©2012HedgeFundAcademy.Allrightsreserved.REGULATORY UPDATE
©2012HedgeFundAcademy.Allrightsreserved.• G20• OTC Derivatives (TR & CCP)• FMA• REG 28 (OTC, Hedge Funds, SecuritiesLendin...
©2012HedgeFundAcademy.Allrightsreserved.3
©2012HedgeFundAcademy.Allrightsreserved.AIG4
©2012HedgeFundAcademy.Allrightsreserved.5
©2012HedgeFundAcademy.Allrightsreserved.G206
©2012HedgeFundAcademy.Allrightsreserved.G20, IOSCO, BASEL III, DODDFRANK, SOLVENCY II, EMIR & CCPG20IOSCOBASEL IIIDODDFRAN...
©2012HedgeFundAcademy.Allrightsreserved.GROUP OF 20 (G-20)The effects of the 2007/2008 global financial crisisprompted the...
©2012HedgeFundAcademy.Allrightsreserved.G-20 BACKGROUND• The G-20, was established in 1999 and Trevor Manual was thechairp...
©2012HedgeFundAcademy.Allrightsreserved.G20 OTC REQUIREMENTAll OTC derivatives trades should bereported to a trade reposit...
©2012HedgeFundAcademy.Allrightsreserved.IOSCO – INTERNATIONAL ORGANISATIONSOF SECURITIES COMMISSIONS• International Organi...
©2012HedgeFundAcademy.Allrightsreserved.IOSCO RECOMMENDATIONS FOR OTCDERIVATIVES FOR EMERGING MARKETS•Players should have ...
©2012HedgeFundAcademy.Allrightsreserved.TRADE REPOSITORIES13
©2012HedgeFundAcademy.Allrightsreserved.WHAT IS A TRADE REPOSITORYTrade Repository or SwapData Repository is:an entity tha...
©2012HedgeFundAcademy.Allrightsreserved.G20 VIEW OF THE ROLE OF A TRADE REPOSITORYOTC derivatives contracts should be repo...
©2012HedgeFundAcademy.Allrightsreserved.WHY THE NEED FOR A TRADEREPOSITORYWhat to do when we next face a LehmanTrade repos...
©2012HedgeFundAcademy.Allrightsreserved.17
©2012HedgeFundAcademy.Allrightsreserved.FMA : TRADE REPOSITORYFMA establish duties of TRs and a framework for their superv...
©2012HedgeFundAcademy.Allrightsreserved.FMB : TRADE REPOSITORYDomestic TRRegistration of foreign TRwith equivalent testExt...
©2012HedgeFundAcademy.Allrightsreserved.WHAT IS TR REQUIRED TO DO:Accept datafrom swapcounterpartiesConfirm theaccuracy of...
©2012HedgeFundAcademy.Allrightsreserved.TR DATA DISCLOSUREregister with their home regulatormake available on a confidenti...
©2012HedgeFundAcademy.Allrightsreserved.SA PROPOSED REGULATIONRequired to ensure the confidentiality, integrityand protect...
©2012HedgeFundAcademy.Allrightsreserved.TRANSPARENCYREDUCTION• The collection of data and making it available to regulator...
©2012HedgeFundAcademy.Allrightsreserved.COST OF A TROTC derivative marketparticipantsAdditionalsystemsStaff ControlsTrade ...
©2012HedgeFundAcademy.Allrightsreserved.CENTRAL CLEARING25
©2012HedgeFundAcademy.Allrightsreserved.COUNTERPARTY RISK© 2011 Hedge Fund Academy. All rightsreserved www.hedgefundacadem...
©2012HedgeFundAcademy.Allrightsreserved.AIG 200827
©2012HedgeFundAcademy.Allrightsreserved.BEFORE OTC CLEARINGCounterparty A(End user -asset manager )Counterparty B(OTC Deal...
©2012HedgeFundAcademy.Allrightsreserved.OTC DERIVATIVES – COUNTERPARTY RISKAND THE THREAT OF CONTAGION•OTC Derivatives: Th...
©2012HedgeFundAcademy.Allrightsreserved.ONCE CLEAREDCounterpartyA(End user -assetmanager )CounterpartyB(OTC Dealer- Bank)C...
©2012HedgeFundAcademy.Allrightsreserved.BENEFITS OF CENTRAL CLEARING• Multilateral netting reduces overall exposure• Mitig...
©2012HedgeFundAcademy.Allrightsreserved.DISADVANTAGES OF CCP• Concentration of risk at CCP – what if CCP fails?• Mutualiza...
©2012HedgeFundAcademy.Allrightsreserved.FMA - FINANCIAL MARKETS ACT33
©2012HedgeFundAcademy.Allrightsreserved.FINANCIAL MARKETS ACTBring securities services industry in linewith new legislativ...
©2012HedgeFundAcademy.Allrightsreserved.FINANCIAL MARKETS ACTDeveloped by:•Nat Treasury•FSB•Market• Consultation with JSEa...
©2012HedgeFundAcademy.Allrightsreserved.FINANCIAL MARKETS ACT• Bill recognises self-regulatoryoriginations – Including sto...
©2012HedgeFundAcademy.Allrightsreserved.FINANCIAL MARKETS ACTOTC•Lays groundwork for OTCderivative regulation (as perG20)....
©2012HedgeFundAcademy.Allrightsreserved.TIMELINES• The Financial Markets Act will become effective inQ2, 2013.• Requiremen...
©2012HedgeFundAcademy.Allrightsreserved.DODD FRANK39
©2012HedgeFundAcademy.Allrightsreserved.DODD FRANK• Registration• Mandatory clearing• Transparency and execution• Reportin...
©2012HedgeFundAcademy.Allrightsreserved.BASEL III41
©2012HedgeFundAcademy.Allrightsreserved.BASEL• The Basel Committee is a committee based in Basel,Switzerland, consisting o...
©2012HedgeFundAcademy.Allrightsreserved.BASEL 1 - 3• the first international risk-based capital standardsfor banking organ...
©2012HedgeFundAcademy.Allrightsreserved.LIQUIDITY LIQUIDITY LIQUIDITYWithout it you AREin real trouble myfriends.44
©2012HedgeFundAcademy.Allrightsreserved.BASEL III• Basel III brings new rules in four areas• capital quality• capital requ...
©2012HedgeFundAcademy.Allrightsreserved.LIQUIDITY COVERAGE RATIO (LCR)• To ensure that a bank maintains an adequate level ...
©2012HedgeFundAcademy.Allrightsreserved.NET STABLE FUNDING RATIO (NSFR)• To promote resiliency over longer-term horizons b...
©2012HedgeFundAcademy.Allrightsreserved.OPTIMISATIONAbout managing and optimising the use of cash,optimal use of the balan...
©2012HedgeFundAcademy.Allrightsreserved.SA BANKS & THE CRISIS• South African banks were:• not exposed to toxic assets• are...
©2012HedgeFundAcademy.Allrightsreserved.CVA (CREDIT VALUE ADJUSTMENTS)50
©2012HedgeFundAcademy.Allrightsreserved.BASEL III – CVA• Credit value adjustment• Seeks to mitigate counterparty credit ri...
©2012HedgeFundAcademy.Allrightsreserved.BEFORE OTC CLEARINGCounterparty A(End user -asset manager )(CVA)Counterparty B(OTC...
©2012HedgeFundAcademy.Allrightsreserved.EXEMPTION FROM CLEARING IN EU• Pension funds / Corporates hedging in Europehave be...
©2012HedgeFundAcademy.Allrightsreserved.MITIGATING CVA• Buy protection like a CDS (ifavailable on a single namecounterpart...
©2012HedgeFundAcademy.Allrightsreserved.CURRENT COLLATERAL LEVELS• ISDA Margin Survey, 2012:– $3.6tr of collateral already...
©2012HedgeFundAcademy.Allrightsreserved.ESTIMATED GLOBAL COLLATERALREQUIREMENTS FOR CCP TRADESSource Gross Net NotesOliver...
©2012HedgeFundAcademy.Allrightsreserved.HEDGE FUND REGULATIONS (PROPOSED)57
©2012HedgeFundAcademy.Allrightsreserved.OBJECTIVE OF THE HFFRAMEWORKGreaterinvestmentprotectionPrevention ofsystemic riskP...
©2012HedgeFundAcademy.Allrightsreserved.REGULATORY FRAMEWORKCISCA Framework (Collective Investment Scheme Control Act)Crea...
©2012HedgeFundAcademy.Allrightsreserved.TWO CATEGORIESRestrictedhedgefundsLightly regulatedCannot solicit frompublicQualif...
©2012HedgeFundAcademy.Allrightsreserved.SERVICE PROVIDERSSAProposedHFThe intention is not to regulatethe service providers...
©2012HedgeFundAcademy.Allrightsreserved.REGULATION 2862
©2012HedgeFundAcademy.Allrightsreserved.HEDGE FUNDS, PE & OTHER• Total Investment into Asset Class 15%• Inside the Republi...
©2012HedgeFundAcademy.Allrightsreserved.PENSION FUND INVESTMENT INTOHEDGE FUNDS (DRAFT NOTICES)Hedge fundstructurepermitte...
©2012HedgeFundAcademy.Allrightsreserved.REG 28 & OTC (DRAFT NOTICES)Who will beanacceptablecounterpartyCalculationof expos...
©2012HedgeFundAcademy.Allrightsreserved.REG 28 & SLB (DRAFT NOTICES)AcceptablecounterpartiesSecuritieseligible forlendingL...
©2012HedgeFundAcademy.Allrightsreserved.ALTERNATIVE INVESTMENT FUNDMANAGEMENT DIRECTIVE European Hedge Fund Regulations ...
©2012HedgeFundAcademy.Allrightsreserved.FATCA68
©2012HedgeFundAcademy.Allrightsreserved.OFFSHORE FOREIGN ACCOUNTTAX COMPLIANCE ACT• The US Govt intent on determining owne...
©2012HedgeFundAcademy.Allrightsreserved.FATCAPenalties30%withholding onall paymentsfrom the USUS FSPs mustclose accountsof...
©2012HedgeFundAcademy.Allrightsreserved.POPI – PROTECTION OF PERSONAL INFORMATION71
©2012HedgeFundAcademy.Allrightsreserved.POPI WILLbecome SA primary legislation dealing with the processing ofpersonal info...
©2012HedgeFundAcademy.Allrightsreserved.PURPOSE OF POPI• gives effect to the constitutional right to privacy;• regulates t...
©2012HedgeFundAcademy.Allrightsreserved.RESEARCH MATERIALThank you to Bloomberg for providing us someresearch material on:...
©2012HedgeFundAcademy.Allrightsreserved.UPCOMING COURSES• 26 June Cape Town UCITS• 27 - 28 June Cape Town Hedge Fund 101 M...
©2012HedgeFundAcademy.Allrightsreserved.CONTACT DETAILSMarilyn Ramplinmarilyn@hedgefundacademy.co.zaMercy Chigomamercy@hed...
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CFA regulatory presentation

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REGULATORY UPDATE


G20, OTC Derivatives (TR & CCP), FMA, REG 28 (OTC, Hedge Funds, Securities Lending),Collateral, FATCA, POPI

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CFA regulatory presentation

  1. 1. ©2012HedgeFundAcademy.Allrightsreserved.REGULATORY UPDATE
  2. 2. ©2012HedgeFundAcademy.Allrightsreserved.• G20• OTC Derivatives (TR & CCP)• FMA• REG 28 (OTC, Hedge Funds, SecuritiesLending)• COLLATERAL• FATCA• POPI2
  3. 3. ©2012HedgeFundAcademy.Allrightsreserved.3
  4. 4. ©2012HedgeFundAcademy.Allrightsreserved.AIG4
  5. 5. ©2012HedgeFundAcademy.Allrightsreserved.5
  6. 6. ©2012HedgeFundAcademy.Allrightsreserved.G206
  7. 7. ©2012HedgeFundAcademy.Allrightsreserved.G20, IOSCO, BASEL III, DODDFRANK, SOLVENCY II, EMIR & CCPG20IOSCOBASEL IIIDODDFRANKSOLVENCYIIEMIR7
  8. 8. ©2012HedgeFundAcademy.Allrightsreserved.GROUP OF 20 (G-20)The effects of the 2007/2008 global financial crisisprompted the Group of 20 (G20) leaders and theirinternational coordinating body, the Financial StabilityBoard, to review global financial markets to enhance theirstability and integrity, and to provide necessary protectionsto financial market participants.8
  9. 9. ©2012HedgeFundAcademy.Allrightsreserved.G-20 BACKGROUND• The G-20, was established in 1999 and Trevor Manual was thechairperson in 2007• Australia, India, Argentina, France, China, Canada, Russia,Brazil, Germany, Indonesia, Saudi Arabia, South Africa,Mexico, Italy, Japan, United States, Turkey, United Kingdom,South Korea and a representative of the European Union• Brings together major industrialized and developing economiesto discuss key issues in the global economy• It is the premier forum for international economic discussion onissues related to global economic stability9
  10. 10. ©2012HedgeFundAcademy.Allrightsreserved.G20 OTC REQUIREMENTAll OTC derivatives trades should bereported to a trade repositoryAll standardised OTC derivatives tradesshould be centrally clearedStandardised OTC derivatives shouldbe traded on exchange or electronicplatforms where appropriateHigher capital charges should beimplemented for non-cleared OTCderivatives2009 commit to reformthe OTC derivativesmarket in 4 key areas:10
  11. 11. ©2012HedgeFundAcademy.Allrightsreserved.IOSCO – INTERNATIONAL ORGANISATIONSOF SECURITIES COMMISSIONS• International Organisations of SecuritiesCommissions• IOSCO reiterated calls by the G-20 and theFinancial Stability Board for regulatoryintervention in the structural and operationalfunctioning of OTC derivatives markets.11
  12. 12. ©2012HedgeFundAcademy.Allrightsreserved.IOSCO RECOMMENDATIONS FOR OTCDERIVATIVES FOR EMERGING MARKETS•Players should have the necessary resources, especially minimum regulatory capital, tominimise the risk resulting from transactions.Market entry•Disclosure standards and suitability tests of unsophisticated OTC investors can reduce therisk they face.Investor protection•This can enhance data quality and reporting standards, but the balance betweenstandardisation and market efficiency and liquidity must be taken into account.Standardisation•For cost reasons, central clearing of standardised contracts makes more sense for largeOTC markets.Clearing/centralcounterparty (CCP) clearing•Central counterparties or trade repositories can improve transparency. Regulatorystandards and arrangements should be established for them.Transparency•Reporting should cover at least the size of positions and be accessible to regulators andsupervisors. The standards of reporting should be set out.Providing data and reporting•For transactions that are not centrally cleared, the standards for bilateral collateralisationshould be set and appropriate capital charges should be arranged for the relevant risks.Collateralisation and riskmanagement•OTC derivatives should be valued realistically. Market value should be applied as much aspossible. Where market value is not available, fair value should be used.Valuation12
  13. 13. ©2012HedgeFundAcademy.Allrightsreserved.TRADE REPOSITORIES13
  14. 14. ©2012HedgeFundAcademy.Allrightsreserved.WHAT IS A TRADE REPOSITORYTrade Repository or SwapData Repository is:an entity that centrallycollects andmaintains therecords of over-the-counter (OTC)derivatives14
  15. 15. ©2012HedgeFundAcademy.Allrightsreserved.G20 VIEW OF THE ROLE OF A TRADE REPOSITORYOTC derivatives contracts should be reportedto trade repositories (“TRs”) in order to:improvetransparencymitigatesystemic riskprotectagainstmarket abusein thederivativesmarkets15
  16. 16. ©2012HedgeFundAcademy.Allrightsreserved.WHY THE NEED FOR A TRADEREPOSITORYWhat to do when we next face a LehmanTrade repositories act as authoritativeregistries of key information regarding openover-the-counter (OTC) derivatives tradesThey provide an effective tool for mitigatingthe inherent opacity of OTC derivativesmarkets, i.e. brings transparency16
  17. 17. ©2012HedgeFundAcademy.Allrightsreserved.17
  18. 18. ©2012HedgeFundAcademy.Allrightsreserved.FMA : TRADE REPOSITORYFMA establish duties of TRs and a framework for their supervision byRegistrarNot an ‘SRO’, Licensed under s 56 & regulations by MinisterTrade Repository for unlisted securitiesSilent on what trade data must be reported, format, storage, etc – butRegistrar regulates on which transactions to be reported on andfrequency of reporting (s 58)18
  19. 19. ©2012HedgeFundAcademy.Allrightsreserved.FMB : TRADE REPOSITORYDomestic TRRegistration of foreign TRwith equivalent testExternal TRA juristic person mayapply for a license: cross-border reach taking intoaccount global nature ofderivative transactionsinvolving local andinternationalcounterparties (andMinister determines whereassets may be held)19
  20. 20. ©2012HedgeFundAcademy.Allrightsreserved.WHAT IS TR REQUIRED TO DO:Accept datafrom swapcounterpartiesConfirm theaccuracy ofthat dataMaintain thedata pursuantto standards tobe establishedby theregulatorIncluding directelectronicaccess to theregulatorysystems formonitoring andanalyzing dataMakinginformationavailable tootherregulators20
  21. 21. ©2012HedgeFundAcademy.Allrightsreserved.TR DATA DISCLOSUREregister with their home regulatormake available on a confidentialbasis all data obtained by the TR(including individual counterpartytrade and position data)to each appropriate prudentialregulatorIncluding foreign financialsupervisors (including foreignfutures authorities), and foreigncentral banks and foreignministriesTR required to21
  22. 22. ©2012HedgeFundAcademy.Allrightsreserved.SA PROPOSED REGULATIONRequired to ensure the confidentiality, integrityand protection of reported information.They will need to calculate the positions byclass of derivatives and by reporting entity,based on the details of the derivativescontracts.Trade repositories will be obliged to allowparties access to correct contract informationto prevent any misuse of data and confidentialinformation by the trade repository or any of itssubsidiaries.22
  23. 23. ©2012HedgeFundAcademy.Allrightsreserved.TRANSPARENCYREDUCTION• The collection of data and making it available to regulators does notautomatically reduce systemic risk.• In order to reduce systemic risk regulators/supervisors must:– sensibly interpret data– overcome data gaps– accurately assess risks– enforce risk-reducing measuresRISK23
  24. 24. ©2012HedgeFundAcademy.Allrightsreserved.COST OF A TROTC derivative marketparticipantsAdditionalsystemsStaff ControlsTrade RepositoryEstablishmentcostStaffing Systems GovernanceRegulators/supervisors SystemsExtractingand analysingthe dataStaffing24
  25. 25. ©2012HedgeFundAcademy.Allrightsreserved.CENTRAL CLEARING25
  26. 26. ©2012HedgeFundAcademy.Allrightsreserved.COUNTERPARTY RISK© 2011 Hedge Fund Academy. All rightsreserved www.hedgefundacademy.co.zaCredit counterparty risk has proven to be one ofthe biggest risks to financial institutions and thebest way to mitigate this risk is through collateralmanagement.26
  27. 27. ©2012HedgeFundAcademy.Allrightsreserved.AIG 200827
  28. 28. ©2012HedgeFundAcademy.Allrightsreserved.BEFORE OTC CLEARINGCounterparty A(End user -asset manager )Counterparty B(OTC Dealer -Bank)ISDA & CSA (COLLATERALAND BILATERAL NETTING)Bilateral / UnilateralCollateral MoveBilateral trade execution28
  29. 29. ©2012HedgeFundAcademy.Allrightsreserved.OTC DERIVATIVES – COUNTERPARTY RISKAND THE THREAT OF CONTAGION•OTC Derivatives: The default of firm A in an OTC derivative transaction has apossible contagion effect. It does not only affect firm C it leaves all connectedtrading counterparties to firm A and C potentially at risk.29
  30. 30. ©2012HedgeFundAcademy.Allrightsreserved.ONCE CLEAREDCounterpartyA(End user -assetmanager )CounterpartyB(OTC Dealer- Bank)Could alsobe a clearingmemberCLEARING HOUSEINITIAL MARGIN + DEFAULT FUNDBilateral trade executionClearing member Clearing memberInitial and variation marginInitial andvariation marginInitial andvariation marginVariationmarginVariationmargin30
  31. 31. ©2012HedgeFundAcademy.Allrightsreserved.BENEFITS OF CENTRAL CLEARING• Multilateral netting reduces overall exposure• Mitigate risk of counterparty default• Robust margining methodology & Collaterals• Cross margining benefit• Well defined default management procedure1. ReducedCredit Risk• Automated operational procedures• Transparency in positions and collateral reporting2. ReducedOperationalRisk• Multilateral netting reduces knock on failures• CCP access to central bank liquidity• Absence of connectivity for transferring• Legal enforceability possible3. ReducedSystemic &Legal Risk31
  32. 32. ©2012HedgeFundAcademy.Allrightsreserved.DISADVANTAGES OF CCP• Concentration of risk at CCP – what if CCP fails?• Mutualization risk by CM1. Risk of CCPfailure• Product complexity & valuation of illiquid products• ETD Risk management methodology may not beequally effective for OTC2. Standardizationissues• a. Differences in Risk Management & Default byindependent entity• b. Lack of coordination in managing exposures• c. Absence of connectivity for transferring3. Interoperabilitybetween multipleCCP32
  33. 33. ©2012HedgeFundAcademy.Allrightsreserved.FMA - FINANCIAL MARKETS ACT33
  34. 34. ©2012HedgeFundAcademy.Allrightsreserved.FINANCIAL MARKETS ACTBring securities services industry in linewith new legislative development andreplaces the Securities Services Act.Companies Act2008CompetitionAmendment Act2009Financialinstitutions(protection ofFunds) act 2001.FinancialServices BoardAct 1990.NB: Consumerprotection actwill not apply toany person,function, act,transactiongoods orservices that aresubjected to theFMA34
  35. 35. ©2012HedgeFundAcademy.Allrightsreserved.FINANCIAL MARKETS ACTDeveloped by:•Nat Treasury•FSB•Market• Consultation with JSEand StrateDates•Expected effective date 3June 2013Regulate andcontrols•securities trading•custody•administration ofsecuritiesProhibit insidertrading•limits current availabledefences•approve holders ofsecurities on behalf ofothers•provide codes for conductof the market35
  36. 36. ©2012HedgeFundAcademy.Allrightsreserved.FINANCIAL MARKETS ACT• Bill recognises self-regulatoryoriginations – Including stock exchange,CSD’S, independent clearing houses.SelfRegulatoryOrganisation• Clarify SA law re offering securities ascollateral. Replaces Section 43 ofSecurities Services Act.Collateral• Recognises outright transfers ofdematerialised securities in non-insolvency context.Read withinsolvency Act.36
  37. 37. ©2012HedgeFundAcademy.Allrightsreserved.FINANCIAL MARKETS ACTOTC•Lays groundwork for OTCderivative regulation (as perG20).•FMBA provides forestablishment + licencing oftrade repositories in SA andestablishment of “independent clearing houses”not directly appointed by anexchange.•FMA currently doesn’t setout which OTC derivativemust be reported to TR orstipulating which marketparticipants are obligated toreport OTC derivatives.“Securities” definition• Applies to listed andunlisted securities.• Definition of “ securitiesservices” extended to OTCderivatives.Section 5(6)• Foreign entitiesparticipation in SA marketphased in.• New definitions includeinternational marketplayers.37
  38. 38. ©2012HedgeFundAcademy.Allrightsreserved.TIMELINES• The Financial Markets Act will become effective inQ2, 2013.• Requirements for the authorisation of OTCDerivative Providers (issuers). (includingconfirmation timelines, reconciliation andcompression) will be released for consultation in Q2,2013 and are expected to be effective by Q4, 2013.38
  39. 39. ©2012HedgeFundAcademy.Allrightsreserved.DODD FRANK39
  40. 40. ©2012HedgeFundAcademy.Allrightsreserved.DODD FRANK• Registration• Mandatory clearing• Transparency and execution• Reporting requirements40
  41. 41. ©2012HedgeFundAcademy.Allrightsreserved.BASEL III41
  42. 42. ©2012HedgeFundAcademy.Allrightsreserved.BASEL• The Basel Committee is a committee based in Basel,Switzerland, consisting of senior central bankers from 27leading industrial countries.• The Basel Committee provides a forum for regularcooperation on banking supervisory matters with thegoal of enhancing the understanding of key supervisoryissues and improving the quality of banking supervisionworldwide.• It fulfills this objective by, among other things, issuingsupervisory standards in areas that the Basel Committeeconsiders most in need.42
  43. 43. ©2012HedgeFundAcademy.Allrightsreserved.BASEL 1 - 3• the first international risk-based capital standardsfor banking organizations in.Basel 1 - 1988• revisited the standards and issued a second BaselaccordBasel 2 – 2004• to address deficiencies identified during thefinancial crisis (Market and securitisation rules)Basel 2.5 – 2009• Aimed at strengthening bank capital requirements andincreasing bank liquidity and bank leverage.Basel 3 – 201043
  44. 44. ©2012HedgeFundAcademy.Allrightsreserved.LIQUIDITY LIQUIDITY LIQUIDITYWithout it you AREin real trouble myfriends.44
  45. 45. ©2012HedgeFundAcademy.Allrightsreserved.BASEL III• Basel III brings new rules in four areas• capital quality• capital requirements• leverage ratios• liquidity ratios (LCR & Net Stable Funding Ratio)45
  46. 46. ©2012HedgeFundAcademy.Allrightsreserved.LIQUIDITY COVERAGE RATIO (LCR)• To ensure that a bank maintains an adequate level ofunencumbered, high-quality liquid assets that can beconverted into cash to meet its liquidity needs for a 30calendar day time horizon under a significantly severeliquidity stress scenario.• Banks are expected to meet this requirementcontinuously…”• 1 Jan 201546
  47. 47. ©2012HedgeFundAcademy.Allrightsreserved.NET STABLE FUNDING RATIO (NSFR)• To promote resiliency over longer-term horizons by creatingadditional incentives for banks to fund their activities with morestable, longer tenor sources of funding.• 1 Jan 2018• Given the structural funding challenges faced in the South Africaneconomy, sourcing stable funding will increase funding costs, whilstthe lack of appropriate funding levels may hamper credit extension,which is already under pressure.• The availability of the required stable funding in South Africa to meetthese requirements will also be a challenge47
  48. 48. ©2012HedgeFundAcademy.Allrightsreserved.OPTIMISATIONAbout managing and optimising the use of cash,optimal use of the balance sheet.48
  49. 49. ©2012HedgeFundAcademy.Allrightsreserved.SA BANKS & THE CRISIS• South African banks were:• not exposed to toxic assets• are well capitalised• generally well run from a liquidity risk management perspective• not overly reliant on offshore funding• have only a small portion of funding arising from structuredproducts• the necessity for the new regulations from a purely local contextcould be questioned, but in order to align itself with global marketstandards these are essential.49
  50. 50. ©2012HedgeFundAcademy.Allrightsreserved.CVA (CREDIT VALUE ADJUSTMENTS)50
  51. 51. ©2012HedgeFundAcademy.Allrightsreserved.BASEL III – CVA• Credit value adjustment• Seeks to mitigate counterparty credit risk inbilateral trades• Based on the riskiness of the counterparty• Will significantly increase capital requirementsfor uncleared OTC derivatives51
  52. 52. ©2012HedgeFundAcademy.Allrightsreserved.BEFORE OTC CLEARINGCounterparty A(End user -asset manager )(CVA)Counterparty B(OTC Dealer -Bank)ISDA & CSA (COLLATERALAND BILATERAL NETTING)Bilateral / UnilateralCollateral MoveBilateral trade execution52
  53. 53. ©2012HedgeFundAcademy.Allrightsreserved.EXEMPTION FROM CLEARING IN EU• Pension funds / Corporates hedging in Europehave been granted exemption from clearing• Dilemma …– Opting for exemption means opting for higher capitalcharges on uncleared OTC and therefore a higherCVA and therefore higher price putting on the sameposition– Impact on asset managers, pension funds andcorporates53
  54. 54. ©2012HedgeFundAcademy.Allrightsreserved.MITIGATING CVA• Buy protection like a CDS (ifavailable on a single namecounterparty and therefore notpractical)CDS• with both initial and variationmargin (probably cash)• Threshold• Min Transfer amoutCollateralisethe trade54
  55. 55. ©2012HedgeFundAcademy.Allrightsreserved.CURRENT COLLATERAL LEVELS• ISDA Margin Survey, 2012:– $3.6tr of collateral already supporting non-clearedOTC derivatives transactions.– CVA will potentially increase this number.55
  56. 56. ©2012HedgeFundAcademy.Allrightsreserved.ESTIMATED GLOBAL COLLATERALREQUIREMENTS FOR CCP TRADESSource Gross Net NotesOliver Wyman $3,1tr $700bn $700bn middle of the range$500 - $800bnBank ofEngland$156bn -$594bnFinancial Stability paper Oct2012BIS $718bn Range $303bn - $1.167tndepending on volatility (BISworking paper March 2012)OCC $2.56tr Based on OCC’s largedealersMoody’s $3.6tr “New OTC regulations willboos demand for eligiblecollateral”56$3tr - $4trn gross additional collateral
  57. 57. ©2012HedgeFundAcademy.Allrightsreserved.HEDGE FUND REGULATIONS (PROPOSED)57
  58. 58. ©2012HedgeFundAcademy.Allrightsreserved.OBJECTIVE OF THE HFFRAMEWORKGreaterinvestmentprotectionPrevention ofsystemic riskPromotion ofmarketintegrityTransparency58
  59. 59. ©2012HedgeFundAcademy.Allrightsreserved.REGULATORY FRAMEWORKCISCA Framework (Collective Investment Scheme Control Act)Creation of a separate categoryG20 requirementCAT II A licenseAll hedge fund managers• to be authorised by the Registrar irrespective of value of the assets of the fund• Subject to fitness and proper test59
  60. 60. ©2012HedgeFundAcademy.Allrightsreserved.TWO CATEGORIESRestrictedhedgefundsLightly regulatedCannot solicit frompublicQualified investorsonly RetailhedgefundsHighly regulatedRetail andinstitutionalMin investmentbetween R50 –100k prescribed60
  61. 61. ©2012HedgeFundAcademy.Allrightsreserved.SERVICE PROVIDERSSAProposedHFThe intention is not to regulatethe service providers but toregulate the hedge funds as aspecial collective investmentscheme.61
  62. 62. ©2012HedgeFundAcademy.Allrightsreserved.REGULATION 2862
  63. 63. ©2012HedgeFundAcademy.Allrightsreserved.HEDGE FUNDS, PE & OTHER• Total Investment into Asset Class 15%• Inside the Republic and foreign assetsHedge Fund &Private Equity• 10%• 5% per fund of hedge funds• 2.5% per hedge fundHedge Funds• 10%• 5% per fund of private equity funds• 2.5% per private equity fundPrivate EquityFunds• 2.5%Other assets63
  64. 64. ©2012HedgeFundAcademy.Allrightsreserved.PENSION FUND INVESTMENT INTOHEDGE FUNDS (DRAFT NOTICES)Hedge fundstructurepermittedAuthorisationof hedgefundmanagerInvestmentreportsDisclosure ofconflict ofinterestConfirmationof assetsSuitability ofinvestment64
  65. 65. ©2012HedgeFundAcademy.Allrightsreserved.REG 28 & OTC (DRAFT NOTICES)Who will beanacceptablecounterpartyCalculationof exposureFocus oncollateralmanagementDuediligence onthecounterpartyriskReporting65
  66. 66. ©2012HedgeFundAcademy.Allrightsreserved.REG 28 & SLB (DRAFT NOTICES)AcceptablecounterpartiesSecuritieseligible forlendingLending limitsCollateral• 105% cash• 110 % bonds• 115% equitiesStructure ofthe legalagreements66
  67. 67. ©2012HedgeFundAcademy.Allrightsreserved.ALTERNATIVE INVESTMENT FUNDMANAGEMENT DIRECTIVE European Hedge Fund Regulations Anything that is non-UCITS Authorisation Minimum capital requirements Remuneration Depositaries Notification of major holdings Leverage limits Valuation Risk management Delegation Marketing and third country provisions67
  68. 68. ©2012HedgeFundAcademy.Allrightsreserved.FATCA68
  69. 69. ©2012HedgeFundAcademy.Allrightsreserved.OFFSHORE FOREIGN ACCOUNTTAX COMPLIANCE ACT• The US Govt intent on determining ownership of assets inforeign accountsPurpose:• Any foreign financial institution that expects to have AmericaninvestorsApplication:• Must institute procedures to identify US Investors and reporttheir investments to the IRS• Enter into an agreement with the IRS• Must obtain waiver from Investor consenting to reporting to IRSObligation:69
  70. 70. ©2012HedgeFundAcademy.Allrightsreserved.FATCAPenalties30%withholding onall paymentsfrom the USUS FSPs mustclose accountsof any fund thatfails to sign anagreement70
  71. 71. ©2012HedgeFundAcademy.Allrightsreserved.POPI – PROTECTION OF PERSONAL INFORMATION71
  72. 72. ©2012HedgeFundAcademy.Allrightsreserved.POPI WILLbecome SA primary legislation dealing with the processing ofpersonal info.significantly affect the manner in which companies collect,store, process and disseminate personal information.bring SA in line with other jurisdictions that have similarlegislation (such as the 1995 EU Directive, currently underreview).place a significant compliance burden on companies andpublic bodies, as such bodies are likely to possesssubstantial personal data records (electronically and hardcopy).
  73. 73. ©2012HedgeFundAcademy.Allrightsreserved.PURPOSE OF POPI• gives effect to the constitutional right to privacy;• regulates the manner in which personalinformation may be processed; and• provides rights and remedies to protectpersonal information.POPI:• the protection of personal informationprocessed by the private and the public sectors.Promotes
  74. 74. ©2012HedgeFundAcademy.Allrightsreserved.RESEARCH MATERIALThank you to Bloomberg for providing us someresearch material on:– CVA– Regulations– Credit RiskAdditional research which we have available to email toyou.74
  75. 75. ©2012HedgeFundAcademy.Allrightsreserved.UPCOMING COURSES• 26 June Cape Town UCITS• 27 - 28 June Cape Town Hedge Fund 101 Masterclass• 2 - 3 July Johannesburg Collateral Management & Credit counterparty Risk• 8 July Johannesburg Proposed hedge fund regulations analysed and clarified.• 10 - 12 July Johannesburg Prime Brokerage• 15 July Cape Town Proposed hedge fund regulations analysed and clarified• 22 – 23 July Johannesburg Introduction to Securities Lending• 24 - 25 July Johannesburg Central Clearing of OTC derivatives• 29 July Johannesburg FATCA• 2 August Johannesburg Fundamentals of UCITS• 5 August Johannesburg Hedge Fund Distribution Conference• 3 – 4 October Johannesburg Hedge Fund 101 Masterclass75
  76. 76. ©2012HedgeFundAcademy.Allrightsreserved.CONTACT DETAILSMarilyn Ramplinmarilyn@hedgefundacademy.co.zaMercy Chigomamercy@hedgefundacademy.co.zaYvonne Van Wykyvonne@hedgefundacademy.co.za011 783 9390www.hedgefundacademy.co.zaTwitter : hedgefundacadem76

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