client clearing
Post on 29-Feb-2016
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Client Clearing In-depthThe Client SpectrumThe Client Spectrum
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O iOverview Who is impacted by clearing mandates and what are p y gthe relevant timelines?
What is the scope of products impacted by clearing mandates?
Incentives and common concerns related to clearing, including commercial and risk considerationsincluding commercial and risk considerations
Overview of decisions, documentation and implementationimplementation
How will capital rules impact me? Extraterritoriality concerns for clientsExtraterritoriality concerns for clients
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Concerns Cost
New post trade costsVariability between Clearing Brokers
EB 1
EB 2
Current Bi-Lateral Execution
Variability between Clearing Brokers Segregation
Risk of the clearing broker defaulting and the clients collateral being lost
Service Continuity
Client EB 3
EB 4Service Continuity
Current OTC derivative is a contract between two parties. When the same transaction moves to clearing the Clearing Broker will provide a service, which they can resign from
EB 5
which they can resign from Collateral availability
Variation Margin to be paid in local cash Initial Margin to be paid in high quality
government bonds Client CM CCP
OTC Clearing
go e e t bo ds
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IncentivesM d t Mandatory
U.S. mandated USD, EUR, GBP to 50yrs and JPY to 30yrs
EMIR mandate expected in Q2-Q3 2015 Risk Reduction
EB 1
EB 2
Current Bi-Lateral Execution
Reduced systemic risk between counterparties Independent third party marking positions and
assessing risk Collateral segregated from clearing brokers Portability between clearing brokers
Client EB 3
EB 4Portability between clearing brokers
Operational Consolidated reporting Consolidated collateral, coupon, upfront
payment and interest paymentsSi lifi d ti l
EB 5
Simplified operational process Capital
Client can face CCP for capital purposes Brokers have reduced capital requirements for
cleared derivatives Client CM CB CCP
OTC Clearing
Liquidity Potential liquidity shift to cleared OTC rather
than bi-lateral
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StandardDocumentation NEGOTIATED POINTSDocumentation
Maximum Initial Margin Limit
Daily / Liquidity Limit Pre-Funding
Credit multipliersInitial Margin
Eli ibilit it i
Trading Limit Structure
C ll t l
Core AgreementsUS: FIA/ISDA AddendumEU: ISDA Clearing AnnexEU: Modified Credit Support Annex
Eligibility criteria
Transfer mechanics
Termination Period
Collateral
Variation Margin
Triggers
Timings
Single currency margining
Action during resignation periodSupport Annex
plus
Futures and Options Agreement or baseline
t
Change LimitsTermination or changeof Service
Margin Level/Collateral eligibility
Adjust eligible products
Terms under which margin is changed
Trade acceptance Guaranteed acceptanceTerms for acceptance
agreement
Segregation/Portability Docs
What constitutes a default / ATE
Omnibus Segregation
Individual SegregationAccount structure
Interest Charges/Credits
pTrades by Trade basis Reasons for acceptance suspension
LSOC in US
Close out/course of action
Resolution/Cure period
Clearing Fees
House FeesFee structure
Default Ticket Fee
Risk Maintenance Fee
Minimum Fees
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Global Regulatory Update:g y pUS ahead of Europe, and CFTC leads SEC in rulemaking
Although US and European regulations have similar bj ti ( d t t i k i i htobjectives (reduce counterparty risk, increase oversight
and competitiveness), they differ in scope, approach and timing.
Generally European regulatory initiatives are proceeding at a Generally, European regulatory initiatives are proceeding at a slower pace, attributable to the many individual country regulators involved in the process.
In the US, regulatory responsibility for the swap market is , g y p y pdivided between the CFTC, which is responsible for regulating CDS indices and interest rate swaps, and the SEC, which is responsible for regulating single name CDS
d itand equity swaps. The CFTC is much further along in the implementation process
and as such, our discussion within the US will primarily focus on the status of regulation as it pertains to the CFTC.the status of regulation as it pertains to the CFTC.
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Important Recent Developments:Important Recent Developments:Trading Venues in the US; Trade Reporting in Europe
In the US, the most important recent developments have focused on the implementation of the Swap Execution Facility requirementsthe implementation of the Swap Execution Facility requirements.
In October, the first Made Available to Trade determinations were filed with CFTC by SEFs.
CFTC can approve these determinations which means that market participants must begin SEF trading 30 days thereafterparticipants must begin SEF trading 30 days thereafter.
In Europe, the most important recent development is the commencement of the trade reporting requirement
ESMA authorized 4 trade repositories on Nov 7. From February 12, 2014, all counterparties established in the EU must report
details of their transactions to a trade repository by the next working day following the conclusion, modification, or termination of the relevant contract.
Counterparties will need to agree between themselves whether to report separately, to agree that one will report on behalf of both counterparties, or to delegate the reporting obligations to a third party.
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Status of Clearing Mandates:Status of Clearing Mandates:Client clearing in the US has commenced but EU requirements are still being developed
Mandatory clearing is under way in the US, butMandatory clearing is under way in the US, but mandatory client clearing in Europe (for both indices and single-names) is not likely until Q3 2014
European clearing on a voluntary basis has started recently. Exchange trading under MiFID/R in Europe is not expected until the end of 2015 at the earliest but inexpected until the end of 2015 at the earliest but, in the US, exchange trading under SEFs will begin soon.
The potential for regulatory mismatch has caused some uncertainty in the market.
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M k t P ti i tMarket Participants Clearinghouses: CME, ICE, LCHClearinghouses: CME, ICE, LCH Middleware: MarkitWire (Markit Trade Manager), ICELink, TradeWeb, CME Clearport, Bloomberg VCON
SEFs: Creditex, BCG, Tullett, Phoenix, GFI, ICAP, T d b M k tA Bl b T ditiTradeweb, MarketAxess, Bloomberg, Tradition, Javelin, TrueEx
FCMs: BAML Barcs BNP Citi CS DB GS JPM FCMs: BAML, Barcs, BNP, Citi, CS, DB, GS, JPM, MS, RBS, UBS
26 (or so) active dealers( )
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O ti l IOperational Issues Biggest concern for FCMs is middleware connectivity.Biggest concern for FCMs is middleware connectivity.
Rates - Bloomberg VCON & MarkitWire Credit - Bloomberg VCON, Clearport, ICE Link, MarkitWire FCMs cited incorrect trade mapping and lack of
responsiveness, particularly in interest rate clearing, as the number one concernnumber one concern.
Collateral models for customers: Gross omnibus Gross omnibus LSOC with excess LSOC without excess
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Cl i Ad tClearing Advantages Bilateral derivatives will be subject to increased capital j pcharges including a higher RWA for uncleared as compared to cleared swaps, and possible CVA charges if
ll li d ll d b h b kany uncollateralized exposures are allowed by the bank. Regulators have provided incentives for buy-side participants to use central clearingparticipants to use central clearing
Opportunities for cross-product margining Favorable margin methodology for cleared products:
1 to 2-day, 95% VaR (futures) 5 to 7-day, 95-98% VaR (cleared swaps)
Uncleared swaps will be subject to 10-day 99% VaRUncleared swaps will be subject to 10 day, 99% VaR.
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Cl i h FClearinghouse FeesEach clearinghouse will charge its members fees:Each clearinghouse will charge its members fees:
annual clearing fees booking fees g maintenance fees
Additional costs may be incurred for technology licensing and operational connectivity.
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FCM FFCM Fees
FCMs typically agree on a fee schedule or standard charges for customers to act as their agent forcharges for customers to act as their agent for clearing.
Primarily this is in the form of ticket charges per trade and bps charged on IM (an approximate measure of balance p g ( ppsheet utilization and risk).
Charges can also include allocations for default-fund contributions owed by the FCMs to the various clearinghousesclearinghouses.
Customers can assume that default fund fees are passed from FCMs onto their clients either directly or indirectly.
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C l ti Eff t f Cl iCumulative Effect of Clearing According to a recent study by Sapient Global g y y pMarkets, the costs of hedging duration in a post-Dodd-Frank environment will increase.
Sapient estimates that the drag on portfolio alpha in Sapient estimates that the drag on portfolio alpha in the new environment will range from between ~20bps to ~62bps for cleared trades, depending on the
d t d t 91b f t diti l l dproduct, and up to ~91bps for traditional uncleared bilateral OTC trades.
In short hedging using cleared instruments (eitherIn short, hedging using cleared instruments (either swap futures and cleared swaps) will be preferable in most if not all cases.
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E ti t d I t R tEstimated Impact on Returns
Source: The Cost of Clearing: A Buy-side g yInvestigation, Sapient Global Markets, June 2013.
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