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Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey . Paul Landless and Emir Nurmansyah. 22 November 2011. Indonesian GMRA Annex. Overview. PART I – OVERVIEW OF THE REPO MARKET Introduction on Repos

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slide1

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

Paul Landless and Emir Nurmansyah

22 November 2011

Indonesian GMRA Annex

overview
Overview

PART I – OVERVIEW OF THE REPO MARKET

  • Introduction on Repos
  • International Master Agreements

PART II – PRACTICAL CONSIDERATIONS FOR THE INDONESIAN GMRA ANNEX

  • Risk Issues in Repo Markets
  • Output of Initial Legal Survey

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

slide3

PART I: OVERVIEW OF THE REPO MARKET

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

slide4

Introduction on Repos

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

what is a repo
What is a repo?
  • “Repo” is short for sale and repurchase transaction
  • Under a "classic" repo, the owner of securities (the seller) will
    • sell the securities or shares (the repoed securities) to a bank or other financial provider (the buyer) for $X and
    • agree to buy the repoed securities back (or equivalent securities) at a specified future date for $Y

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

what is a repo1
What is a repo?

Start of Transaction - Purchase Date

During life of Transaction – Margin Transfer

End of Transaction – Repurchase Date

transfer of securities

Seller

Buyer

purchase price

manufactured income on securities interest on cash margin

Buyer

Seller

margin transfers

manufactured income on securities margin interest on cash margin

transfer of equivalent securities

Seller

Buyer

repurchase price

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

why are repos used
Why are repos used?
  • Seller: to raise cash on a short term basis from longer term assets
  • Buyer: to make money from the interest charge
  • To support other money-making transactions
  • To fund "long" positions in securities
  • To take "short" positions in securities
  • Central banks: monetary policy instruments

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

repo market the players and the securities
Repo marketThe players and the securities

The Players

  • Dealers in securities
  • Central banks
  • Banks
  • Insurance companies
  • Pension funds
  • Mutual funds

The Securities

  • Government Bonds
  • Corporate Bonds
  • Structured finance bonds
  • Equities

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

types of repo
Types of Repo
  • Classic repo
    • Fixed term
      • Overnight to one year
    • “on demand” or “open” repo
  • Reverse repo
  • Buy-sell back
  • Tri-party repo
  • “Special” or “GC”
  • Synthetic repo
    • Total return swap
  • Forward-start repo

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

distinguishing repos from similar transactions
Distinguishing repos from similar transactions
  • Repos are similar to
    • Secured loans
    • Buy/sell-backs
    • Stock loans or securities lending transactions

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

similarities and differences repos and secured loans
Similarities and differencesRepos and secured loans
  • Similarities
    • Similar economic terms
  • Differences
    • Secured loans
      • Outright title transfer
      • No security interest granted

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

similarities and difference repo and secured loans
Similarities and difference Repo and Secured Loans

Repo

transfer of securities

Purchase Price

Seller

Buyer

outright transfer – no security interest

Loan

securities collateral

Cash Loan

Seller

Buyer

security interest

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

development of the international repo markets
Development of the international repo markets
  • Originated in the US
    • Introduced by the US Federal Reserve in 1918
  • Developed in Europe during 1980 and 1990s
  • Increasingly global
    • Latin America
    • Eastern Europe
    • Southeast Asia
  • Innovations
    • Electronic trading
  • CCP
    • Repoclear

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

repo market trends
Repo market trends
  • Rapid expansion in overall repo volumes
    • European Repo survey (September 2010): 25% increase in the size of the European repo market since December 2009
    • higher than the previous highest figure in June 2007 (pre financial crisis)
  • Growing market concentration
  • Broader underlying shift towards CCP
  • Market share of electronic repo trading falling

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

slide15

International Master Agreements

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

introduction to master agreements
Introduction to Master Agreements
  • What are Master Agreements?
    • The standard contractual terms apply
  • Why are they used?
    • Repo contracts in most jurisdictions can be created without formality i.e. orally
    • Most transactions agreed orally over the telephone
    • This can lead to uncertainty about what has been agreed – a written contract removes this uncertainty
    • Entire agreement clauses

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

common architecture
Common Architecture
  • Documentation Architecture
    • Master Agreement produced by trade association
    • Annex
    • Confirmations for each trade
    • Customised for particular markets or products by annexes which form part of the master agreement
  • Forms a single agreement
    • No cherry picking
    • Forms the basis for close-out netting

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

repo markets master agreements
REPO MARKETS MASTER AGREEMENTS

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

market guidance and best practice
Market Guidance and Best Practice
  • ICMA (International Capital Market Association) statements of best practice for repos
  • Not a contractual commitment
  • Guidelines or recommendations aimed at improving efficiency or liquidity in the repo markets
    • Repo Trading Practice Guidelines of August 20, 2003
    • Best Practice Guide to Repo Margining of September 15, 2005
  • Available from the ICMA website

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

slide20

PART II: PRACTICAL CONSIDERATIONS FOR THE INDONESIAN GMRA ANNEX

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

slide21

Risks Issues in Repo Markets

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

myriad of risks
Myriad of risks

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

settlement risk
Settlement Risk
  • Repo transactions are structured as sales of securities
  • Inherent risk that the sale does not settle as agreed between the parties

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

simple legal analysis of a sale of a security
Simple legal analysis of a sale of a security

Seller

Buyer

Simple Scenario

  • Assume physical certificates
  • Assume simultaneous transfer of funds
  • Sale is complete – title to the security passes – upon physical delivery of the security to the buyer and money to the seller

Transfer of Securities

Transfer of Funds

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

the settlement process settlement risk
The Settlement Process – Settlement Risk
  • Risk to buyer/seller inherent in settlement system in process of transferring title
  • Delay in reconciling settlement system register with definitive register of title for registered securities
  • Aim to minimise delay between payment and transfer of ownership
  • Delivery versus Payment (DvP) is the ideal

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

documentation risk
Documentation Risk
  • Are there any rules in a particular jurisdiction that require particular formalities
    • Rules requiring writing, signatures, notorisation or other formalities?

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

liquidity risk
Liquidity Risk
  • The risk that a firm will not be able to meet its obligations as they fall due
    • Lehman Brothers collapse 2008
    • Northern Rock collapse 2007
  • Liquidity risk has two aspects
    • Funding liquidity
    • Market liquidity

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

market risk
Market Risk
  • Market risk: the exposure to adverse movement in the prices of securities lent
  • Market risk mostly arises due to counterparty default, inappropriate margin or reinvestment of cash collateral
  • ISLA guidance on pricing securities for securities lending transactions

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

credit risk
Credit Risk
  • Risk that a counterparty will fail to meet its obligations
  • Collateralisation is an effective way to reduce credit exposure
    • reduces the exposure of the lender to borrower by the amount of collateral held
    • Important that the collateral management process is robust
      • Operational risk

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

slide30

Output of Initial Legal Survey

(Conducted by Ali Budiardjo, Nugroho, Reksodiputro)

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

key legal issues
Key Legal Issues

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

capacity and authority
Capacity and Authority
  • Special considerations apply for Indonesian parties to the GMRA
  • Classification of local counterparties
      • Government authorities - Corporates / Companies
      • State-owned enterprises - Financial institutions
      • Banks - Insurance companies
  • Ultra vires issues
  • Verification of capacity and authority
      • Documents to be requested from counterparty
  • Sovereign immunity

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

tax issues
Tax issues
  • Stamp duty
  • Witholding tax
  • Treatment of the “repo rate”
    • Whether “profit” or for the purpose of capital gains tax
  • Filing of tax returns

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

recharacterisation risk 1
Recharacterisation risk (1)
  • Recharacterisation risk
  • Consequence of recharacterisation – GMRA transaction deemed void and unenforceable
  • Circumstances under which a GMRA transaction may be recharacterised
    • Rights as owner of underlying assets/securities
    • Treatment of manufactured dividends/coupon payments

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

recharacterisation risk 2
Recharacterisation risk (2)
  • Recharacterisation risk in Indonesia
    • Views from the Indonesian repo market
    • Academic views
  • Recharacterisation risk in other Western jurisdictions

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

enforceability of set off 1
Enforceability of set-off (1)
  • An Indonesian entity party to GMRA has rights of set-off and netting upon EOD or insolvency, subject to any preferential transactions
  • Preferential transactions (actio pauliana) – may be subject to cancellation by Indonesian court under the:
    • Indonesian Bankruptcy Law
    • Indonesian Civil Code

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

enforceability of set off 2
Enforceability of set-off (2)
  • Set-off and netting in Indonesia
    • Margin issues - criteria for mutuality in the context of Equivalent Margin Securities?
    • Requirement for creditor to act in good faith?
    • Formalities required?

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

automatic early termination
Automatic Early Termination
  • General position
  • Automatic Early Termination
  • It is necessary for Indonesian GMRAs to apply AET to preserve the other part’s right to set-off and net under the GMRA.

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

language
Language
  • Documentation to be executed in Indonesian language if contracting party is an Indonesian individual/entity

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

recognition of english law
Recognition of English law
  • Recognition of English law as governing law of the GMRA
    • Valid and binding subject to:
      • public policy
      • any mandatory rules of laws of another jurisdiction
      • there being a connection between at least one of the parties or the transaction and the chosen governing law
  • Effect of application of Indonesian law to the GMRA

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

enforcement of judgements and arbitral awards
Enforcement of judgements and arbitral awards
  • Enforcement of foreign judgments
    • Foreign judgments unenforceable – territorial sovereignty
    • Exception - Foreign countries with convention with Indonesia
  • Enforcement of arbitral awards
    • Arbitral awards enforceable – 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (i.e. New York Convention)

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

agency transactions
Agency transactions
  • Treatment for transactions entered into by party as Principal or as Agent in respect of a Principal
    • Terms and extent of any agency disclosed?

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

formalities for transfer of indonesian securities
Formalities for transfer of Indonesian Securities
  • General Position
    • True sale without any conditions
    • Ownership transferred after “juridische levering”
  • Bonds
  • Securities
  • Other registered receivables

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

fx related issues
FX-related issues
  • Foreign exchange restrictions in respect of Indonesian Rupiah?
    • Generally no FX restrictions but subject to:
      • Reporting obligations which apply to certain Indonesian entities (and failure to report renders such entities liable to relevant criminal or administrative sanctions)
      • Restrictions on payment or remittance of sales proceeds in Rupiah apply to Indonesian banks
  • Foreign exchange events involving settlement of Indonesian Rupiah

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

treatment of flawed asset provision
Treatment of flawed asset provision
  • Anti-deprivation principle
    • Rule to invalidate a contract that has the effect of transferring one’s property to another (and removing it from the estate) on insolvency, contrary to the pari passu principle of distribution
  • “Flawed asset” provision under Paragraph 6(j) of the GMRA in respect of an Indonesian entity which has become insolvent

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

questions
Questions?

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

your contacts
Your Contacts

Paul Landless

ConsultantClifford ChanceOne George Street19th FloorSingapore 049145Singapore

T + 65 6661 2029

F + 65 6410 2288

E paul.landless@cliffordchance.com

Paget Dare Bryan

Partner28th Floor

Jardine House

One Connaught Place

Central

Hong Kong SAR

T +852 2826 2459

F +852 2825 8800

E paget.darebryan@cliffordchance.com

Terry Yang

Senior Associate28th Floor

Jardine House

One Connaught Place

Central

Hong Kong SAR

T +852 2825 8863

F +852 2825 8800

E terry.yang@cliffordchance.com

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

your contacts1
Your Contacts

Emir Nurmansyah

Partner

Graha CIMB Niaga 24th Floor

Jl. Jend. Sudirman Kav. 58

Jakarta 12190

T +62 21 2505125

F +62 21 2505001, 5121, 5122,5392

E enurmansyah@abnrlaw.com

Philip Payne

Foreign Of CounselGraha CIMB Niaga 24th Floor

Jl. Jend. Sudirman Kav. 58

Jakarta 12190

T +62 21 2505125

F +62 21 2505001, 5121, 5122,5392

E ppayne@abnrlaw.com

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

a premier law firm in asia pacific with deep ties to leading local players
A premier law firm in Asia Pacific with deep ties to leading local players

We have been active in the Asia Pacific region for more than 50 years:

  • with eight offices across the region and more than 400 lawyers in Bangkok, Beijing, Hong Kong, Perth, Shanghai, Singapore, Sydney and Tokyo
  • practising English, US, Hong Kong, Japanese, Singapore, Thai and Australian law and providing local law advice in all offices, where the regulatory framework permits, and working with local lawyers in other jurisdictions
  • receiving one of the first Qualifying Foreign Law Practice licences issued by the Singapore Government, allowing us to provide Singapore law advice
  • with a joint marketing and cooperation arrangement with VILAF-Hong Duc in Vietnam
  • creating strong working relationships with local law firms in Malaysia, Indonesia, the Philippines, South Korea and elsewhere in Asia Pacific
  • providing a multilingual service to reflect the nature of the region.

Our lawyers advise a diverse client base including domestic and multi-national corporates, banks and other financial institutions, governments and other regulatory bodies, and international partnerships.

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

22 November 2011

slide51

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey