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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
3Russia Derivatives 2013 – Global derivatives markets
Clifford Chance 4Russia Derivatives 2013 – Global derivatives markets
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.
Clifford Chance
Ending “too big to fail”
5Russia Derivatives 2013 – Global derivatives markets
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
Clifford Chance
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
6Russia Derivatives 2013 – Global derivatives markets
Clifford Chance
Regulation of shadow banking
7Russia Derivatives 2013 – Global derivatives markets
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
8
Clifford Chance
•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.
10Russia Derivatives 2013 – Global derivatives markets
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*
Clifford Chance
BCBS-IOSCO final margin framework: universal two-way margin system
11Russia Derivatives 2013 – Global derivatives markets
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
Clifford Chance
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
Clifford Chance
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
13Russia Derivatives 2013 – Global derivatives markets
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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
14Russia Derivatives 2013 – Global derivatives markets
Clifford Chance
Sea of ChangeRegulatory reforms – charting a new course
Contacts
Chris BatesPartnerClifford Chance [email protected]+44 20 7006 1041
15Russia Derivatives 2013 – Global derivatives markets
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