly applicable on uncleared trades between Financial Counterparties and/or NFC+s

Certain thresholds of gross notional trades are triggered

Level two regulations not yet been finalised

Main impact will be on documentation providing collateral such as the ISDA Credit Support Annex/Deed

No rights of rehypothecation (re-use of collateral) of initial margin

Initial margin to be kept with third party custodians – new agreement

Rights of rehypothecation can apply to variation margin

Can initial and variation margins be covered under the same CSA/Deed?

Principles of Credit Support Deed to be introduced?

Method of Introducing amendments

– Wet signature exercise

– Protocol adherence

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Legal Hot Topics

MiFID2

CSDR

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Legal Hot Topics

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Disclaimer

These slides are not intended to be advice (legal or otherwise) by Lloyds Bank plc on

any of the legal principles, regulations or other business principles discussed under

these slides or presentation thereof. Nor may any part of these slides be copied without

the express written agreement of Lloyds Bank plc. Lloyds Bank plc does not accept any

liability for the content of these slides, the presentation thereof or for the consequences

of any actions taken on the basis of the information provided in these slides or

presentation. Lloyds Bank plc recommends that recipients and members of the

audience should conduct their own independent enquiries and obtain their own

independent professional, legal, regulatory, tax or accounting advice as appropriate to

assist in the understanding the legal principles, regulations or other business principles

as set out under these slides and presentation thereof.

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