Sea of Change Regulatory reforms – charting a new course Russia Derivatives 2013 – Global derivatives markets Chris Bates, Partner, Clifford Chance, London.

Sea of ChangeRegulatory reforms – charting a new course

Russia Derivatives 2013 – Global derivatives marketsChris Bates, Partner, Clifford Chance, London

September 2013

Clifford Chance

“FSB members have made major progress correcting the fault lines that caused the crisis”

Building more resilient financial institutions/more robust markets by strengthened international standards

Addressing “too big to fail”

Working to prevent regulatory arbitrage

Building a framework for robust market-based finance so that markets continuously open

“Our work is not yet completed … crucial that G20 stays the course”

Ending “too big to fail”

Reforming shadow banking

Making derivatives markets safer

“The G20’s response will ultimately dictate the openness the global system and consequently the strength and sustainability of global growth”

Build institutions and co-operative cross-border mechanisms to realise full benefits of integrated and global financial system

The G20 commitments – 5 years on

Clifford Chance

Growth agenda

Eurozone crisis: Banking Union

EU market integration and EU-US competitive cooperation

Regulatory institutional reform:: UK FSA split into PRA/FCA

Tax-regulation intersection: FATCA, financial transactions taxes, bank levies

LIBOR and benchmarks

Short selling and sovereign CDS

Retribution and redress

Market development in BRICs, Asia, etc. (e.g. Renminbi)

Etc.

G20 not the only driver or agenda

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More resilient financial institutions

Achieved:

Basel II.5 and III implementation advanced in many jurisdictions

Consistency assessment programme

Banks progress towards Basel III targets

Reformed compensation structures

Improved risk disclosures, accounting and data to regulators

To do:

Outlier jurisdictions: Turkey and Indonesia

Uneven repair of bank balance sheets

Differences in risk models and resulting risk weights

Finalisation of leverage ratio

Implementation of liquidity ratios

Conflicts:

Differential implementation e.g. EU wider CVA exemptions, remuneration, CCPs

Super-equivalent capital measures, stress tests, etc.

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Ending “too big to fail”

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Identifying SIFIs across sectors

Changes to resolution regimes

Higher loss absorbency

More intensive supervision

Bail-in

insurers

Pari passu claims

Alternative tier 1

Ring-fencing

Co-cos

Depositor preference

Subsidiarisation

Bank structure

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US

• Volcker rule: bans proprietary trading and sponsorship of private funds

• Push out rule: limits OTC derivatives in insured bank

UK

• Mandatory ring fencing of retail deposit-taking activities

• Limits on derivatives activities of ring-fenced entities

EU

• Mandatory subsidiarisation of trading activities

Bank structural initiatives

*G20 agenda item

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Regulation of shadow banking

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Bank exposures to shadow banks

Money market and other funds

Repo and securities financing

Securitisation

In Place

Increased capital requirements

Large exposure limits Consolidation

CESR Guidelines and 2a-7

Transparency, EU risk retention requirements

In Progress

Requirements for bank investments in funds –

“Look through or deduct”

ESMA proposed restrictions on MMF Activities and new

SEC rules

Basel proposals

– restriction of reinvestment of collateral and minimum

haircuts

US risk retention requirements

To Come

Restrictions on provision of liquidity to shadow banks

Extend liquidity restrictions to non-MMF open-ended funds

Liquidity and capital requirements for all

Restrict use of client assets by non-banks

Restrictions on liquidity mismatches within vehicles

Limits on links between securitisations and banks

Clifford Chance

Sea of ChangeRegulatory reforms – charting a new course

“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.”

G20 Pittsburgh, September 2009

Making derivatives markets safer – G20 commitments

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•Mandatory clearing of eligible OTC derivatives using central counterparties

Clearing•Ma

ndatory execution of sufficiently liquid OTC derivatives on trading platforms

Trading

•Reporting of all OTC derivatives to trade repositorie

•Regulators access to data

Reporting

•Minimum requirements for margining of uncleared OTC derivatives

Margining

•Timely confirmation, portfolio reconciliation, portfolio compression, dispute resolution for uncleared OTC derivatives

Risk mitigation

•Pre- and post-trade access to individual quote and trade data

Transparency

Key elements of the reforms

Clifford Chance

EMIR: illustrative implementation timeline

•Estimated start dates for these obligations.

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MiFID2/MiFIR: transparency, platform trading, position limits, etc.*

First CCPs authorised:*

Clearing member

obligations Frontloading

Margining uncleared trades*

15 September 2013

Portfolio reconciliation

Portfolio compression Dispute resolution

15 March 2013

Confirmations Daily valuation NFC+ reporting

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2Q1

2013 2014

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2Q1

2015 2016 2017

‘Summer 2014’

First clearing obligation

starts*

3 year phase-in for NFC+s

Risk mitigation for non-EU to non-EU trades*

CRD4/CRR: capital rules

Reporting OTC trades to TRs*

Reporting ETD trades to TRs*

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BCBS-IOSCO final margin framework: universal two-way margin system

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Zero threshold for variation margin*

All covered entities engaging in uncleared derivatives must exchange on a bilateral basis full amount of variation margin (i.e. zero threshold) on a regular basis (e.g.daily).

Start date 1 December 2015.

Maximum €50 million threshold for initial margin*

All covered entities engaging in uncleared derivatives must exchange on a bilateral basis initial margin with a threshold not to exceed €50 million.

Threshold applies at level of consolidated group to which the threshold is being extended and is based on all uncleared derivatives between the two groups (groups choose how to allocate among group entities)

Start date 1 December 2015, but phased in over period to 1 December 2019 starting with largest users At the end of phase-in, a consolidated group will have to have a minimum level of OTC derivatives business (at least

€8 billion total gross notional value) in order to be subject to initial margin requirements.

Covered entities

All financial entities and systemically important non-financial entities (defined by national rules). Excluding sovereigns, central banks, multilateral development banks and BIS. National discretion to exclude inter-affiliate transactions. Foreign branches of banks subject to home or host state rules. Group home state supervisor may choose to

recognise .margin regime applicable to foreign subsidiaries if equivalent.

Covered transactions

All non-centrally cleared derivatives entered into between covered entities. Exclude physically settled FX forwards and swaps but these are included in calculating trigger levels for phase in of

initial margin requirements and national discretion for supervisory guidance/rules on variation margin. Initial margin for cross-currency swaps do not apply to the fixed physically settled exchange of FX principal.

*Margin transfers can be subject to a minimum transfer amount not exceeding €500,000

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Different pace of reform around the world

US, EU, BRICs, Asia

Clearing, reporting, margining vs. trading, transparency

Scope issues

Instruments: e.g. FX, physical commodities and securities

Entities: e.g. treatment of end-users, intra-affiliate trades, pension funds, central banks

Margining of uncleared trades

Initial margin and collateral thresholds

Extraterritoriality and overlapping, conflicting rules

Different approaches to territorial nexus e.g. location of counterparties, arranger, transaction underlying

Extra-territorial application of licensing rules

Regulation of CCPs and trade repositories

Points of difference

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Key techniques

Recognition of non-domestic CCPs and trade repositories subject to equivalent regimes

Relief from overlapping or conflicting rules by substituted compliance, equivalence

Issues as to reciprocity, concerns as to creation of loopholes

OTC Derivatives Regulators Group

Equivalence assessments should be flexible, outcomes based approaches

Stricter rule approach to address gaps in mandatory clearing or trading requirements

Consultation on equivalence assessments and mandatory clearing determinations

Aim to remove barriers to reporting to trade repositories and regulators access to data

Transitional measures and reasonable transition period for foreign entities

For further discussion: Authorities access to registrants’ information Treatment of guaranteed subsidiaries and foreign bank branches

Resolution of cross-border conflicts

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Restriction on banks’ derivatives capacity

Client and bank response may result in regional booking silos

Reduction in product range

Increased barriers to entry for smaller market participants

Increasing importance of CCPs

Focus on financial stability issues and market structure

Possible new market entrants: “shadow banks”

Winners and losers

Market outcomes

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Sea of ChangeRegulatory reforms – charting a new course

Contacts

Chris BatesPartnerClifford Chance [email protected]+44 20 7006 1041

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Clifford Chance, 10 Upper Bank Street, London, E14 5JJ© Clifford Chance LLP 2012Clifford Chance LLP is a limited liability partnership registered in England and Wales under number OC323571Registered office: 10 Upper Bank Street, London, E14 5JJWe use the word 'partner' to refer to a member of Clifford Chance LLP, or an employee or consultant with equivalent standing and qualifications