23 October 2013
PRIVATE & CONFIDENTIAL

Derivatives have served Housing Associations well
Derivatives are incredibly useful tools in the Treasurer’s box of tricks
 increase financial flexibility allowing a borrower
 to limit risk absolutely, to limit downside or take a managed view on rates
 to separate from funding decisions from views on rates
 to exploit arbitrages
 allow for the management of specific risks
 The absolute exposure to moves in interest rates in terms of a mix of fixed and floating debt
 Adjusting the sensitivity of a portfolio to moves in interest rates in terms of duration
 can be procured through a competitive process
 with more counterparties than in the loan market
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The Good…. But increasingly expensive
 Standalone derivatives, so long as they are not over complex, are also transparent
 Can be independently valued and priced
 May have a fixed cost
 Have a secondary market value
 Subject to standard termination terms
 Can be assigned to other counterparties
 However,
 In the case of swaps, are likely to be subject to collateral calls
 Are, of course, subject to hedge accounting
 Are subject to radical regulatory change
 And have become very expensive to transact
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The “not as good as we thought they were”
Most of the derivatives that HAs entered into were pre-2008 and were embedded as part of the loan agreement
 Fixed or index linked borrowers still have contingent exposure to derivatives
 These may be less flexible and less transparent than standalone contracts – consequently more difficult to manage
 The banks have a legacy swap problem just as they have a legacy loan problem
 Assymetric collateral agreements
 Underestimated mark to market exposure
 Mis-priced credit exposure
 Underprovisioning due to upfronting excessive profits
 New regulation and risk models demanding increased capital allocation
They will offer you a deal…
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Good friends
The bank may offer to:
 Terminate the swap
 this will lead to the crystallisation of the Banks mark to market cost which will be recharged to the borrower as a lump sum
 Restructure the loan with the swap
 this may spread the mark to market cost over a number of years - at a cost in terms of margin (as the bank is now lending more) and almost certainly a reduction in tenor
 Dis-embed the swap
 either to terminate the swap and leave the loan in place or
 if permitted under treasury policy, become subject to an ISDA
However, most HAs do not have sufficient surpluses to absorb the cancellation costs
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More virtues than vices
 Simple interest rate swaps are extremely useful for Treasurers in reducing risk
 Business plans can be effectively de-risked by using short term derivatives to lock in rates
 For those able to use standalone swaps, derivatives can be overlaid to manage some of the embedded fixes which are no longer fit for purpose
 In particular, over hedging where borrower has forward starting swaps which are no longer necessary
 ameliorating mark to market with fixed to floating swaps.
 However, there are still challenges
 Collateral
 Accounting
 Reporting
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Vicious or just ugly?
 Complex derivatives often have a purpose beyond reducing interest rate risk
 The most obvious are using complex derivatives to reduce interest cost – usually by selling an option
 Others are trying to manage cashflows by cutting cash debt service costs – using accreting swaps, increasing gearing
 These swaps can move in unexpected ways
 This means they are extremely difficult to value and often only the bank that wrote them can unwind them
 However, it may be in the interests of both the Bank and the borrower to exit the position:
 A transaction was arranged earlier this year to transfer an inflation swap with a punitive break clause to a pension fund
• The swap was restructured helping the utility
• The bank removed it from its balance sheet and
• pension fund received a 150bps premium over the credit risk of the utility for taking he swap.
• The pension fund was advised by investment adviser Redington
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Collateral
 Risk mitigation through Collateral
 One way CSAs
 Thresholds
 Cash, cash equivalent and property
 New counterparties
 Exchanges
 Institutional investors
 Bilateral vs OTC derivatives
 Opportunities offered by exchange traded derivatives
 Changes to credit risk and collateral
 Transparent and competitive
HCA: Derivatives and collateral calls - cash and property Mar
2013
LHS shows the MTM liability owed by HAs to banks on IR derivatives , split between unsecured threshold, property and cash collateral, except prior to Sept 2011 when only collateral shown. RHS shows 15 years swap as proxy for the average term of sector’s IR derivatives
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Neither the whole nor any part of the information in this pitch/presentation may be disclosed to, or used or relied upon by, any other person or used for any other purpose and, in particular, should not be distributed outside the United Kingdom, without the prior written consent of Canaccord Genuity. The material contained herein may include unpublished price sensitive information, the misuse of which may result in criminal and/or civil proceedings against you.
None of the information on which this pitch/presentation is based has been independently verified by Canaccord Genuity or any of its connected persons.
Accordingly, neither Canaccord Genuity nor any of its connected persons accepts any liability or responsibility for the accuracy or completeness of, nor makes any representation or warranty, express or implied, with respect to, the information on which this pitch/presentation is based or that this information remains unchanged after the issue of this pitch/presentation.
No duty of care or otherwise is owed by Canaccord Genuity or any of its connected persons to any other person in relation to this pitch/presentation.
The valuation in this pitch/presentation has been prepared on the bases and assumptions described herein. This pitch/presentation is not intended to provide the basis of any investment decision and should not be considered as a recommendation by Canaccord Genuity or any of its connected persons to any recipient of the pitch/presentation. No person has been authorised to give any information not contained in this pitch/presentation.
Nothing in this pitch/presentation is, or should be relied on as, a promise or representation as to the future.
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Financial Conduct and Markets Act 2000 (Financial Promotions) Order 2005 (the “FPO”);


High net worth companies or high net worth unincorporated associations falling within Article 49 of the FPO;
Persons who are already shareholders of the Company within article 43 of the FPO; and

Any other person to whom this promotion may lawfully be directed.
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October 2013

G20 leaders made a commitment in Pittsburgh in September 2009 that:
All standardised 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. We ask the Financial Stability Board and its relevant members to assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.
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• Reporting obligation for OTC derivatives
• Clearing obligation for eligible OTC derivatives
• Measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives
• Common rules for central counterparties (CCPs) and for trade repositories
• Rules on the establishment of interoperability between CCPs
• To all types and sizes of EU entities that enter into any form of derivatives contract
• Even indirectly to non-EU firms trading with EU firms.
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All derivatives trades, both exchange-traded and OTC, must be reported to a Trade Repository
•
All trades, including all intra-group, but excluding embedded derivatives
• Backdated from 16 August 2012
OTC derivatives: minimum set of information to be provided
• Unique Trade Identifiers (UTI) – Unique global trade ID
•
Legal Entity Identifiers (LEI)
– Identification of counterparties
•
Universal/Unique Product Identifiers (UPI)
– a globally agreed product identifier
• Valuation – MtM valuation required on cleared OTC contracts
• Collateral – information on exposures including collateral valuation and currency
•
In total 85 data fields could be required
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Banks
Our Structure and the issue this created
Circle Housing Group
Circle Anglia
Limited (parent)
Funding
SPV
Registered
Providers x9
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30 August 2013
Pre-LEI (IEI) codes issued &
Cosigned TriOptima’s
TriResolve QuickPort
7 November 2013
ESMA Publish List of TRs
15 Sept 2013
EMIR Portfolio Reconciliation and Dispute Resolution
12 February 2014
All Asset Class Reporting
Start Date
July 2013
Started EMIR project
9 September 2013
Completed EMIR Portfolio
Reconciliation
August 2013
TR selection process October 2013
Sign up to UnaVista TR
15 March 2014
EMIR Reconciliation of uncollateralised, collateralised and intercompany derivatives
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EMIR Portfolios Reconciliation and Dispute Resolution
 Reviewed ISDA protocol
 Identified Counterparty classification; Non-Financial Counterparty (NFC-)
 Portfolios Reconciliation; Portfolio data receiving entity

Dispute identification and resolution procedure
-
Signed up to TriOptima’s TriResolve QuickPort; Circle Anglia Treasury Limited
- Set up an email for future communication
EMIR Reporting
 A Trade Repository (TR) selection process; UnaVista vs. REGIS-TR
 Issued pre-Legal Entity Identifier (pre-LEI) codes
 Set up the Mark-to-Market (MtM) valuation via Bloomberg
 Reconciled all the trades we had since 16 August 2012
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