The objectives of regulators and market participants have thus become aligned. While regulators are looking to enhance prudential supervision by
requiring more rigorous capital and liquidity adequacy standards, credit institutions are looking to improve the quality of their asset base both to
reduce credit and counterparty risk and to improve their liquidity profile.
Dividend Policy and Dividend Decision Theories.pptx
CLEAR OR NOT CLEAR? CURRENT TRENDS ON THE OTC DERIVATIVES MARKET
1. POST TRADE FORUM
VIENNA, SEPTEMBER, 12TH
Philippe de Brossard
Head of Clearing for OTC
Operations and Fixed Income
Clearing Solutions Program
Function Owner ( FTO) Clearing
SGCIB and NEWEDGE
CLEAR OR NOT CLEAR?
CURRENT TRENDS ON THE OTC DERIVATIVES MARKET
2. 216/09/2014
DISCLAIMER
Cette communication a été préparée par Société Générale Corporate & Investment Banking (“SG CIB”), un des pôles d‟activités de Société Générale.
Cette communication vous est envoyée à titre purement informatif. Rien dans ce document ne peut être interprété comme reflétant la position officielle de
Société Générale ou sur l'interprétation d'une quelconque de ses dispositions ni comme constituant un conseil juridique ou réglementaire de Société
Générale à ses clients. Rien ne dispense les destinataires de ce document d'obtenir leur propre avis juridique et réglementaire.
Ce document est à usage purement informatif et il n‟a pas pour objet et ne peut en aucun cas être interprété comme constituant une offre d‟achat ou de
vente ou une invitation à acheter ou vendre des produits financiers. Les points de vues, opinions ou conclusions inclus dans ce document sont purement
indicatifs, et ne sont basés sur aucune recherche indépendante.
Les investisseurs doivent prendre leurs décisions d‟investissement en utilisant leurs propres conseils indépendants, en prenant en compte leur situation
financière propre et leurs objectifs d‟investissement. SG CIB n‟agit pas en tant que conseil en investissements financiers sauf s‟il le mentionne
expressément par écrit. Ce document ne peut en aucun être considéré comme fournissant des recommandations d‟investissements, ou des conseils
comptables, juridiques, réglementaires ou fiscaux.
En préparant ce document, SG CIB a utilisé l‟information publique disponible. SG CIB pense que les informations contenues dans ce document sont fiables
mais ne garantit en rien, explicitement ou implicitement, leur caractère complet ou exact, que ces informations proviennent de SG CIB ou d‟une quelconque
partie tierce.
Le contenu de ce document peut être amendé à tout moment et SG CIB n‟a aucune obligation de notification en cas d‟amendement. En aucun cas SG CIB
ne pourra être tenu responsable pour une quelconque erreur, omission ou information incorrecte, sauf en cas de fraude ou de toute autre responsabilité qui
ne peut être légalement exclue. SG CIB s‟exonère expressément de toute responsabilité en rapport avec l‟utilisation de ce document.
Ce document est confidentiel et ne peut faire l‟objet d‟aucune diffusion à des tiers. Il ne peut être reproduit en tout ou en partie sauf accord expresse de SG
CIB.
Société Générale est un établissement de crédit de droit français agréé et supervisé par l‟Autorité de Contrôle Prudentiel (ACP).
3. 316/09/2014
INTRODUCTION
The objectives of regulators and market participants have thus become aligned. While regulators are looking to enhance prudential supervision by
requiring more rigorous capital and liquidity adequacy standards, credit institutions are looking to improve the quality of their asset base both to
reduce credit and counterparty risk and to improve their liquidity profile.
The credit crunch put the financial markets under two major reforms, the Dodd-Frank Act (US) and EMIR (Europe) are deeply impacting financial
institutions‟ operating models.
They must now generalize their credit risk through the regular exchange of collateral. This focus on collateral coincides with a regulatory trend
towards standardization of OTC derivatives and migration to central clearing. While this should increase transparency, reduce counterparty credit
risk and allow better regulatory oversight, concerns remain over loss of flexibility, increased cost of financing positions, fragmentation of exposure
(and associated loss of bilateral netting benefits) across multiple systemically important venues and disruption over the transition period.
Meanwhile financial institutions must also conform to the general increase in regulatory controls, with their accompanying demands for compliance
and transparency. This need to improve post-trade and position transparency and to provide a comprehensive view of systemic risks leads to the
requirement that all derivatives transactions (cleared & bilateral) be reported to central trade repositories.
Dodd-Frank is an Act to promote the financial stability of the United States by improving accountability and transparency in the financial system (…).
EMIR: European Market Infrastructure Regulation is the European Union legislative proposal to regulate financial markets.
Basel III and its new set of capital rules is also putting collateral management in the spotlight: a clear goal of the Basel III accord is to push trading activity
towards exchanges by means of capital charge levers. In this perspective sizeable capital charges will be levied against OTC products not being cleared
through a CCP. Furthermore, whereas CCP-cleared products were capital charge free under Basel II, this will not hold true under Basel III. This evolution
will make cross-product netting a key goal in order to reduce banks‟ net credit exposure under the emerging CCP operating model.
The impact of these reforms on collateral management is enormous: it moves it from an operational unit to a critical tool for risk mitigation, liquidity
management and revenue enhancement.
One of the cornerstones of this change is collateral optimization, which we might rather describe as active collateral inventory management
7. 716/09/2014
CLASSES OF CDS AND IRS PROPOSED FOR CLEARING OBLIGATION
Classes of CDS proposed for clearing obligation
Classes of IRS proposed for clearing obligation
EMIR DFA
Specification Currency Index Maturity CCPs Specification Currency Index Maturity
Basis Swap Class EUR EURIBOR 28D - 50Y LCH - Eurex Basis Swap Class EUR EURIBOR 28D - 50Y
Basis Swap Class GBP LIBOR 28D - 50Y LCH - Eurex Basis Swap Class GBP LIBOR 28D - 50Y
Basis Swap Class JPY LIBOR 28D - 30Y LCH - Eurex Basis Swap Class JPY LIBOR 28D - 30Y
Basis Swap Class USD LIBOR 28D - 50Y LCH - Eurex Basis Swap Class USD LIBOR 28D - 50Y
Fixed-to-Float IRS Class EUR EURIBOR 28D - 50Y LCH - Eurex - OMX Fixed-to-Float IRS Class EUR EURIBOR 28D - 50Y
Fixed-to-Float IRS Class GBP LIBOR 28D - 50Y LCH - Eurex - OMX Fixed-to-Float IRS Class GBP LIBOR 28D - 50Y
Fixed-to-Float IRS Class JPY LIBOR 28D - 30Y LCH - Eurex - OMX Fixed-to-Float IRS Class JPY LIBOR 28D - 30Y
Fixed-to-Float IRS Class USD LIBOR 28D - 50Y LCH - Eurex - OMX Fixed-to-Float IRS Class USD LIBOR 28D - 50Y
Forward Rate Agreement EUR EURIBOR 3D - 3Y LCH - Eurex - OMX Forward Rate Agreement EUR EURIBOR 3D - 3Y
Forward Rate Agreement GBP LIBOR 3D - 3Y LCH - Eurex - OMX Forward Rate Agreement GBP LIBOR 3D - 3Y
Forward Rate Agreement USD LIBOR 3D - 3Y LCH - Eurex - OMX Forward Rate Agreement USD LIBOR 3D - 3Y
Forward Rate Agreement JPY LIBOR 3D - 3Y
Overnight Index Swap EUR EONIA 7D - 3Y LCH - Eurex - OMX Overnight Index Swap EUR EONIA 7D - 2Y
Overnight Index Swap USD Fed Funds 7D - 3Y LCH - Eurex - OMX Overnight Index Swap USD Fed Funds 7D - 2Y
Overnight Index Swap GBP SONIA 7D - 3Y LCH - Eurex - OMX Overnight Index Swap GBP SONIA 7D - 2Y
EMIR DFA
Reference Index Series Maturity CCPs Reference Index Series Maturity
iTraxx Europe Main 11 onwards 5Y LCH - ICE iTraxx Europe Main 10 onwards 5Y
iTraxx Europe Main 7 onwards 10Y
iTraxx Europe Crossover 11 onwards 5Y LCH - ICE iTraxx Europe Crossover 10 onwards 5Y
iTraxx Europ HiVol 10 onwards 5Y
CDX.NA.IG 15 onwards 3Y
CDX.NA.IG 11 onwards 5Y
CDX.NA.IG 8 onwards 7Y
CDX.NA.IG 8 onwards 10Y
CDX.NA.HY 11 onwards 5Y
8. 816/09/2014
CLASSES OF CDS AND IRS MONITORED FOR CLEARING OBLIGATION
Classes of CDS and IRS for which ESMA has determined that a clearing obligation is not necessary at this stage but will
continue to monitor the activity for subsequent clearing obligation determinations.
Classes of CDS monitored for clearing obligation
● iTraxx Europe Senior Financial
● iTraxx Europe High Volatility
● CDS Single Name
Other CDS mentioned in the consultation paper but with no hint regarding the clearing obligation : CDX.NA.IG and CDX.NA.HG
The consultation goes until 18th September.
Classes of IRS monitored for clearing obligation
● Interest rate futures and options classes
● Covered Bonds meeting certain conditions are exempt from clearing obligation*
● ESMA considers the following four currencies in priority: EUR, GBP, JPY, USD
Other currencies mentioned in the consultation paper but with no hint regarding the clearing obligation : JPY (in Forward Rate Agreement and Overnight Index Swap),
AUD, CAD, CHF (in all IRS classes), SEK, NZD, ZAR, KRW, MXN, PLN, SGD, HKD, NOK, HUF, CZK, MYR, DKK, INR, CLP, COP, NZD, CLF, TRY, RUB, ILS, AED
The consultation went until 8th August.
Equity are not subject of clearing obligation
Clearing obligation rules do not apply to derivatives transactions within the same legal entity
* Conditions are described on slide 8
9. 916/09/2014
REGULATORY IMPACT THAT ENHANCE THE RESHAPING OF THE OTC
DERIVATIVES MARKET
Frontloading
The frontloading requirement is the obligation to clear the OTC derivative contracts (pertaining to a class of OTC derivatives that has been declared
subject to the clearing obligation) that are entered into after the notification and before the date of application of the clearing obligation.
The frontloading period can be divided into two different timeframes:
● Period A: between the notification of the classes to ESMA and the publication in the Official Journal of the regulatory technical standards
(RTS) on the clearing obligation
● Period B: between the publication in the Official Journal of the RTS and the date on which the clearing obligation takes effect (the date of
application).
Frontloading is not required for:
● Derivatives which as at least one non-financial counterparty as a party as NFC are not subject to frontloading.
● For any transactions entered into prior to the publication in the Journal of an RTS specifying an asset class subject to the clearing obligation.
● For instruments of less than 6 months maturity as of the time of publication in the Official Journal of the relevant RTS.
Minimum remaining maturity of the contracts
The “minimum remaining maturity”, is the maturity of that contract as of the date of application of the clearing obligation for this contract and for this
counterparty.
● For contracts concluded in Period A, the minimum remaining maturity is set at a level equal to the maximum maturity of the contracts of this
class minus the length of the implementation period of Category 1 (6 months).
European Untranched CDS index (5 years) => 4 years and 6 months
Basis and Fixed-to-Float: (50 years) => 49 years and 6 months
Forwards rate agreement and Overnight index swaps: (3 years) => 2 years and 6 months
● ESMA considers that contracts concluded during Period B with more than 6 months before expiration on the date of application of the
clearing obligation should be subject to frontloading.
10. 1016/09/2014
SG ACTIVITIES ON CDS AND IRS SUBJECT TO THE CLEARING OBLIGATION
SG is able to clear with all CCP
* if Frontloading starts the 15th December 2014
** Already eligible to DFA mandatory clearing
Trade date between 1st January 2014 and 29th July 2014 with Category 1 counterparts
Classes CDS IRS
% of deals cleared 77% 94%
% of deals subject to Frontloading* 98% 67%
% of deals subject to Frontloading not cleared* 83% 5%
Number of Category 1 counterparts 11 101
Number of Category 1 US person** 5 18
11. 1116/09/2014
EVALUATING STRATEGIES TO OVERCOME CLEARING RISK EFFECTIVELY
Objectives to achieve
a. Reduce CVA‟s impact on OTC bilateral deals (to comply with Basel III constraints)
b. Decrease the level of Initial Margin so as to reduce or stabilize our threshold with CCP
c. Reduce counterparty‟s exposure ( CVAR) on all OTC deals
d. Reduce our leverage ratio „s exposure on all OTC cleared deals
e. Best Strategy to follow about Funding optimisation
f. To be informed by new rule book updates at each CCP
12. 1216/09/2014
BEST PRACTICES IN THE MITIGATION OF COLLATERAL
Collateral Optimisation
A. Overview
a. Manage all liquidity pools and the collateral inventory
b. Collateral allocation for the Repo trading desk
c. Oversight of collateral allocation decisions for margin management and portfolio optimisation
d. Funding of all cash and non-cash collateral requirements
e. Sourcing of the required types of collateral
f. Allocation of collateral costs
g. Cover: OTC Bilateral, OTC House Cleared, OTC Client Cleared, Listed Derivatives, Repo and Stock Lending
B. Platform Requirements
a. Identify the cheapest venue to collateralise a trade
b. Understand whether cheaper to clear trade or enter Bilateral margin agreement
c. Compute collateral selection based on internal price list taking into account dynamic haircuts and collateral hierarchy
d. Can plug-in internal algorithms to compute the cheapest collateral to deliver and to allocate collateral to trades based on
a number of predefined rules
e. Analyse the pledged collateral portfolio and identify the cheapest to deliver based on eligibility and relative cost
f. Identify surplus collateral either at the CCP or listed exchange that can be recalled
g. Show the most expensive collateral to hold in terms of capital requirements
h. Propose substitutions based on changing asset profiles and maturities
i. Monitor collateral limits vs. CCP and Client
j. Manage the funding and allocation of collateral based on incoming calls
k. Auto allocate collateral to trades based on a number of predefined parameters (e.g. client risk profile and tolerances,
maturity data, security rating)
l. Provide real-time optimisation by balancing assumed settlement and settled basis
13. 1316/09/2014
NEWEDGE PRIME SERVICES
World #1 execution and clearing broker of
Listed Futures and Options by volume
12% global market share
3.6 billion contracts executed and cleared in
2013
Access to more than 85 exchanges
€30.4bn segregated client assets on deposit
globally
Newedge in numbers
LISTED
OTC
DERIVATIVES & CASH
EQUITIES/INDICES
COMMODITIES
BONDS/FIXED INCOME
FX
CLIENTS:
CORPORATES
HEDGE FUNDS
INSTITUTIONALS
PRINCIPAL TRADING
GROUPS
CLEARING
FINANCING
CAP INTRO
STRUCTURING
CROSS-MARGINING
A global multi-asset agency prime services offer that combines scale and agility
Single point of access to more
than 130 venues via Voice / CARE
/ DMA
Open-architecture approach
Real-time consolidated view of all
orders/fills across all channels and
all markets
200+ futures brokers offer full
high-touch service
Algorithmic trading: proprietary tick
base, algo suite and synthetic
order types
Global Execution Clearing Financing and Prime Brokerage Awards
Listed and OTC
Cover all major CCPs
Proprietary multi-asset
cross-margining
capabilities
Collateral management
and transformation
STP 99% of listed
derivatives across all
markets
Single global platform
Cross-asset financing covering Fixed
Income, Equities Commodities and FX
Global, multi-asset, prime brokerage
service covering Equities, Fixed Income,
Foreign Exchange and Commodities in
cash and derivative/synthetic instruments
Value-add services include:
● Risk-based cross-margining and
portfolio-margining
● Capital Introduction
● Synthetics solutions
Mitigates risk; minimises conflict of interest; ensures clients benefit from best execution, full transparency and
anonymity
Enforced by strict information barriers
Agency Model
EXECUTION
HFM Week, European Hedge Fund
Services Awards 2014
Best Global Prime Broker – Excellence in
Service and Solutions
Best Prime Broker – Capital Introductions
HFM Week, US Hedge Fund Services
Awards 2013
Best Prime Broker – Capital Introduction
CTA Intelligence, US CTA Services
Awards 2014, Risk & Energy Risk
Commodity Ranking
Best FCM Overall
Best Capital Introduction Service
Banking Technology Awards 2013
Best Trading Platform or venue
FOW Awards
Non-Bank FCM of the Year
The Wall Street Letter, Institutional
Trading Awards 2014
„Best Broker‟ Dealer – Futures
14. 1416/09/2014
CROSS MARGINING : ETDS AND OTC CLEARED
Operational challenges
● Market fragmentation
● Account structures (individual accounts and segregation models)
● Risk parameters harmonization
Position netting between ETDs and OTC products
● Better evaluation of the risk of a portfolio and reinforced positions
control
● Reduced Initial Margin requirements (up to 90% IMR reduction
according to CME‟s analysis)
● Simplification of payments with a single global position
Cross Margining at the CCP
Cross Margining between OTC cleared and ETDs products
within the same CCP
CCPs offering and implementation timeline
● Eurex : Q1 2015 with their new risk model PRISMA
● CME : Q3 2015
Portfolio Margining at Newedge
Cross margining between OTC, OTC Cleared, ETDs,
Equities, Bonds … and all instruments and assets
classes covered by Newedge
● Fimatrix - proprietary risk
management platform
● Monte-Carlo VaR based on 5,000
simulations
● Supported by a centralized team of
25 quants
● Daily reporting and detailed risk
analysis, including position by
position drill-down
15. 1516/09/2014
COLLATERAL MANAGEMENT FRAMEWORK
1. Margin Calculation
● Recalculation of CCP provided Initial Margins (IMs)/Variation Margins (VMs)
● Scale-up/down of initial margin depending on client credit check/relationship
● Cross-CCP calculation to minimize clearing cost
2. Netting
● Net positions held across a client portfolio (legal entities, products and/or asset
classes) by fund/currency and across CCPs
3. Client Collateral Tracking
● Consolidate collateral from external sources and Integrate with custodians
● Understand eligibility rules by CCP and collateral type
● Value complex derivatives products and reconcile CCP calculations
● Track and provide a cross-CCP, cross-product view of client collateral
4. Collateral transformation
● Understand regulatory constraints
● Interpret the substitution/eligibility rules
● Integrate with Repo desk/Global Transaction Bank (GTB)
5. Clearing broker collateral optimization
● Understand regulatory constraints
● Interpret the substitution/eligibility rules
● Integrate with Repo desk/Global Transaction Bank (GTB)
6. Core services
● Reconciliation
● Reporting
● CCP Connectivity