Zanders Academy presentation 'Treasury Regulations' EMIR & IFRS 13

1. 1
Zanders Academy
“Treasury Regulations”
EMIR
&
IFRS 13
Bussum, 3rd of September 2013
Jaco Boere - Associate Director
Pierre Wernert – Senior Consultant
Marcos Barrabés-Rebollo - Consultant

2. 2
• 08:30 – 09:00 Registration
• 09:00 – 09:15 Welcome and Introduction - Jaco Boere
(Zanders)
• 09:15 – 10:00 EMIR - Marcos Barrabés-Rebollo
(Zanders)
• 10:00 – 10:30 Coffee break
• 10:30 – 11:15 IFRS13 - Pierre Wernert (Zanders)
• 11:15 – 11:45 Discussion
Agenda

3. 3
Agenda
1 Welcome and Introduction
3 Coffee Break
4 IFRS13
2 EMIR
5 Discussion

4. 4
 Zanders, Treasury & Finance Solutions is founded
in 1994
 Independent and specialised advisory firm
 Focusing on Treasury Management, Corporate
Finance and Risk Management
 Over 160 qualified treasury consultants
 Our advisory services range ‘from ideas until
implementation’
 Focusing on treasury strategy, organisation,
processes and systems
 Strong network of offices in Europe (Netherlands,
Belgium, Switzerland and United Kingdom)
 Leading advisory firm with global experience gained
on treasury projects across Europe, North America
and Asia
 Long-term business relationships with corporations,
financial institutions, public sector as well as NGOs
based on highest levels of ethics and trust
“...Zanders believes that treasury
and finance solutions should be
advised in an independent,
innovative and entrepreneurial
manner based on thought
leadership and conforming to the
constantly changing demands of
the market...”
Zanders Company Overview – Where we are Today

5. 5
Since Enron scandal and the resulting introduction of
Sarbanes Oxley (SOX), regulatory compliance is coming more
and more on the agenda.
On the back of the financial crises new regulations are
introduced with the main objective to:
– Reduce (counterparty) risk
– Increase transparency
The details are still being hammered out but a new wave of
regulatory reforms is coming and the consequences will be
substantial for corporate treasurers.
– Impact on: strategies, systems, processes and results.
Regulations

6. 6
New or revised regulations will affect all areas of corporate
treasury
Regulations
- Cash Flow Forecasting
- Cash Management
- SSC/IHB/Payment Factory
- Financial Supply Chain
- Market Risk (FX, IR, commodity)
- Credit Risk
- Earnings / Cash Flow at Risk
- Operational Treasury Risk
- Debt & Capital Markets
- Structured Finance
- Intercompany Finance
- Credit Rating & WACC
Treasury Operations Corporate Risk
Management
Corporate FinanceInformation Managem
Treasury
Strategy & Organization
Treasury
Systems & Processes
Activities
Enablers
Treasury
Performance & Control
Regulation

7. 7
Basel III IFRS9
EMIR SEPA
IFRS13
EU Financial Transaction Tax (FTT)

8. 8
Agenda
1 Welcome and Introduction
3 Coffee Break
4 IFRS13
2 EMIR
5 Discussion

9. 9
Implementation guide to
EMIR compliancy
Bussum, 3rd of September 2013
Marcos Barrabés-Rebollo - Consultant

10. 10
Agenda
2 Implementation plan to become EMIR compliant
1 Impact of EMIR on Corporates
Overview of Systems, Trade Repositories and Central Counterparties3

11. 11
What is EMIR? The impact on Corporates
≤
NFC-
>
NFC+
EUR 1 billion
• Credit derivative contracts
• Equity derivative contracts
EUR 3 billion
• Interest rate derivative
contracts
• Foreign Exchange derivative
contracts
• Commodity derivative
contracts
Central ClearingRange
(Gross Notional)
Threshold
• Select CCP(s)
• Comply with CCP
terms & conditions
Risk Mitigation Techniques:
1. Timely Confirmation
2. Portfolio reconciliation
3. (Portfolio compression)
4. Dispute resolution
CentralClearing
Bilateral Settlement
Risk Mitigation Techniques:
!5 Daily calculation of MtM
or MtModel
N/A

12. 12
What is EMIR? The impact on Corporates (2)
• Parties to the contract Ids
• Trading capacity
• Clearing Threshold
• Mark-to-market
• Collateralization
• Notional amounts
• Currency
• Details on transaction
• Details on mitigation
• Details on clearing
• Details per derivative class
Content examples How Who needs to report
Reporting
Suitable
option
depends
on
volume:
• MQ
• SFTP
• Web
• Upload
One of the following needs to report:
• Each counterparty reports common & counterparty
data directly to the TR itself
• The two counterparties agree that one of them will
take partial/full responsibility for reporting
• One of the counterparties engages the services
of a third party for partial/full reporting, while
the other counterparty reports itself
• Both counterparties outsource their partial/full
reporting to different third parties
• Both counterparties outsource their partial/full
reporting requirement to the same third party

13. 13
Agenda
2 Implementation plan to become EMIR compliant
1 Impact of EMIR on Corporates
Overview of Systems, Trade Repositories and Central Counterparties3

14. 14
Implementation timelines overview
September
October
November
December
January
February
March
April
May
June
July
August
September
Objectives Objectives
Select TR Select CCP
Implement TR Implement CCP
Timeline Timeline
1-3 months 3-6 months
Objectives
Define processes
Implement processes
Timeline
1-2 months
RISK MITIGATION TECHNIQUES
2013 2014
CENTRAL CLEARINGREPORTING TO TRADE REPOSITORY
15-09-13
24-09-13
01-01-14
15-03-14

15. 15
Implementation timelines risk mitigation techniques
(Electronic) Timely confirmation 1-2m
Portfolio reconciliation 4-6w
Dispute resolution 4-6w
Daily mark-to-market 4-6w
D
E
A
D
L
I
N
E
15
-
09
-
13
Objectives
• Define processes
• Implement processes
Dependencies
• Processes: build on
existing processes vs
define brand new process
• System(s):
• Build on current
system vs selection
of new system
• Standard
functionality vs
custom development
• Scope (a.o. volume
of derivatives,
derivative classes,
currencies)
NFC-
NFC+
NFC-
NFC+
NFC-
NFC+
NFC+

16. 16
(Electronic) timely confirmation
Process following Best Practice
• Have a deal management process that includes the following:
o Four Eyes principle (deal execution – deal approval) (S)
o Corrections to the deal are recorded (S)
o Check of limit utilization (S)
o (Electronic) timely confirmation (S)
• Follow the principle of “one confirmation, one trade” sending and storing electronic
confirmation of each derivative contract (S)
• Execute OTC derivative contracts with a signed ISDA Master Agreement and Credit
Support Annex (S)*
• Capturing ISDA and CSA terms on systems (S)*
(S) System is needed to support the best practice * If compliant with ISDA, then it is best practice to capture this in a system

17. 17
Portfolio reconciliation
Process following Best Practice
• Agree with counterparty which resources will be allocated to working on
reconciliations. Exchange organization charts and contact lists with each counterparty
and agree on trigger points for escalation.
• Define formal escalation procedures
• Define roles and responsibilities across all relevant front, middle and back office areas
involved in the portfolio reconciliation
• Agree in writing/electronic means with counterparty on the terms of the portfolio
reconciliation (i.e. when the portfolio is valued, when files are available and the
methods for transmission and communication)
• Use of systems to support the portfolio reconciliation (S)
(S) System is needed to support the best practice* If compliant with ISDA, then it is best practice to capture this in a

18. 18
Portfolio reconciliation (2)
Process following Best Practice
• Follow the principle of “One confirmation, One trade” (S)
• Files for reconciliation should be sent in a commonly available industry standard
format (i.e. excel, CSV, and text formats) (S)
• Agree the tolerances to determine what constitutes a significant MtM difference
• Parties should agree the time by which files are to be exchanged or uploaded (S)
• Exchange results by no later than the business day following the reconciliation taking
place (S)
• Agree in writing/electronic means with each counterparty on the results of the
portfolio reconciliation
• Document and archive the results of the portfolio reconciliation
(S) System is needed to support the best practice

19. 19
Dispute resolution
Process following Best Practice
• Set up governance and/or escalation procedures to ensure proper senior
management visibility into collateral disputes and associated resolution activities
• Define roles and responsibilities across all relevant front, middle and back office areas
involved in the resolution of a collateral dispute
• Age collateral disputes on a calendar basis from two perspectives; the first being from
one’s own exposure perspective and the second being from the counterparty’s
exposure perspective (S)
• Specify in the CSA which derivative contracts are included in the collateral call
process
• Execute daily revaluation of collateral with haircuts applied consistent with CSA*
(S) System is needed to support the best practice* If compliant with ISDA, then it is best practice to capture this in a

20. 20
Dispute resolution (2)
Process following Best Practice
• Investigate the source of a collateral dispute after the portfolio reconciliation is
completed (S)
• Define authorizations for sales and trading personnel to access post reconciled
portfolio data (S)
• Monitor and report dispute resolution status (S)
• Document and archive the results of the dispute resolution
(S) System is needed to support the best practice

21. 21
Daily mark-to-market
Process following Best Practices
• Automated daily market data feed (S)
• Use correct yield curves for estimating future cash flows and discounting (i.e. OIS
curve if applicable, basis spread if applicable) (S)
• Assign correct yield curves depending on the derivative (S)
• IFRS13 compliance (S)
(S) System is needed to support the best practice

22. 22
Implementation timeline Trade Repository
Reporting to TR 1-3m
D
E
A
D
L
I
N
E
01
-
01
-
14
Objectives
• Select TR
• Implement TR
Dependencies
• System(s):
• Build on current system vs selection of new system
• Standard functionality vs custom development
• Scope (a.o. volume of derivatives, derivative
classes)
• Third parties:
• TR
• Middelware
• Outsourcing reporting party
S
T
A
R
T
24
-
09
-
13
NFC-
NFC+

23. 23
Selection of Trade Repository
Check list selection of TR
• Decide whether reporting to TR is partially/fully delegated to a third party
• Short list TR candidates
• Contact TRs
• Evaluate volume of derivatives to report & available connectivity methods
• Evaluate pricing
• Evaluate readiness of Testing environment
• Evaluate implementation timelines

24. 24
Implementation of Trade Repository
Check list implementation of TR
• Agree with third party on methodology to share reporting data*
• Agree with counterparty on common data to be reported
• Decide connectivity method based on reporting volume (S)
• Onboarding TR team establishing connectivity (S)
• Identify source of data in the system (S)
• Test creation of file (S)
• Test Inbound communication TR (S)
• Test connectivity between TR and middleware (S)
• Test Outbound communication TR (S)
• Test reconciliation by TR (S)
(S) System dependency
* If reporting is delegated partially/fully to a third party

25. 25
Implementation timeline Central Clearing
Central Clearing 4-6m
D
E
A
D
L
I
N
E
?
-
?
-
14
Objectives
• Select CCP
• Implement CCP
Dependencies
• System(s):
• Build on current system vs selection of new system
• Standard functionality vs custom development
• Scope (a.o. volume of derivatives, derivative
classes)
• Third parties:
• CCP
• Middleware
• Clearing Member
S
T
A
R
T
15
-
03
-
14
NFC+

26. 26
Selection of Central Counterparty
Check list selection of CCP
• Calculate whether threshold is exceeded (S)
• Shortlist CCP candidates
• Evaluate CCP margin requirements
• Evaluate fees (i.e. clearing member, clearinghouse, execution)
• Evaluate clearing members
• Evaluate terms & conditions
• Evaluate available connectivity methods
• Evaluate implementation timelines
(S) System dependency

27. 27
Implementation of Central Counterparty
Check list implementation of CCP
Preparation
Clearing Firm:
• Choose affirmation platform
• Choose clearing form
• Define and choose role and apply for accounts at affirmation platform
• Prepare connectivity to affirmation platform (S)
At CCP
• Apply for registration to get access to CCP
• Prepare connectivity to CCP (S)
• Contact and instruct third party software vendors, if used (S)
(S) System dependency

28. 28
Implementation of Central Counterparty (2)
Check list implementation of CCP
Legal Review
Clearing Firm:
• Review and negotiate Clearing Firm Agreements
• Review and prepare affirmation platform forms
• Review and prepare further forms and agreements
At CCP
• Review Clearing Conditions, Clearing Agreements and Forms
• Prepare agreements and forms for production

29. 29
Implementation of Central Counterparty (3)
Check list implementation of CCP
Testing
Clearing Firm:
• Connect to UAT environment (S)
• Request for mapping to EBs and Clearing House (S)
At CCP:
• Connect to Interfaces (S)
• Define and request simulation setup (S)
• Receive and check reports (S)
• Search for trades in Reports (S)
• Upload test portfolio (S)
(S) System dependency

30. 30
Implementation of Central Counterparty (4)
Check list implementation of CCP
Preparation for Go Live
Clearing Firm:
• Connect to production environment (S)
• Provide legal forms and agreements
At CCP:
• Apply for production setup and provide forms and agreements
• Define Fee-Model
• Define Netting-Settings
(S) System dependency

31. 31
Agenda
2 Implementation plan to become EMIR compliant
1 Impact of EMIR on Corporates
Overview of Systems, Trade Repositories and Central Counterparties3

32. 32
Systems
Reporting
Reporting, Central
Clearing, Risk
Mitigation Techniques
Central Clearing
Integrates EMIR
requirements with
Treasury & Risk
Management
• Calculation and
reporting of the
clearing thresholds
• Execution of central
clearing with CCP
• Reporting to TR
• Electronic confirmation,
(portfolio reconciliation,
dispute resolution),
daily mark-to-market
Integrates EMIR
reporting with Treasury
& Risk Management
EMIR reporting stand
alone solution
Central clearing solution
with potential integration
to other Misys products

33. 33
Trade Repositories
Trade Repositories
Annual Cost Estimate*
0 to 3K trades p.a. 3 to 50K trades p.a. > 50K trades p.a.
8000 – 18000 EUR 22000 – 36000 EUR > 50000 EUR
• No official list of TRs who have applied for an ESMA license
exists
• At the moment it is not known which other TRs different from
the above have applied for a license to ESMA
• ESMA is expected to officially publish the TRs who have been
given a license on the 24th of September 2013
* Based on information disclosed by one TR. The estimate does not take into account group discount for
subsidiaries. The estimate assumes no ETD are reported

34. 34
Central Counterparties
Central Counterparties
• No official list of CCPs who have applied for an ESMA license
exists
• At the moment it is not known which other CCPs different from
the above have applied for a license to ESMA
• ESMA is expected to officially publish the CCPs who have been
given a license at the end of Q1 2014

35. 35
Central Counterparties
CCP Country Commodity Credit Equity Interest
rate
FX
CME
Clearing
US
USA
CME
Clearing
EU
UK
ECC Germany
Eurex
Clearing
Germany
ICE Clear
Credit
USA
ICE Clear
EU
UK
KDPW_CCP Poland

36. 36
Central Counterparties
CCP Country Commodity Credit Equity Interest
rate
FX
LCH.Clea
rnet Ltd
UK
LCH.Clea
rnet SA
France
MEFF Spain
Nasdaq
OMX
Sweden
OMI
Clear
Portugal
Holland
Clearing
House
The
Netherlands

37. 37
QUESTIONS?

38. 38
Agenda
1 Welcome and Introduction
3 Coffee Break
4 IFRS13
2 EMIR
5 Discussion

39. 39
Agenda
1 Welcome and Introduction
3 Coffee Break
4 IFRS13
2 EMIR
5 Discussion

40. 40
IFRS13-Fair Value
Measurement
Bussum, 3rd of September 2013
Pierre Wernert – Senior Consultant

41. 41
Agenda
1 IFRS13-Highlights
3 Determination of Fair Value
4 Valuation Techniques
2 Definitions of Fair Value
5 Disclosure
6 Definition CVA/DVA
7 Impacts for corporates
8 Example/Case

42. 42
• IFRS13-Fair Value Measurement
 single source of guidance for fair value
measurement under IFRSs
 no requirements in which situations fair value
measurement is required
 it prescribes how fair value is to be measured
 applied to both financial or non-financial items for
which IFRSs require or permit fair value
measurement
 Effective for annual periods beginning on or after
1 January 2013
IFRS13-Highlights

43. 43
• IAS39 (previous definition):
The amount for which an asset could be exchanged, or a
liability settled between knowledgeable willing parties in
an arm’s length transaction
• IFRS13:
The price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between
market participants at the measurement date
 notion of “exit price”
Definitions

44. 44
• For a financial asset under both definitions, an entity is
required to include counterparty credit risk (Credit Value
Adjustment)
• For financial liability: in practice there was some
divergence, now IFRS13 uses the term non-performance
risk (which includes entity’s own risk  Debit Value
Adjustment)
In the past the divergence came from the term settlement
value versus transfer
IFRS13-Definitions (2)

45. 45
• IFRS13 indicates that an entity must determine the
following to arrive at an appropriate measure of fair value:
– Asset or liability being measured
– For non-financial asset, the appropriate valuation technique(s)
(focusing on inputs)
– Assumptions used when pricing
– Principal market in which a transaction would take place
• Principal market:
– Market with greatest volume and level of activity for that
asset or liability
– Market in which the entity normally transacts would be
presumed to be the principal or most advantageous market
IFRS13-Determination of fair value

46. 46
• IFRS13 requires the price within the bid-ask spread (when
existed) to be used  mid-price
• Fair value of a liability or equity instrument is determined
under the assumption that the instrument would be
transferred on the measurement date but would remain
outstanding  transfer value
• If a quoted price is not available: fair value from the
perspective of a market participant holding the item as an
asset is used
IFRS13-Determination of fair value (2)

47. 47
• Market approach: uses of quoted prices (Bonds)
• Income approach: converts future amounts to a single
current (discounted) amount (IRS/CCIRS)
• Cost approach: reflects the amount that would be
required currently to replace the service capacity of
an asset (current replacement cost) (Properties)
 valuation technique should be used to maximize the use
of relevant observable inputs, minimize unobservable
inputs.
IFRS13-Valuation techniques

48. 48
• 3 levels hierarchy:
– Level 1: more robust: based on quoted market price
– Level 2: based on valuations technique where all
significant inputs are based on observable market data
– Level 3: based on valuations technique where at least 1
significant inputs are based on unobservable market
data
IFRS13-Disclosures
Quoted Price? Level 1
Yes
No
Unobservable
inputs?
No
Level 2
Level 3
Yes

49. 49
Impacts for corporates
– Valuation of the CVA and DVA adjustments
– Transition: impact goes to P&L in the current year
earnings when first applied
– Hedge accounting: change in credit risk affecting the fair
value of the derivative may be a source of hedge
ineffectiveness
– DVA may shift from level 2 to level 3. Level 3 requires
extra disclosure information

50. 50
Impact on hedge accounting
• Hedge relation involves an hedged item (exposure) and a
hedging instrument (financial instrument)
• Under IFRS13 the hedging instrument will carry CVA/DVA
adjustment
• What about the hedged item?
 Does the CVA/DVA adjustment apply on it?
Different opinions from the auditors
Economically, if the hedge is perfect, the hedging instrument
is the mirror of the exposure. If the hedging instrument is
carrying the CVA/DVA solely, the results of the hedge test will
not be 100%.

51. 51
IFRS13 does not recommend a specific methodology for
the valuation of the CVA/DVA. The IFRS standard only
uses the term adjustment
– At instrument level or at counterparty level
– Take into account collateral agreement
– Need of new market data – observable credit spreads
– Need a system which can handle the valuations
– Difficulties for instruments which may be an asset or a
liability during their lifetime (IRS/CCIRS)
CVA/DVA-How to value it?

52. 52
CVA/DVA-How to value it? (2)
• Simplest approach:
– CVA: the credit spread curve is add to the discount curve
– DVA: the credit spread curve is add to the discount curve 
are the market data available?  use of peer group
– Similar to a sensitivity scenario
– The CVA/DVA adjustments result will be the difference
between the market value with credit spread and the market
value at risk free rate
• CVA: intuitive: the market value of the asset will become
lower (loss) in case of the counterparty rating goes down
• DVA: contra-intuitive: the market value of the liability will
become lower (gain) in case of the company rating goes
down

53. 53
CVA/DVA-How to value it? (3)
• CVA example with a flat free rate of 2% and a flat Credit
Default Swap (CDS) curve of 100bps.
Market value risk free: 238.90
Market value with spread: 233.63
CVA adjustment: -/- 5.27
Represents the potential loss in case of default of the
counterparty
t=1 t=2 t=3
Cash Flows 50 75 125
Discount Factor Risk Free 98.0% 96.1% 94.2%
Discount Factor with CVA spread 97.1% 94.3% 91.5%
Discounted CF Risk Free 49.02 72.09 117.79
Discounted CF with CVA spread 48.54 70.69 114.39

54. 54
CVA/DVA-How to value it? (4)

55. 55
CVA/DVA-How to value it? (5)

56. 56
Example-Spread approach IRS
• Interest rate swap (may be an asset or a liability):
– Notional: kEUR 15,000
– Maturity: 1 January 2028
– Pay fixed: 3.50%
– Received floating: EURIBOR 3M
– Payment frequency: Quarterly
– Counterparty: ING
– Company AA rating
CDS Data ING
31 Dec 12
ING
31 May 13
DVA
31 Dec 12
DVA
31 May 13
5 Years 109 136 70 55
10 years 127 178 95 84

57. 57
Example-Spread approach IRS (2)
Issues with spread method:
– the impact is depending of the actual market value
– doesn’t take into account the change in market value in the
future (asset or liability)
– miss one of the adjustment
– no probability of default
market value @
risk free
CVA
Adjustment
DVA
Adjustment
market value
with
adjustments
31 Dec 2012 -/- € 3,499,695 -/- € 176,685 € 124,254 -/- € 3,375,171
31 May 2013 -/- € 3,044,005 -/- € 182,267 € 82,700 -/- € 2,961,305
Difference € 455,689 € 5,582 -/- € 41,823 € 413,866

58. 58
Example-Swaptions approach IRS
Issues with swaption method:
– static view: use of interest rate curve at valuation date
CVA
Adjustment
DVA
Adjustment
market value
with
adjustments -
Swaption
market value
with
adjustments -
Spreads
31 Dec 2012 -/- € 55,660 € 167,700 -/- € 3,387,654 -/- € 3,375,171
31 May 2013 -/- € 83,433 € 128,213 -/- € 2,999,225 -/- € 2,961,305
Difference -/- € 27,773 -/- € 39,487 € 388,429 € 413,866

59. 59
QUESTIONS?

60. 60
Agenda
1 Welcome and Introduction
3 Coffee Break
4 IFRS13
2 EMIR
5 Discussion

61. 61
• Credit Risk Seminar – 28th of November 2013
Zanders Academy – Next event

62. 62
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This material is not to be disseminated, reproduced in whole or in part without
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circumstances or new understanding through further analyses.
Disclaimer

63. 63
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