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Russia Derivatives 2013 – Global derivatives markets. Chris Bates, Partner, Clifford Chance, London. September 2013. The G20 commitments – 5 years on. “FSB members have made major progress correcting the fault lines that caused the crisis”

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russia derivatives 2013 global derivatives markets
Russia Derivatives 2013 – Global derivatives markets

Chris Bates, Partner, Clifford Chance, London

  • September 2013
the g20 commitments 5 years on
The G20 commitments – 5 years on
  • “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
g20 not the only driver or agenda
G20 not the only driver or agenda
  • 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.

Russia Derivatives 2013 – Global derivatives markets

slide4

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.

Russia Derivatives 2013 – Global derivatives markets

ending too big to fail
Ending “too big to fail”

insurers

Identifying SIFIs across sectors

Bail-in

Paripassu claims

Changes to resolution regimes

Depositor preference

Alternative tier 1

Higher loss absorbency

Co-cos

Subsidiarisation

More intensive supervision

Ring-fencing

Bank structure

Russia Derivatives 2013 – Global derivatives markets

bank structural initiatives
Bank structural initiatives
  • *G20 agenda item

Russia Derivatives 2013 – Global derivatives markets

regulation of shadow banking
Regulation of shadow banking

Russia Derivatives 2013 – Global derivatives markets

making derivatives markets safer g20 commitments
Making derivatives marketssafer– G20 commitments
  • “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

8

emir illustrative implementation timeline
EMIR: illustrative implementation timeline

15 March 2013

Confirmations Daily valuation NFC+ reporting

CRD4/CRR: capital rules

  • Estimated start dates for these obligations.

Reporting ETD trades to TRs*

Reporting OTC trades to TRs*

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

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‘Summer 2014’

First clearing obligation starts*

3 year phase-in for NFC+s

15 September 2013

Portfolio reconciliation Portfolio compression Dispute resolution

First CCPs authorised:*

Clearing member obligations Frontloading

Margining unclearedtrades*

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

Russia Derivatives 2013 – Global derivatives markets

bcbs iosco final margin framework universal two way margin system
BCBS-IOSCO final margin framework: universal two-way margin system
  • 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.
  • Zero threshold for variation 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.
  • Maximum €50 million threshold for initial margin*
  • 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 entities
  • 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.

Covered transactions

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

Russia Derivatives 2013 – Global derivatives markets

points of difference
Points of difference
  • 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
resolution of cross border conflicts
Resolution of cross-border conflicts
  • 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

Russia Derivatives 2013 – Global derivatives markets

market outcomes
Market outcomes
  • 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

Russia Derivatives 2013 – Global derivatives markets

contacts
Contacts
  • Chris Bates
  • Partner
  • Clifford Chance LLP
  • London
  • Chris.bates@cliffordchance.com
  • +44 20 7006 1041

Russia Derivatives 2013 – Global derivatives markets