Sea of Change
Regulatory reforms – charting a new course
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”
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
Clifford Chance
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
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More resilient financial institutions
Achieved:
To do:
Conflicts:
Basel II.5 and III
implementation advanced in
many jurisdictions
Outlier jurisdictions: Turkey
and Indonesia
Differential implementation
e.g. EU wider CVA
exemptions, remuneration,
CCPs
Consistency assessment
programme
Banks progress towards
Basel III targets
Reformed compensation
structures
Improved risk disclosures,
accounting and data to
regulators
Russia Derivatives 2013 – Global derivatives markets
Uneven repair of bank
balance sheets
Differences in risk models
and resulting risk weights
Super-equivalent capital
measures, stress tests, etc.
Finalisation of leverage
ratio
Implementation of liquidity
ratios
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Ending “too big to fail”
Identifying SIFIs
across sectors
Pari passu
claims
insurers
Changes to resolution
regimes
Depositor
preference
Bail-in
Alternative
tier 1
Higher loss
absorbency
Co-cos
Bank
structure
Russia Derivatives 2013 – Global derivatives markets
Ringfencing
More intensive
supervision
Subsidiar
isation
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Bank structural initiatives
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 ringfenced entities
EU
• Mandatory
subsidiarisation
of trading
activities
*G20 agenda item
Russia Derivatives 2013 – Global derivatives markets
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Regulation of shadow banking
In Place
In Progress
To Come
Bank exposures to
shadow banks
Increased capital
requirements
Large exposure limits
Consolidation
Requirements for bank
investments in funds –
“Look through or deduct”
Restrictions on provision of
liquidity to shadow banks
Money market and
other funds
CESR Guidelines and 2a-7
ESMA proposed restrictions
on MMF Activities and new
SEC rules
Extend liquidity restrictions to
non-MMF open-ended funds
Basel proposals
– restriction of reinvestment
of collateral and minimum
haircuts
Liquidity and capital
requirements for all
Restrict use of client assets
by non-banks
US risk retention
requirements
Restrictions on liquidity
mismatches within vehicles
Limits on links between
securitisations and banks
Repo and securities
financing
Securitisation
Russia Derivatives 2013 – Global derivatives markets
Transparency, EU risk
retention requirements
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7
Sea of Change
Making derivatives markets safer
– G20 commitments
Regulatory 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. Noncentrally cleared contracts should be subject to higher capital
requirements.”
G20 Pittsburgh, September 2009
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Key elements of the reforms
Clearing
• Mandatory clearing of eligible OTC derivatives using central
counterparties
Trading
• Mandatory execution of sufficiently liquid OTC derivatives on
trading platforms
Reporting
• Reporting of all OTC derivatives to trade repositorie
• Regulators access to data
Margining
• Minimum requirements for margining of uncleared OTC
derivatives
Risk mitigation
• Timely confirmation, portfolio reconciliation, portfolio
compression, dispute resolution for uncleared OTC derivatives
Transparency
• Pre- and post-trade access to individual quote and trade data
Clifford Chance
EMIR: illustrative implementation timeline
CRD4/CRR: capital rules
15 March 2013
Reporting OTC trades to
TRs*
Confirmations
Daily valuation
NFC+ reporting
Reporting ETD trades to
TRs*
Risk mitigation for non-EU
to non-EU trades*
Q1
Q2
Q3
Q4
2013
Q1
Q1
Q2
Q3
Q4
2014
Q2
Q3
15 September 2013
Portfolio reconciliation
Portfolio compression
Dispute resolution
Q4
Q1
First CCPs
authorised:*
Clearing
member
obligations
Frontloading
Q1
Q2
Q3
Q4
2015
Q2
Q3
Q4
Q1
Q1
Q2
Q3
Q4
2016
Q2
Q3
Q4
Q1
Q1
Q2
2017
Q2
Q3
Q4
Q1
Q2
‘Summer 2014’
First clearing
obligation
starts*
3 year phase-in
for NFC+s
Margining
uncleared trades*
MiFID2/MiFIR: transparency, platform
trading, position limits, etc.*
•Estimated start dates for these obligations.
Russia Derivatives 2013 – Global derivatives markets
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BCBS-IOSCO final margin framework: universal two-way
margin system
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
Covered transactions




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.
 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
Russia Derivatives 2013 – Global derivatives markets
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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
Clifford Chance
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
Clifford Chance
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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
Clifford Chance
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Sea of Change
Contacts
Regulatory reforms – charting a new course
Chris Bates
Partner
Clifford Chance LLP
London
Chris.bates@cliffordchance.com
+44 20 7006 1041
Russia Derivatives 2013 – Global derivatives markets
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