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Response from UBS Page 1 of 43
UBS AG P.O. Box 8098 Zürich Public Policy EMEA Group Governmental Affairs Dr. Gabriele C. Holstein Bahnhofstrasse 45 P.O. Box 8098 Zürich Tel. +41-44-234 44 86 Fax +41-44-234 32 45 gabriele.holstein@ubs.com www.ubs.com
European Securities and Markets Authority 103 Rue de Grenelle 75007 Paris France
3 August 2012 Re: ESMA Consultation Paper on Draft Technical Standards for the Regulation on OTCDerivatives, CCPs and Trade Repositories
Dear Sir/Madam,
UBS would like to thank ESMA for the opportunity to comment on the Consultation Paper on Draft Technical Standards for the Regulation on OTC Derivatives, CCPs and Trade Repositories. Please find attached our response to the Paper. We would be happy to discuss with you, in further detail, any comments you may have. Please do not hesitate to contact Gabriele Holstein on +41 44 234 4486.
Yours sincerely, UBS AG
Dr. Thomas Bischof Dr. Gabriele C. Holstein Head of Legislative & Regulatory Initiatives
Head of Public Policy EMEA Group Governmental Affairs
Response from UBS Page 2 of 43
UBS Response to the ESMA Consultation Paper on Draft Regulatory
Technical Standards for the Regulation on OTC derivatives, CCPs and
Trade Repositories
INTRODUCTION
UBS would like to thank ESMA for the opportunity to comment on the consultation
paper on Draft Regulatory Technical Standards for the Regulation on OTC derivatives,
CCPs and Trade Repositories. Please find below our response to the overall content, as
well as specific explanatory sections and standards set out in the Paper.
With regard to the indirect clearing requirements, we consider the CP to be unclear as
to whether the provision of indirect clearing by a clearing member is a mandatory
requirement or whether the clearing member can choose to offer indirect clearing
arrangements should it wish but would not be mandated to do so. We strongly believe
the provision of indirect clearing should be at the discretion of the clearing member and
not a mandatory requirement.
We would like to emphasize our view that we do not believe the approach outlined in
the CP for indirect clearing is workable from a legal, operational or a risk management
perspective for a number of reasons. These include the lack of a single EU bankruptcy
framework, difficulties in undertaking adequate due diligence on indirect clients, an
overly aggressive proposed timetable for setting up legal documentation for indirect
clients and clearing members’ counterparty risk to indirect clients which will be difficult
to manage given likely information constraints. We set out our specific concerns in more
detail in the paper and propose an alternative interim approach, under which, indirect
clearing would be available through a client omnibus account with the direct client, held
separately from the direct client's house positions (the annex to this response sets out
our proposed amendments to the relevant articles). We believe this will meet many of
ESMA’s stated objectives for indirect clearing but will be more workable for market
participants in practice. A longer term solution will require greater harmonisation of EU
bankruptcy regimes.
EMIR Article 5 states that one of the methods via which OTC derivatives become subject
to the clearing obligation is where, within six months of receiving notification, ESMA
develops draft regulatory technical standards (RTS) which it will submit to the
Response from UBS Page 3 of 43
Commission specifying i) the class of OTC derivatives that should be subject to the
clearing obligation and ii) the date or dates from which the clearing obligation takes
effect including any phase-in and the categories of counterparties to which the
obligation applies. Once ESMA has submitted its draft RTS to the Commission, that class
of OTC derivatives is likely to become subject to the clearing obligation within three
months.
We believe it is necessary to clarify the exact circumstances in which the competent
authority notification to ESMA is required. Our understanding is that the notification is
only triggered in the case where a competent authority has completed the authorisation
process under EMIR and we believe this needs to be made explicit in the technical
standards
We do not consider that the notification requirement is triggered in the circumstances
where a competent authority has received an application for authorisation under EMIR,
or where a CCP is already authorized under existing national law. If an application
triggered the notification, there would be significant uncertainty as to when the clearing
obligation applied. This is because there is no requirement under EMIR for competent
authorities to notify ESMA when they receive an application for authorisation under
EMIR. There is then a risk that the CCP authorisation process and the process for
determining whether an OTC derivative contract should be subject to the mandatory
clearing obligation would be run in parallel. The consequence would then be that the
relevant class of OTC derivative contract may become subject to the mandatory clearing
obligation at the same time that the CCP becomes authorized. This would give firms no
time to prepare to meet the clearing obligation and would be extremely difficult to
comply with.
We disagree with the blanket application of a 99.5% confidence interval for OTC
derivatives and consider that a 99.5% level will result in a disproportionate margin
requirement for many asset classes, particularly for liquid products with low volatility.
Whether an instrument is OTC or not does not in itself determine the risk of the
instrument and a more risk sensitive approach is necessary. We therefore propose that a
99% confidence interval is applied to all instruments within the scope of EMIR, with
CCPs having the flexibility to set higher confidence intervals for different classes of
financial products based on their specific risk characteristics.
We consider that the amount of a CCP’s ‘skin in the game’ should be calibrated to
ensure adequate margins are maintained that reflect the close-out risk and so that the
CCP proactively monitors the creditworthiness of its clearing members and adjusts the
Response from UBS Page 4 of 43
required margin for weaker or lower rated clearing members. However, from a financial
stability perspective, we believe the need for significant CCP capital should be balanced
with the concern that the amount of capital dedicated to skin-in-the game should not
be large enough to threaten the viability of the CCP should a large clearing member
default.
Consistent with this, our concerns with the proposed skin the game calculation are
twofold: i) it is difficult to assess the magnitude of the proposed 50% requirement given
that the CCP capital requirements being developed by the EBA are not yet finalised but
we note that the requirement may be significant (particularly if based on less risk
sensitive standardised methodologies used by the CCP) to the extent such calibration
could threaten a CCP’s viability and ii) the proposed approach is effectively based on
the sum of the CCPs expenses in a winding-down scenario, its operational risks and its
risks arising from investment activity, meaning it is not risk sensitive in the sense of not
reflecting the likelihood and impact of a clearing member default. We propose that the
calibration of the skin in the game should be amended so that it is based on a CCP’s risk
from clearing activity and is structured so that CCPs have capital at risk both before and
after the non-defaulting clearing members in order optimise the CCP’s risk management
incentives.
We regard to data reporting to trade repositories, we would stress the importance of
consistency across jurisdictions and particularly with regards to requirements in the US.
A requirement to source different data fields for the same client for trades falling within
different jurisdictions would be highly onerous, would reduce the global comparability
of data and would not deliver any benefits. We believe it is necessary to have alignment
of granular data reporting requirements in order to allow for the development of
systems and processes that are suitable for reporting across different jurisdictions. An
approach based on consistent principles only is unlikely to be sufficient to enable this.
We believe that, as far as possible, reporting standards under ESMA should be based on
existing international data standards in order to maximise the extent of global
consistency and comparability of data. We therefore support the proposal to use LEI and
ISO standards. In order to minimise the potential detrimental impacts of data
fragmentation, we advocate that regulations are designed to encourage the use of a
single global trade repository.
Response from UBS Page 5 of 43
III. OTC DERIVATIVES
III.I CLEARING OBLIGATION
Types of indirect clearing arrangements (Art 4 EMIR, Annex II Chapter II ICA)
In order to comply with the clearing obligation, EMIR requires that a counterparty must
become a clearing member (“CM”), a client or establish indirect clearing arrangements.
Assets and positions of a counterparty entering into such an arrangement should
benefit from protections with equivalent effect to those allowing segregation and
portability for direct clients. Indirect clearing arrangements are considered client-to-client
arrangements i.e. a direct client is considered a client that has an account with a CM, an
indirect client a client of a client. In ESMA’s view, an “equivalent” level of protection
means that the indirect client should be protected from the default of the direct client
providing clearing services and from any losses resulting from the default of other direct
clients of the same CM. To ensure positions of indirect clients are protected in an
equivalent manner, indirect client should have the possibility of requesting an individual
client account with the CM, but not necessarily with the CCP. It is also considered that:
a. The direct client providing clearing services should at least maintain an
individual client account at the CCP level for the exclusive purpose of holding
assets and positions of indirect clients: For its proprietary positions the direct client
will retain the right to choose between omnibus or individual segregated accounts, but
for the indirect clients it will need to maintain at least one specific segregated account at
CCP level to ensure that the indirect clients are not exposed to losses derived from (i)
the proprietary positions of the direct client and (ii) from other clients of the CM.
b. If the direct client defaults, the CM member must have procedures that
ensure the transfer of the indirect client positions to another client or commit to
directly manage these positions: To ensure portability, the CM needs to know the
identity of the indirect clients. As this is commercially sensitive information for the direct
client, appropriate Chinese Walls should be established by the CM to ensure that
information provided by the direct client to the CM member is not used for commercial
purposes. All information held by a client in respect of its indirect clients will be made
available to the CM following the default of the direct client. According to ESMA there
should also be full transparency over the different types of account segregation available
to indirect clients and the level of protection provided by each option.
Response from UBS Page 6 of 43
UBS view on types of indirect clearing arrangement
We would like to raise several issues which can be categorised as the clarification of
clearing member obligations and the operation of indirect clearing arrangements.
Clarification of clearing member obligations with regard to indirect clearing:
Article 4 ICA, 1. states that “A clearing member shall be required to facilitate indirect
clearing arrangements on reasonable commercial terms. These terms shall be publicly
disclosed by the clearing member”.
We consider this requirement to be ambiguous as it could be read as either i) a
mandatory requirement for a clearing member to offer indirect clearing arrangements to
its clients or any clients of its clients or ii) a requirement that, should a clearing member
choose at its own volition to offer indirect clearing, it would be required to do so on
reasonable commercial terms.
We strongly believe that the appropriate interpretation should be ii) as firms should have
the option, but not the obligation, to offer indirect clearing as this is a commercial
decision and clearing members may have legitimate reasons why they do not wish to
provide indirect clearing services. In addition, we consider that a mandatory requirement
for clearing members to offer indirect clearing would go beyond the EMIR Level 1 text.
We therefore propose the following amendment to Article 4 ICA, 1. “In
circumstances in which a clearing member chooses to offer indirect clearing
arrangements, the clearing member shall be required to facilitate indirect clearing
arrangements on reasonable commercial terms. These terms shall be publicly disclosed
by the clearing member”.
It is also important to recognise that an indirect client would have a choice in how to
clear their trades - i.e. to use an indirect clearing arrangement, or to have a direct
clearing arrangement through a clearing member. An indirect clearing arrangement
would be likely to be much more cost-effective for a small client, who might otherwise
have to pay high minimum fees (in relation to their trading activity) if they wanted to
have a direct clearing arrangement. The client should be free to make the choice
between a more cost-effective clearing arrangement which incurs some additional risks
(which should be explained clearly to the client, and which are similar to the risks
Response from UBS Page 7 of 43
currently faced by almost all clients of ETD clearing arrangements), and a more
expensive clearing arrangement with more protections in place.
Operation of indirect clearing arrangements: We would like to emphasize our view
that we do not believe the approach outlined in the consultation paper is workable from
a legal, operational or a risk management perspective for a number of reasons outlined
below.
1) Lack of single EU bankruptcy framework: We do not have a single bankruptcy
framework within the EU that covers all jurisdictions that clients, CCPs and clearing
brokers will reside in. As such, we are unable to see that indirect customer assets will be
appropriately protected in the event of a default, under the model proposed. The crucial
issue at present seems to be that it is virtually impossible to offer exactly the same
options and protections (in terms of segregation options, portability, and return of
assets in the event of a direct client default) as would be available to a direct client. This
is due in large part to the many different bankruptcy regimes under which the clearing
members, direct clients and indirect clients could be operating.
2) Requirement for clearing members to extend individual accounts to indirect
clients results in complexity and leads to prohibitively high costs: It is impractical
for the indirect client to be known to the clearing member and CCP, although we do
appreciate this would be required to facilitate the porting of assets and positions in the
event of direct client or CB default. Clearing members would have to perform 'Know
Your Client' (KYC) due diligence on each indirect client entity as well as risk manage
each end customer both on an on-going basis and in the event of a default. This is
effectively a direct relationship, except, the clearing member would not have been in a
position to assess the end client to our internal standards and criteria. As a result, each
clearing member could have to perform and maintain accounts for thousands of end
clients which would make the costs prohibitively high.
We consider that under the proposed requirements of Article 4 ICA, default
management of a direct client will be very difficult as clearing members will also have to
manage their indirect clients' portfolios individually and there is likely to be considerable
uncertainty as to the process to be followed at the point the direct client defaults. For
example, some indirect clients may want to transfer to a different client/clearer, some
may just wait, and some may not know what to do.
Response from UBS Page 8 of 43
In the case of a direct client default, we would also appreciate clarification of the
following points:
Communication with indirect clients: Would the clearing member have to contact
each and every one of the likely thousands of indirect clients to confirm what their
intentions are?
Approach to margin collection: How long would the clearing member have to wait,
and what is the legal position, with regard to collecting margins from indirect clients
once the direct client (broker) has defaulted?
We would also raise ESMA’s attention to the fact that it is highly improbably that in the
event of a default, these customer assets could be ported, given that the clearing
houses have specific timeframes for porting (e.g. LCH gives client 48 hours to
port,before portfolios are liquidated).
Today Eurex has approximately 50 members and probably less than 1,000 house and
client accounts in total. With the model suggested, where indirect clients are given
equivalent protections as direct clients, Eurex and clearing members could find
themselves opening thousands more accounts for indirect customers.
Should ESMA mandate that information held by the direct client on its indirect clients
must be made available to the clearing member despite our concerns raised, it should
be limited to information relevant for the clearing service. For example, fee
arrangements and other details of the relationship between the direct and indirect
client, should not be released.
3) Requirement for clearing members to extend individual accounts to indirect
clients not achievable in envisioned timeline: From a clearing broker’s perspective,
we are currently negotiating and onboarding direct clients for OTC IRS Clearing at LCH
SwapClear. The client negotiations for legal documentation are taking approximately
three months to complete, as it is necessary to educate clients on the key differences
between Bilateral ISDA documentation and clearing. At UBS, we are currently targeting
approximately 200 clients for OTC Clearing and we believe there are more than 5,000
clients that trade OTC Derivatives in the market today. If clearing brokers are to perform
KYC due diligence with indirect customers, negotiate legal agreements and set up the
accounts internally, this believe this could take the market 2 years. This is assuming a 3
Response from UBS Page 9 of 43
month timeframe for onboarding and 12 clearing brokers in the market who all
onboard 50 client per year, with each client uses a single account structure. Given this
timeframe, meeting mandatory clearing for either direct or indirect clients is unlikely to
be achievable in the timeframes required by EMIR.
4) Requirement to manage indirect client’s portfolio individually increases
counterparty risk to indirect clients: Article 4 ICA, 6. states that “In circumstances
where the positions and assets of indirect clients cannot be successfully transferred, the
clearing member shall offer to hold directly the positions and assets in an equivalent
account with the CCP for a period of at least 30 days and on reasonable commercial
terms. These terms shall be specified in advance as part of the contractual relationship
between the clearing member and the client”.
A clearing member will backstop its customers. If one defaults, the onus is on the
clearing member to make good any losses incurred. If we are clearing on an indirect
basis for a client that defaults, we would be expected to make good any losses to the
clearing house and potentially port the end indirect clients assets to another broker or
hold them for 30 days until they can port.
We may not have the appropriate documentation in place to directly clear for that
client, yet we are still liable for any counterparty risk they pose to the CCP. From a
clearing member perspective, we have the operational burden of maintaining and
segregating the end customer assets, and the responsibility to make good any losses
incurred without being given the opportunity to complete our due diligence and decide
whether we would accept the client or not based on our internal standards and criteria.
This clause creates additional counterparty exposure to indirect clients which we cannot
reasonably manage from the very beginning due to Chinese Walls.
So whilst Article 4, 3. of EMIR states that indirect clearing arrangements must not
‘increase counterparty risk’, in our view, the 30 day holding period would in fact
increase counterparty risk which cannot be adequately managed due to Chinese Walls.
Proposed Solution
In light of these issues, we propose the following:
i) as an interim measure, ESMA put in place an indirect clearing provision as outlined
below, which meets some, but not all, of the desirable clearing standards; and,
Response from UBS Page 10 of 43
ii) as a longer-term measure, ESMA works with the European Commission and national
governments to harmonise bankruptcy legislation to enable greater protections to be
put in place effectively.
Interim approach
Here we aim to describe an interim clearing arrangement which we believe would be
workable in the short term, and we highlight areas where this arrangement would fall
short of the segregation/portability standards which would be preferable:
Indirect clearing would be available through a client omnibus account with the direct
client, held separately from the direct client's house positions
Direct clients should only be allowed to offer indirect clearing capabilities if they meet
certain requirements (e.g. appropriate regulatory supervision; appropriate risk
management framework and procedures for managing risk to their clients; appropriate
KYC and anti-money laundering standards and a requirement to fully inform clients of
the risks involved in an indirect clearing arrangement). The direct client acts as
guarantor to the clearing member for the activity going through their client account.
The clearing member will set risk limits in line with their risk appetite to direct client.
In the event of a clearing member default, the indirect client omnibus could be ported
across to another clearing member just like any other account under direct clearing
arrangements. If the positions could not be ported as a whole, the omnibus account
would be liquidated and any collateral returned by the CCP to the direct client to be
passed back through to the indirect client.
In the event of a direct client default, the clearing member would have procedures in
place (similar to a CCP in a direct clearing arrangement) to port the client omnibus to an
alternative direct client who supported indirect clearing. The clearing member would
need to have contact information available for the indirect clients in order to seek their
permission for this porting. The client agreement with the direct client would need to
include provisions to allow porting of these positions and the associated collateral. If
porting was not possible, the positions in the indirect client omnibus would be closed
out immediately and any collateral returned to the estate of the defaulted direct client.
We recognise that this proposal may not be deemed suitable by all potential indirect
clients on the basis that it does not provide full protection to indirect clients in the case
Response from UBS Page 11 of 43
of a direct client default. But we do consider that a material number of indirect clients
would be able to get comfortable with the level of protections provided and would be
willing to participate in indirect clearing arrangements under this approach. Given the
identified limitations however, we stress the importance of achieving a single
bankruptcy framework across the EU to facilitate indirect clearing, a point we discuss in
more detail below.
We have provided detailed proposed amendments to the indirect clearing articles in the
Annex to this response.
Longer term approach
We recognise that it will be very difficult for ESMA to devise an indirect clearing model
that protects the indirect client to an equivalent level that the direct customer assets are
protected and gives clearing brokers comfort around the risk management process for
the indirect clients both on an ongoing basis and in the event of a default. Whilst we
note that indirect clearing is common for ETD, in such cases the indirect client does not
benefit from the same protections as the direct client.
We feel that a necessary condition for effective indirect clearing arrangements is a single
bankruptcy framework that legally works in all jurisdictions that EMIR covers. A single
segregation and bankruptcy framework would facilitate indirect clearing.
We would like to draw ESMA’s attention to the fact that today none of the European
insolvency laws foresee special treatment of client collateral in relation to central
clearing in the case of a clearing broker default.
Where client collateral, both cash as well as non-cash, is passed through to the clearing
house, it is exposed to the regular insolvency process and bankruptcy estate vis-à-vis the
clearing broker. The one exception where client collateral enjoys special treatment on
clearing broker level are the FSA Client Money and Client Asset Segregation Rules in the
UK, which allow omnibus level segregation of designated client collateral. However,
these rules are not appropriate for strong collateral segregation for OTC clearing by
clients. The recent broker insolvencies, in particular Lehman Brothers, have highlighted
the weakness of such collateral segregation rules. By contrast, in the US, clients enjoy a
much more robust segregation rule in the cleared futures business. The US have, in light
of the mandatory requirement for OTC clearing, further improved their rules and
Response from UBS Page 12 of 43
recently introduced LSOC (Legally Segregated Operationally Commingled) rules that give
effective protection of client collateral on the clearing broker level.
The challenge is hence to establish an EU framework that allows OTC clearing with
effective and efficient collateral segregation rules on the level of the clearing broker.
Consistent with this, we support Annex II, Recital (4) as a means of trying to address this
issue by stating that the requirements set out in the Regulation on the segregation and
portability of positions and assets of indirect clients should prevail over any conflicting
laws, regulation and administrative provisions of the Member State that prevents the
parties from fulfilling them. We believe the legal force of the statement would be
improved were it included in an article rather than a recital and we therefore propose
that it is included within an article in Chapter II. We also believe the text should be
amended to be more explicit that it is applicable to all parties involved in indirect
clearing arrangements (i.e. CCPs, clearing members, direct clients and indirect clients).
However, we still do not consider the text to provide adequate legal certainty that the
Regulation requirements on the segregation and portability of positions and assets of
indirect clients would override any conflicting laws, regulations and administrative
provisions of member states. We propose that ESMA work with other relevant parties to
facilitate the development of a suitable legal framework that ensures effective legal
segregation.
Specifically in regards to indirect clearing, collateral treatment rules need to be adjusted
to the effective nature of the role of the clearing broker and indirectly participating
bank, which is the role of an agent (the clearing broker clears at the CCP, and the
indirectly participating bank at the clearing broker, in its own name, but at the risk of
the client). Related collateral should be treated as such in case of a default of any of
these intermediaries. An additional challenge specific to indirect clearing is that the
clearing member and the indirectly participating bank may operate under different
insolvency laws. As such the feasibility of collateral protection solutions would need to
be verified across two regulations. Also collateral protection rules for indirect clearing
would need to take into consideration not only a clearing broker default, but potentially
also a default of the indirectly participating bank/broker.
Response from UBS Page 13 of 43
III.II CLEARING OBLIGATION PROCEDURE
Criteria to be assessed by ESMA under the clearing obligation procedure (Art
5.5 EMIR and Annex II, Chapter IV, CRI)
ESMA takes into consideration (i) the degree of standardisation of the contractual terms
and operational processes for the relevant class of OTC derivatives, (ii) volume and
liquidity of relevant contracts within the relevant class of OTC derivatives; (iii) availability
of fair, reliable and generally accepted pricing information.
Degree of standardisation: For assessing contractual terms, ESMA considers the use
of common legal documentation, including master netting agreements, definitions and
confirmations which set forth contract specifications commonly used by counterparties
and. For assessing operational processes standardisation, ESMA considers the extent to
which post trade processing is automated and lifecycle events are managed in a
common manner with a widely agreed timetable.
Liquidity: For assessing liquidity ESMA considers whether margins would be
proportionate to the risk that the clearing obligation intends to mitigate, the historical
stability of the liquidity through time and the likelihood that liquidity would remain
sufficient in case of a CM default.
Availability of fair, reliable and generally accepted pricing information: ESMA
would assess whether relevant information to correctly price the contracts is easily
accessible to counterparties on a reasonable commercial basis. The Availability of Pricing
models are not considered an absolute requirement.
Notification to ESMA (Art 5.1 EMIR and Annex II, Chapter III, DET)
According to EMIR, a competent authority shall notify ESMA when it authorises a CCP
to clear a class of OTC derivatives. The clearing obligation will affect contracts entered
into as of the date of the notification. According to ESMA it is likely that only a part of
the classes of OTC derivatives notified will meet the relevant criteria. Regulatory
standards specifying classes of derivatives subject to the clearing obligation will specify
dates as of which the obligation will take effect to give market participants necessary
time for implementation. Where, following a negative assessment of the clearing
eligibility of a given class of OTC derivative contracts, the competent authority is
informed that market conditions or any of the information provided change, it should
Response from UBS Page 14 of 43
have the ability to submit another notification with updated information to ESMA.
According to ESMA a reasonable and balanced approach is required to avoid an
unnecessary heavy workload while assessing appropriateness of the clearing obligation
when required.
UBS views on the application of the clearing obligation
Phasing-in arrangements: We would welcome more clarity in regards to the phasing-
in of the clearing obligation. Article 1 DET, 2. sets out details of the information to be
included in the notification from the competent authority to ESMA in respect of
assessing the date or dates from which the clearing obligation takes effect, including
any phasing-in and the categories of counterparties to which the clearing obligation
applies. Article 5, 2. of the EMIR Level 1 text also refers to phase-in. But, in our view, it
is not clear what types of phasing-in is contemplated by ESMA. We consider that
phasing-in arrangements should be introduced both by i) type of asset class and ii) type
of counterparty and that the technical standards should clearly set out the approach.
We would welcome alignment with the U.S. with regard to phasing-in of different types
of counterparties.
Trigger for the clearing obligation to apply: Article 5 EMIR states that one of the
methods via which OTC derivatives become subject to the clearing obligation is where,
within six months of receiving notification, ESMA develops draft regulatory technical
standards (RTS) which it will submit to the Commission specifying i) the class of OTC
derivatives that should be subject to the clearing obligation and ii) the date or dates
from which the clearing obligation takes effect including any phase-in and the
categories of counterparties to which the obligation applies. Once ESMA has submitted
its draft RTS to the Commission, that class of OTC derivatives is likely to become subject
to the clearing obligation within three months.
We understand that ESMA may only submit draft RTS to the Commission where it has
received notification that a competent authority has authorised a CCP under EMIR, or
where ESMA has recognised a third country CCP under EMIR. Article 5, 1. of the EMIR
Level 1 text states that "where a competent authority authorises a CCP to clear a class
of OTC derivatives under Article 14 or 15, it shall immediately notify ESMA of that
authorization".
We would appreciate clarification of the exact circumstances in which the competent
authority notification to ESMA is required. Our understanding is that the notification is
only triggered in the case where a competent authority has completed the authorisation
Response from UBS Page 15 of 43
process under EMIR and we believe this needs to be made explicit in the technical
standards
We do not consider that the notification requirement is triggered in the circumstances
where a competent authority has received an application for authorisation under EMIR,
or where a CCP is already authorized under existing national law. If an application
triggered the notification, there would be significant uncertainty as to when the clearing
obligation applied. This is because there is no requirement under EMIR for competent
authorities to notify ESMA when they receive an application for authorisation under
EMIR. There is then a risk that the CCP authorisation process and the process for
determining whether an OTC derivative contract should be subject to the mandatory
clearing obligation would be run in parallel. The consequence would then be that the
relevant class of OTC derivative contract may become subject to the mandatory clearing
obligation at the same time that the CCP becomes authorized. This would give firms no
time to prepare to meet the clearing obligation and would be extremely difficult to
comply with.
UBS views on notification following a negative assessment of clearing eligibility
We support the review process following a negative assessment and the opportunity to
provide an updated notification. We would reiterate our comments made in our
response to the ESMA discussion paper that ESMA should seek consistency with US
rules when establishing any process and timeline and should push for alignment across
all G20 jurisdictions and beyond.
We would furthermore welcome clarity in the reverse situation where an eligible
contract would no longer meet the eligibility criteria due to a reduction in liquidity or
volume. Given how the liquidity of an instrument can change over time, it is possible
that contracts deemed eligible for CCP clearing may subsequently become ineligible
and, equally, contracts initially deemed ineligible for CCP clearing may become
sufficiently liquid and standardised to the point where they may become eligible for CCP
clearing. For these reasons, it is important that CCPs, competent authorities and ESMA
adopt a dynamic approach to monitoring eligibility for CCP clearing.
In general, it is essential that market participants are informed at an early stage of
potential changes to existing clearing arrangements for particular contracts, bearing in
mind the economic and other consequences of transitioning from bilateral clearing to
central clearing. We would hence query if in such a situation there would be a status
change in that the contract would no longer be considered eligible and be “delisted”
Response from UBS Page 16 of 43
and if so, immediately upon publication of the negative assessment or with a time lag.
We would stress the importance to have a clearly defined time period to allow the
updating of systems. We believe it would be appropriate to provide for transitional
periods to give firms adequate opportunity to, for example, re-negotiate contracts.
III.IV ACCESS TO A TRADING VENUE (ART 8 EMIR and ANNEX II, CHAPTER VI, LF)
According to Art 8 EMIR, access to a trading venue by a CCP can only be granted if such
access would not require interoperability or threaten the smooth and orderly
functioning of markets in particular due to liquidity fragmentation. In this context,
ESMA is required to specify through draft RTS the notion of liquidity fragmentation.
ESMA decided not to specify a level of liquidity fragmentation which would be sufficient
to threaten the smooth and orderly functioning of markets on the basis that it would
not be possible to specify a single threshold appropriate for all markets. Access of a new
CCP to a venue is considered to cause liquidity fragmentation if, after the CCP had
gained access, there would be no single CCP to which all market participants had
access. In a market with a clearing obligation in place, this would imply that transactions
between some pairs of market participants would be impossible, therefore fragmenting
liquidity in two or more buckets. The draft RTS sets out measures which would need to
be in place to prevent such a situation from occurring. It is specified that in order to
prevent liquidity fragmentation, all participants in a trading venue have access to either:
i) at least one common CCP; or ii) clearing arrangements established by the CCPs.
According to ESMA interoperability arrangements might entail additional risks and given
that under EMIR these arrangements are limited to cash instruments, EMIR specifies that
access to a trading venue can be denied if it requires interoperability. However, this
condition does not exclude that interoperability arrangements can be established among
CCPs if the relevant risks arising from them are duly managed. If the relevant CCPs and
their competent authorities agree with an interoperable arrangement for the purpose of
accessing a trading venue, this possibility should not be excluded.
UBS view on CCP access to trading venues
UBS strongly supports non-discriminatory access to CCPs by trading venues and to
trading venues by CCPs to ensure competition in derivatives trading and clearing
services. Currently the vast majority of trading in ETDs occurs on a few venues, namely
Liffe and Eurex and attempts by new entrants like Turquoise Derivatives have not been
Response from UBS Page 17 of 43
very successful as they either are unable to gain licenses for index products or are not
able to compete in post trade as positions traded on one venue cannot be cross-
margined or netted in the same CCP.
If competition between trading venues is to be fostered, it is critical that CCPs be
required to allow non-discriminatory access to their facilities and services. Access of
CCPs to trade venues should, however, be user demand driven. Where this is not the
case, CCPs should bear the costs (e.g. capital expenditure to develop connectivity). We
do not believe that non-discriminatory access relates to a requirement of
interoperability.
We are aware of a number of market initiatives which are looking at cross margining
(for example, Futures against IRS). In addition, in the futures space there have been
discussions of interoperability between clearing houses, similar to what we see in the
cash world today.
Due to the fact that the OTC cleared derivatives markets is still immature, we do not
support a requirement for CCP interoperability in the short to medium term.
Interoperability beyond cash securities is a laudable goal in the mid-term but we would
caution against practical challenges that need to be better understood as otherwise
interoperability arrangements could lead to a build-up of systemic risk. The timing must
be consistent with the level of CCP readiness to support the process in a scalable
manner. We would stress the importance, however, that the regulatory standards do
not preclude any interoperability offering in the long term.
III.V NON-FINANCIAL COUNTERPARTIES (ART10 EMIR and ANNEX II, CHAPTER
VII, NFC)
OTC derivative contracts that protect non-financials against risks directly related to their
commercial activities and treasury financing activities, as well as those that do not
protect against such risk but do not exceed the clearing thresholds, are not subject to
the EMIR clearing obligation. Once a threshold is exceeded, the clearing obligation
would apply to all future OTC derivatives concluded by the non-financial counterparty
after it has exceeded the clearing thresholds. To calculate whether it exceeds the
clearing thresholds, a non-financial counterparty does not include in its calculation the
OTC derivative contracts which are objectively measurable as reducing risks directly
related to its commercial activity or treasury financing activity or that of its group.
Response from UBS Page 18 of 43
UBS view on clearing thresholds of non-financial counterparties
We believe it is important to clarify which party has the responsibility for ensuring
compliance with the defined clearing thresholds and which party has the liability should
the clearing threshold be incorrectly assessed and the consequent obligations breached.
Both points are currently unclear.
We believe it should be the responsibility of the non-financial counterparty to ensure
compliance with the clearing threshold. Financial counterparties typically do not have
sufficient information with regard to the non-financial counterparty’s activities to
determine whether the threshold has been breached. Requiring having such information
would be a highly burdensome and potentially non-achievable. Furthermore where a
non-financial counterparty has breached a clearing threshold and has not met its
clearing obligation for a period of time, transactions undertaken during this period
should not be back-loaded.
Criteria for establishing which derivative contracts are objectively measurable
as reducing risk directly related to the commercial activity or treasury financing
An OTC derivative contract entered into by a non-financial counterparty is deemed to be
“objectively measurable” as reducing risks if it is:
i) directly related to the commercial activity or treasury financing activity of that non-
financial counterparty or of that group, when its objective is to reduce the potential
change in the value of assets, services, inputs, products, commodities, liabilities that it
owns, produces, manufactures, processes, provides, purchases, merchandises, leases,
sells or incurs in the ordinary course of its business, or the potential change in the value
of assets, services, inputs, products, commodities or liabilities referred to above,
resulting from fluctuation of interest rates, inflation or foreign exchange rates.
An OTC derivative contract used for a purpose in the nature of speculation, investing, or
trading is not considered objectively measurable as reducing risk.
(ii) the accounting treatment of the derivative contract is that of a hedging contract
pursuant to International Financial Reporting Standards (IFRS) principles.
Response from UBS Page 19 of 43
UBS view on objectively measurable criteria
Definition of hedging
Chapter III.V Article 1 NFC sets out conditions that must be met for an OTC derivative
contract to be considered to be objectively reducing risks. Article 1 NFC 1., a. refers to
“…the risks arising from the potential change of the value of….” and Article 1 NFC 1.,
b. refers to “…the risks arising from the potential indirect impact on the value of…”.
We are concerned that use of the word ‘value’ is overly restrictive as OTC derivatives are
frequently used by non-financial counterparties to reduce the risk of variability in future
cash flows rather than the risk of changes in value (e.g. hedging of foreign exchange
risks). We therefore propose that Article 1 NFC is amended to include OTC derivatives
used for the purpose of hedging the variability in expected future cash flows as well as
potential changes in value.
Use of local GAAP
We consider that the proposed technical standards are insufficiently clear with regard to
the ability to rely on local GAAP to determine whether an OTC derivative contract
objectively reduces risks. Article 1 NFC 1., c. states that OTC derivative contracts that
qualify as hedging contracts pursuant to International Financial Reporting Standards
(IFRS) will be deemed to be objectively reducing risks. Annex II Recital 14 recognises that
some non-financial counterparties may report under local GAAP and goes on to say that
“it is expected that most of the contracts that are classified as hedging under local
GAAP would fall within the general definition of contracts reducing risks directly related
to commercial activity or treasury financing activity provided for in this Regulation”.
However, paragraph 61 on page 15 of the CP calls into question whether satisfying
hedge accounting criteria under local GAAP meets the Article 1 NFC 1., c. requirements.
We consider that non-financial counterparties who satisfy hedge accounting criteria
under local GAAP should be considered to meet the Article 1 NFC 1., c. requirements
and that the article should be amended to explicitly reflect this.
Clearing Thresholds
For the purpose of the clearing thresholds, 5 asset classes are considered i.e. credit
derivatives, equity derivatives, interest rate, foreign exchange and, finally, commodity
and others. When one of the clearing thresholds for an asset class is reached, the
counterparty is considered as exceeding the clearing thresholds and therefore is subject
to the relevant requirement for all classes of OTC derivative contracts. The clearing
Response from UBS Page 20 of 43
obligation would apply to all OTC derivatives contracts concluded after the clearing
threshold was exceeded, irrespective of the asset class to which these OTC derivative
contracts belong to. ESMA proposes a phase-in approach where it will start by setting
the clearing thresholds at a level that can be further tailor-made when more data is
available. The clearing thresholds will be reviewed on a regular basis.
ESMA has chosen to determine the value of the clearing thresholds by reference to the
notional amount of the OTC derivative contracts. Contrary to a net exposure approach,
the approach based on the notional amount adds up the nominal value of all
outstanding OTC derivative contracts, irrespective of whether they are in or out of the
money.
UBS View on clearing thresholds
We understand that ESMA has chosen to use notional values to determine clearing
thresholds as it is an approach that will be simple for non-financial counterparties to
implement. Whilst we recognize the need for an approach that can be easily
implemented by non-financial counterparties, we note that notional values frequently
will not reflect actual exposure due to different tenors and payoff formulas.
Consequently, we consider that the notional thresholds per asset class should be better
aligned to the economic characteristics of the underlying. For example, whilst the
clearing thresholds for interest rate derivatives and foreign exchange derivatives are
proposed to be set at the same level, interest rate derivatives usually have a significantly
lower present value sensitivity than foreign exchange derivatives of the same tenor. We
believe the clearing thresholds should be amended to take this into account.
We are concerned that under the ESMA proposal, all classes of derivatives will fall within
the clearing requirement even if only one asset class clearing threshold is breached. We
consider this approach to be significantly more onerous than that of the equivalent US
rules as the CTFC proposals a breach of the threshold for one of the two individual
categories (“rate” swaps and others) would result in only that class of instrument
becoming subject to collateralization requirements. We propose that ESMA aligns its
approach with that of the US to ensure a more harmonized global approach and so as
not to disadvantage EU firms. Thus we propose that the technical standards are
amended so that a breach of the clearing threshold for one asset class results in the
clearing obligation being triggered for that asset class only and not other asset classes.
Response from UBS Page 21 of 43
If this proposal is accepted by ESMA, we consider it also necessary for ESMA to clarify
the approach to be used where a derivative does not easily fit within only one of the
clearing threshold classes. For example, cross-currency interest rate swaps could
arguably be classified as either interest rate derivative contracts or foreign exchange
derivative contracts. So if passing through the clearing threshold triggered the clearing
obligation for that class only, it would be important to know which class to assign the
contract to.
III.VI RISK MITIGATION FOR OTC DERIVATIVE CONTRACTS NOT CLEARED BY A
CCP (ART 11 EMIR AND ANNEX II, CHAPTER VIII, RM)
Timely confirmation
ESMA proposes the following timeline for the confirmation of OTC derivative contracts:
(i) financial counterparties and non-financial exceeding the clearing threshold as soon as
possible, at latest by the end of the day when entered into the contract.
(ii) non-financial counterparties as soon as possible and at the latest, by the second
business day following the trade day.
Where the counterparty would be in a different time zone or when the trade would be
agreed upon late in the day, the contract would have to be confirmed as soon as
possible and at the latest, by the end of the following business day for the relevant
counterparty.
Financial counterparties should report on a monthly basis their OTC derivative contracts
that remain unconfirmed for more than 5 business days.
UBS views on timely confirmation
As an overall comment, we would voice our concern that the timelines envisaged are, in
our view, too aggressive and not achievable by the industry. It is likely to force
participants to focus on speed rather than accuracy. We would suggest a phased in
approach by asset class1. Furthermore that the timelines take into consideration whether
trades are confirmed electronically. Specifically it is our view that trades with brokers /
dealers that are confirmed electronically, confirmation by end of day could be achieved
1 We support a phased in approach as suggested by ISDA in its response to the CFTC notice on proposed rulemaking – confirmation, portfolio reconciliation and portfolio compression requirements for swap dealers and major swap participants, dated 28 February 2011.
Response from UBS Page 22 of 43
for rates, credit and equities. For trades with investment managers who confirm
electronically, T+2 could be achieved. We would bring to ESMA’s attention that a
number of investment managers do not confirm via Marketwire or DTCC (especially in
equities).
For structured contracts, a T or T+2 turnaround is not achievable, regardless of whom
the counterparty is. This will be an industry wide issue.
The industry for many years has been working towards the goal to move trade
confirmations onto electronic platforms but today there are a number of investors who
still confirm via paper. Should ESMA choose to maintain the confirmation time frames
despite our concerns raised, it should consider mandating electronic confirmation for
financial and non-counterparties. We would also stress the importance to have a
consistent approach globally and as propose that the EMIR timeframes are aligned with
the US.
Lastly we would seek clarity as to the consequences of a trade not being confirmed
within the deadline. Our understanding is that the consequence of non-confirmation
within the deadline is the need to include the trade in the monthly report to the
competent authority of trades outstanding for more than five business days. But we
would like clarification of whether the validity of the trade would be affected
We would also appreciate clarification on five aspects outlined below.
Meaning of confirmation: We would appreciate clarification of what confirmation
actually means. Specifically, does confirmation mean i) a fully executed, matched
confirmation or ii) the dispatch of the confirmation to the counterparty. We would
support the latter interpretation.
Scope of confirmation: We would appreciate clarification of whether intra-group and
inter-entity transactions are within scope of the timely confirmation requirements set
out Article 1 RM. We would propose that these transactions are not included in the
confirmation requirements.
Treatment of trades which have a negative confirmation in place: We would
appreciate clarification of how trades which have a negative confirmation in place,
Response from UBS Page 23 of 43
details of which are held within the Master Agreement, would be treated for the
purposes of timely confirmation.
Confirmation of trades in situations where one counterparty would be in a
different time zone: In Article 1 RM, 2., we would appreciate clarification of the
precise definition of “by the end of the same business day” and in Article 1 RM, 3. of
“by the end of the next business day”. We consider that the cut-off time of the business
day should be up until midnight of the following day. Where the two counterparties to
a transaction are in different time zones, we would appreciate clarification as to which
time-zone should be used. For example, in the case where a trade is executed after 4pm
by a financial counterparty in Germany, but with a financial counterparty in London for
whom the local time is 3pm, we consider that Article 1 RM, 3. would apply and the
trade confirmation would need to be sent by the end of the next business day where
the end of the next business day was defined as before midnight German time on the
following business day.
We also note a drafting error in Article 1 RM as two separate paragraphs are numbered
‘3,’.
Reporting of unconfirmed trades: We would welcome clarity as to whether the
reporting requirement only covers the number of unconfirmed trades, or if additional
information, such as counterparty details and type of trades will be required.
Also, we would appreciate clarification of the nature of the monthly report. Our
understanding is that it should be a month-end snapshot of outstanding trades and we
believe this should be made explicit.
Reconciliation of non-cleared OTC derivative contracts
Concerning the frequency of the reconciliation in view of the size of the portfolio that
counterparties have with each other, ESMA proposes that portfolio reconciliation be
performed:
(i) at least each business day when the counterparties have 500 or more derivative
contracts with each other,
(ii) at least once per week for a portfolio between 300 and 500 derivative contracts
(iii) once per month for a portfolio of less than 300 derivative contracts
Response from UBS Page 24 of 43
being understood that the timing should be appropriate based on the size and volatility
of the OTC derivative portfolio between the counterparties.
UBS views on reconciliation of non-cleared OTC derivative contracts
Overall, we consider the proposed frequency and timing of the Portfolio Reconciliation
requirement to be appropriate.
We believe a plausible interpretation of Article 1 RM is that financial and non-financial
counterparties must have bilateral policies and procedures in place which details how
portfolio reconciliations are carried out. We disagree with this requirement and believe
that it is appropriate at a firm wide level to have policies and procedures in place that
details how we undertake portfolio reconciliation, but that such a requirement should
not exist at an individual counterparty level.
Portfolio compression
ESMA proposes that counterparties, financial entities or non-financial entities, having a
portfolio of at least 500 or more non- centrally cleared derivative transactions, should
have procedures to regularly, and at least twice a year, analyse the possibility to conduct
a portfolio compression exercise. The aim of the exercise is for counterparties to reduce
their counterparty credit risk. The procedures should also provide for engaging in such
portfolio compression exercise when it is considered appropriate. Counterparties should
provide a reasonable and valid explanation to the relevant competent authority when
concluding that such a portfolio compression exercise is not appropriate.
As a result of the portfolio compression exercise, the offset OTC derivative contracts
should be terminated no later than the day following the execution of the fully
offsetting derivative contract.
UBS views on portfolio compression
We are generally not supportive of mandating portfolio compression. This is because in
nettable jurisdictions, the compression will not reduce credit, funding or capital usage. It
will reduce the amount of tickets, but not materially, and such trades work on straight
through processing, so are not manually intensive from an operational perspective.
Therefore, we do not consider the costs of portfolio compression in terms of resources
involved, negative impact on cashflow and increased operational risk to be justified by
the benefits which are minimal in our view.
Response from UBS Page 25 of 43
We therefore support the ESMA proposal to limit the portfolio compression requirement
to transactions for which compression would be feasible and appropriate as a risk
mitigation tool. We emphasize our view that portfolio compression is not appropriate
for foreign exchange swaps, equity derivatives and commodities for the reasons outlined
below.
Foreign Exchange Swaps should be excluded due to the short tenor of these trades,
their non-standardized, bilateral nature and the considerable preparation time
associated with the compression process, due to which there is minimal benefit to be
gained from compression. Equity derivatives should be excluded as this market is
broadly positional in nature, lacks product standardization and hence provides little
opportunity for compression and netting. Finally the exclusion should apply to
commodities as well as notional amounts are comparatively low.
We would furthermore query how portfolio compression will work where a client (e.g. a
sovereign wealth fund) appoints several different asset managers to manage different
portions of its overall portfolio. Each asset manager may enter into trades with the same
counterparties, but will not be aware of the trades placed by the other asset managers.
Portfolio compression would be carried out by the asset managers rather than the
sovereign wealth fund, as such it should only operate at the level of the discrete
portfolio managed by that asset manager, i.e. not at the level of the fund across all its
asset managers.
Dispute resolution
ESMA acknowledges that some disputes may require more time than others in order to
be resolved as they may be more complex. In order to avoid that disputes add up and
result in increased risks, ESMA considers that for disputes outstanding for more than 5
business days, procedures and processes shall be agreed upon between counterparties
and provide for some resolution mechanism.
UBS views on dispute resolution
We support the use of the industry standards being developed in relation to dispute
resolution and dispute resolution reporting.
Similar to our comments on portfolio reconciliation, we do not consider it appropriate to
require dispute resolution policies and procedures at an individual counterparty level.
Rather, we consider firm level policies to be sufficient.
Response from UBS Page 26 of 43
We are content with the requirement to report disputes to the competent authorities.
We believe dispute reporting should follow ISDA’s ODSG process which requires the
reporting of disputes of $15 million or greater and outstanding for at least 15 days.
Intra-group exemptions
ESMA proposes that the intra-group exemption information to be disclosed publicly
should contain a mix of qualitative and quantitative information. The quantitative
information would be limited and relate to aggregated data. It would not contain
commercially sensitive information. Disclosure could be made through the annual
accounts or the website of the counterparty on a yearly basis.
UBS views on intragroup transactions
As we are operating against a dynamic background where new classes of derivatives
can be declared eligible for clearing by ESMA on a continuous basis, it is preferable, in
our view, to make one application for a specified list of entities engaging in intragroup
derivative transactions as well as a high level description of the classes of OTC
derivatives they currently or intend to enter into. This would be less cumbersome than
applying for an exemption whenever a new class of derivatives is declared eligible for
clearing by ESMA.
Consistent with the above approach, we would suggest that the entities which have
intragroup relationships and which have been approved for exemption should be made
public.
We do not support the public disclosure of further information such as the anticipated
size, volume and frequency of OTC derivative contracts per annum. This is because the
most common purpose of intragroup transactions is to allow for netting at a parent
level where true net exposures are calculated and elements of OTC derivatives and their
underlying hedges can be brought together. Splitting out elements of the relationships
will only give partial, potentially one-sided elements of the exposure which could be
misleading and is not the way such transactions are managed within banking groups.
Response from UBS Page 27 of 43
IV. CCP REQUIREMENTS
IV.VI MARGINS (Art 41 of EMIR and Annex III, Chapter VII, MAR)
ESMA is required to define: a) the appropriate percentage above the minimum 99
percent confidence interval that margins are required to cover; b) the time horizon for
the liquidation period; and c) the time horizon for the lookback period, i.e. the period
over which the appropriate percentage should be covered, which is necessary to
properly calibrate the model. These three elements are to be considered for the different
classes of financial instruments cleared by the CCP and take into account the objective
to limit procyclicality. Finally ESMA is required to define the conditions under which
portfolio margining practices can be implemented.
Confidence interval for OTC derivatives: ESMA proposes that it should be at least
99.5% and at least 99% for other classes of financial products. For both classes of
financial instruments the criteria based approach should always apply. The percentages
should be increased by each CCP if needed, based on a criteria based approach.
The lookback period is to be calculated by equally weighting: (i) The latest 6
months and (ii) the 6 months reflecting the most stressed historical market conditions
during the last 30 years or as long as reliable price data have been available. A different
calculation would only be allowed if it results in more conservative margin requirements.
A mixed approach is proposed for the liquidation period: For less liquid products,
such as OTC derivatives, the period for the management of the exposures of a CCP
should be, at a minimum, equal to 5 business days, for other financial instruments, at a
minimum, 2 business days. For the determination of the adequate liquidation period,
the CCP shall be responsible for defining the period for which the CCP is exposed after
a default taking into consideration the characteristics of the financial instrument cleared,
the market where it is traded, and the period for the calculation and collection of
margins.
UBS views on margins
Our comments on the scope of the provisions, confidence intervals and portfolio
margining follow below.
Response from UBS Page 28 of 43
Scope of the provisions
Article 1, 1. of EMIR states that “This Regulation lays down clearing and bilateral risk
management requirements for OTC derivative contracts, reporting requirements for
derivative contracts and uniform requirements for the performance of activities of
central counterparties and trade repositories."
In our view, this definition makes a clear distinction between the scope of the clearing
and bilateral risk management requirements which are applicable to OTC derivatives
only, and the reporting requirements which apply to derivatives more generally (i.e. to
both OTC derivatives and exchange traded derivatives). In our view, based on this
distinction, the appropriate interpretation of the scope of the EMIR risk mitigation
requirements for both cleared and bilateral trades is that they apply to OTC derivatives
only, and not to non-OTC derivatives.
However, in Article 1 MAR, ESMA specifies minimum margin requirements for "financial
instruments other than OTC derivatives", namely:
- Confidence interval of at least 99%,
- Liquidation period of at least 2 days,
- Look back period equally weighted between past 6 months and the 6 months
period of highest stress in the past 30 years.
We recognise that the EMIR Article 41 requirements on margins lie within the Title IV
‘Requirements for CCPs’ section of EMIR and that this section covers the uniform
requirements for the performance of activities of central counterparties and trade
repositories as set out in Article 1, 1. We therefore assume that ESMA has relied on this
to justify its wide approach to setting margin requirements for both OTC and non-OTC
derivatives. However, given that margins are used as a risk mitigation technique, we
believe ESMA should only specify margin requirements for OTC derivatives.
We believe the proposed margin requirements for ‘financial instruments other than OTC
derivatives’ could have a highly material impact on listed options and futures.
Consequently, and notwithstanding our view that ESMA should not prescribe margin
requirements for such instruments, we request that ESMA carries out a detailed cost
benefit analysis to justify its approach should it maintain the current scope of the margin
articles in the final draft technical standards.
Response from UBS Page 29 of 43
Calibration of confidence interval for OTC derivatives
We disagree with the blanket application of a 99.5% confidence interval for OTC
derivatives and consider that a 99.5% level will result in a disproportionate margin
requirement for many asset classes, particularly for liquid products with low volatility. .
Whether an instrument is OTC or not does not in itself determine the risk of the
instrument and a more risk sensitive approach is necessary to reflect characteristics such
as liquidity and volatility of different types of instrument. We therefore propose that a
99% confidence interval is applied to all instruments within the scope of EMIR, with
CCPs having the flexibility to set higher confidence intervals for different classes of
financial products based on the criteria set out in Article 1 MAR, 2. This will better align
capital with risk.
Further, we note that in paragraph 167, d. on page 32 of the CP, ESMA has stated that
the chosen confidence interval “does not impact on end clients since they are already
required to post higher margins to direct clearing members". We do not agree with this
point and would appreciate clarification as to why ESMA believes this to be the case.
Portfolio margining
Cross-margining between OTC and non-OTC instruments
We understand that EMIR permits cross-margining between listed derivatives and
cleared OTC derivatives. We are strongly of the view that cross margining between asset
classes should be permitted under EMIR and believe it would be helpful to make this
more explicit within the technical standards. We also note that such cross-margining is
permissible under Dodd Frank.
Should ESMA retain the requirement for different confidence intervals and liquidation
periods for OTC-derivatives and non-OTC derivatives, we would appreciate clarification
of how the different confidence intervals for OTC and non-OTC derivatives in Article 1
MAR should be applied when cross-margining related products (e.g. Interest Rate Swaps
(OTC) and Interest Rate Futures (non-OTC)). The same issue arises for the application of
the different liquidation periods for OTC derivatives and financial instruments other than
OTC derivatives set out in Article 3 MAR and clarification is required as to which
liquidation period should be applied when cross margining related products. We
consider that it is necessary to have consistent minimum requirements for listed and
cleared OTC derivatives.
Response from UBS Page 30 of 43
Correlation requirement
We have concerns with Article 4 MAR as we do not consider the correlation
requirements of this article are consistent with historical VaR margining which does not
use explicit correlations. This is highly problematic as historical VaR is a very commonly
used margining approach for CCPs. We propose that the requirements are amended so
that explicit correlation parameters are not prescribed but rather that a principles based
approach is introduced under which the CCP must be able to demonstrate to its
competent authority on request that it applies a robust approach to portfolio margining.
Time horizon for the calculation of historical volatility
We consider that the proposed requirements in Article 2 MAR, 1. are overly prescriptive
and we believe a principles based approach would be more appropriate. In particular,
we consider that the Article 2 MAR, 1. b. requirement to use the 6 month period
reflecting the most stressed market conditions over the last 30 years or as long as
reliable price data is available to be inappropriate. This is because, for certain asset
classes, the market will may have evolved materially since the beginning of the 30 year
period meaning any calculation based on that period may not appropriately reflect the
volatility of the asset class. We therefore propose an approach in which the
determination of the most appropriate 6 month period of stressed market conditions
would be the result of a bilateral discussion between the CCP and its competent
authority.
IV.IX DEFAULT WATERFALL (ART 45 EMIR AND ANNEX III, CHAPTER X, DW)
Under the draft RTS on the default waterfall, ESMA is required to specify the
methodology for calculation and maintenance of a CCPs’ own resources to be used in a
default situation before the resources of the non-defaulting clearing members can be
mutualised, i.e. so called “skin in the game”.
ESMA has concluded that the most appropriate way for calculating the “skin in the
game” is to base such calculation on the capital of the CCP but notes that:
a. The minimum capital requirements need to be specified in the draft technical
standards to be drafted by EBA, on which ESMA will need to be consulted;
b. For the incentive to be effective, the percentage of capital dedicated to the skin in the
game should be substantial. For this reason ESMA is considering 50 percent of the
Response from UBS Page 31 of 43
minimum capital requirements to be the appropriate percentage for the “skin in the
game”.
UBS views on the default waterfall
As a CCP is a profit-making entity, it should also have considerable resources as a back-
stop to manage defaults of clearing members. A substantial portion of these resources
should be from its own capital. We consider that the amount of the CCP’s skin in the
game should be calibrated to ensure i) adequate margins are maintained that reflect the
close-out risk and ii) the CCP proactively monitors the creditworthiness of its clearing
members and adjusts the required margin for weaker or lower rated clearing members.
However, from a financial stability perspective, we believe the need for significant CCP
capital should be balanced with the concern that the percentage of capital dedicated to
"skin-in-the game" should not be large enough to threaten the viability of the CCP or
result in a breach of its minimum capital requirements should a large clearing member
default.
Consistent with this, our concerns with the proposed skin the game calculation are
twofold:
i) it is difficult to assess the magnitude of the proposed 50% requirement given that the
CCP capital requirements being developed by the EBA are not yet finalised. But we are
concerned that a skin in the game requirement of 50% of the CCP’s minimum capital
requirements, as proposed in paragraph 196, b. of the CP, creates a potential liability to
a single default event that could have this result, particularly if based on less risk
sensitive standardised methodologies used by the CCP (although we note that Article 2
DW may mitigate against this to some extent, this is contingent on the CCP being able
to re-capitalise itself quickly, which may not be possible under potentially stressed
funding conditions); and,
ii) the proposed approach is effectively based on the sum of the CCP’s expenses in a
winding-down scenario, its operational risks and its risks arising from investment
activity, meaning it is not risk sensitive in the sense of not reflecting the likelihood and
impact of a clearing member default.
In achieving a more appropriate balance between the need for the CCP to have
sufficient “at risk” capital to incentivise strong risk management, and the need for its
Response from UBS Page 32 of 43
viability as a going concern to not be immediately threatened by the default of a
significant clearing member, we are supportive of an approach whereby the CCP has
capital at risk based on the risks from its clearing activity. This could for example be
achieved by calibrating skin in the game relative to the default fund contribution of a
large clearing member. We believe ESMA and EBA should jointly undertake quantitative
analysis to determine an appropriate calibration of the skin in the game amount.
We also believe the CCP should have capital at risk in the default waterfall both before
and after the default fund contribution of the non-defaulting clearing members in order
to create better risk management incentives for the CCP. For example, a significant
portion of the total skin the game could be placed ahead of the non-defaulting
members’ default fund contributions as this incentivises the CCP to calibrate margins
and clearing members’ default fund contributions appropriately to reduce the risk of the
skin in the game being required to absorb losses. The remaining amount of the total
skin in the game would then be utilised once all of the default fund contributions of the
non-defaulting clearing members had been exhausted in order to incentivise the CCP to
ensure that the aggregate default fund is appropriately calibrated.
We also support a non-risk based floor for a CCP’s skin in the game which would
provide a minimum level of confidence for market participants, irrespective of the size
and volume of the clearing activity of the CCP.
Notwithstanding our view that the skin in the game should not just be an arbitrary
percentage of a CCP’s capital requirements, we request that ESMA works in conjunction
with the EBA to determine the skin in the game requirement.
IV.X COLLATERAL REQUIREMENTS (ART 46 EMIR AND ANNEX III, CHAPTER XI,
COL)
ESMA is required to define the type of collateral that can be considered highly liquid
and define under which conditions commercial bank guarantees may be accepted.
According to ESMA accepting as collateral assets other than (local currency) cash should
be at the discretion of the CCP, providing space for a more conservative approach than
required by the standard where appropriate. Own name covered bonds will be
permitted as collateral subject to certain conditions that will be aligned with the CPSS-
IOSCO Principles. In particular, the collateral underlying a covered bond should be
Response from UBS Page 33 of 43
eligible in its own right and fully segregated from the default of the issuer. All other
securities issued by the clearing member seeking to provide the collateral will not be
accepted.
ESMA proposes that a CCP should ensure its approach to setting haircuts minimises
procyclicality as far as possible without undermining the robustness of the CCP. The
intention is to employ a criteria-based approach within which CCPs have discretion to
define appropriately conservative haircuts.
UBS views on collateral requirements
Cash investments such as term deposit and reverse-repos (i.e. investments which are not
trade-able and cannot be liquidated daily) should not have a tenor longer than the
expected liquidation period used in determining margins.
We do not agree with the proposal to allow the use of covered bonds as permitted
collateral. This is because the legal framework pertaining to segregation of collateral
from the issuer's default has not been rigorously tested.
IV.XI INVESTMENT POLICY (ART 47 EMIR AND ANNEX III, CHAPTER XII, INV)
In respect of duration, in order to give CCPs sufficient flexibility to appropriately diversify
their investments across financial instruments with a range of maturities, and to avoid
any risk of causing a shortage of short-dated debt instruments, ESMA decided to
increase the average of the time-to-maturity of the portfolio from 12 months to 24
months. This will also align with the CFTC rules.
With reference to concentration risk, ESMA notes that the requirement that CCPs
consider credit risk exposures to individual obligors when making investment decisions is
set out in EMIR and therefore is not a requirement which can be departed from in the
draft RTS . The importance of concentration limits is also included in the CPSS-IOSCO
Principles for FMIs, where it is set out that a CCP should carefully consider not only its
credit risk exposures with an obligor but also the CCPs other relationships with that
obligor which might create additional exposures, such as where the obligor is also a
participant or an affiliate of a participant in the CCP.
With regard to the proposal for a limit on the amount of cash placed on an unsecured
basis, ESMA has specified that where cash is deposited other than with a central bank
Response from UBS Page 34 of 43
then a certain proportion of the CCP’s cash deposits should be secured in a particular
way, namely through collateralisation. In setting this proportion ESMA has taken into
account the need for CCPs to be able to manage securities settlements and margin
inflows, which cannot be fully controlled at all times.
With regard to the use of derivatives by CCPs for hedging purposes, ESMA considers
that: 1) CCPs, being netted by definition, should not have any open position on FX or
interest rate that might give rise to risks to be hedged; 2) under the investment policy
the CCP is not supposed to take any FX or interest risk that requires hedging; 3) the
need to hedging risks could, therefore, only arise from the collateral, but the risk arising
from collateral should be covered by the CCP with adequate haircuts; 4) it could be
quite difficult to determine which derivatives are entered into for hedging or speculative
purposes; 5) CCPs with a banking licence could be eventually required to clear their
derivatives with another CCP. ESMA has therefore concluded that the use of derivatives
may only be used in the exercise of the CCP’s default management procedures.
UBS views on investment policy
We consider that the circumstances in which CCPs can use derivatives should be very
tightly defined.
Response from UBS Page 35 of 43
Trade Repositories
V.I Reporting obligation (Art 9 EMIR, Annex V, RTS on minimum details of
information to be reported; Annex VI, ITS on format and frequency of trade
reports)
Table 1 (“Counterparty Data”) and 2 (“Common Data”) of Annex V contains the
information to be reported by counterparties to TRs.
Where one report is made on behalf of both counterparties, it needs to contain
information of Table 1 in relation to each counterparty. Information of table 2 only is
required once. Where one counterparty reports a trade on behalf of the other
counterparty or a third party entity reports on behalf of both counterparties, the report
must include all details as if reported by each counterparty separately.
ESMA outlines that TR mechanisms are already in place under MiFID. The draft MiFID
proposal notes that TRs may seek authorisation as an Approved Reporting Mechanisms
(“ARM”) and if authorisation is granted, the reporting of a trade to the TR/ARM ensures
compliance with both EMIR and MiFID reporting requirements. The dataset between
what is reported under the MiFID transaction reporting requirements and under EMIR
will need to be compatible, to the extent that this is possible.
Contents of reporting
Minimum set of information to be required: parties to the contract, beneficiary of
the rights and obligations arising from it, main characteristics of the contract (including
type, underlying, maturity, notional value, price and settlement date).
Legal Entity Identifier (LEI): ESMA supports the development of the LEI and any fields
captured by this should not be reported twice. If a global entity identifier is in place, it
should be used. An interim solution in line with the specifications agreed by the FSB
might need to be developed in case of delay in establishing a global solution.
Beneficiaries: Where the economic beneficiary of a derivatives trade is different to the
counterparty, the beneficiary of the rights and obligations arising from the transaction
should be identified. While back-to-back trades would be reported separately,
transparency of other trading techniques must be ensured, including the use of
structures where there may be ‘morphing’ of beneficiaries. Regarding the definition of a
Response from UBS Page 36 of 43
beneficiary, ESMA clarifies that where the transaction is executed by a structure (e.g.
fund, trust which represents a number of beneficiaries), the beneficiary field should
identify this structure.
Format of reporting
Codes
ESMA considers the widest use of codes as possible. The general approach taken is that
the LEI should be used if it follows the principles outlined in the CPSS-IOSCO report. If
an LEI is not available, an interim entity identifier solution will be used. The approach
taken with regards to identifying products follows the same line that has been taken for
the LEI; The UPI should be used if it is globally available and complies with principles
consistent with the one listed in the CPSS-IOSCO report on data aggregation. If the UPI
is not available, the taxonomy as outlined in the draft ITS should be used.
UBS View on the content and format of reporting:
We would like to comment on a number of different aspects:
Determination of who reports: We note that different to Dodd-Frank there is no
concept of a “reporting party”, i.e. a hierarchy that determines who has the
responsibility to report the trade details to the swap data repository. In addition to the
reporting hierarchy, the industry have formally agreed on standards to determine who
the reporting party is when two financial entities are transacting with each other. Our
concern with having no concept of reporting party within the technical standards is the
lack of consistency and uncertainty this creates across the market. For example, UBS
could choose to be the reporting party to one transaction, but not the next.
Participating in many bilateral conversations to determine who the reporting party
should be could have the unintended consequence of creating uncertainly and time
delays across the market. We would be supportive of clear standards and obligations to
make the process more certain and efficient.
Our understanding is that any third entity can report on behalf of the counterparty,
provided the requirements in Annex V, Article 4 are satisfied, and that there are not
restrictions on the nature of third entity provided the criteria are met. Whilst we agree
with this approach and do not propose that an exhaustive list of potential third entities
is produced, it would provide additional certainty if it was clarified that the CCP can
report to the TR on behalf of the counterparties, including the clearing member.
Response from UBS Page 37 of 43
Global standards: We would support the use of global standards i.e. LEI and UPI and
the ISDA taxonomy.
Data fields: We would stress the importance of consistency across jurisdictions. A
requirement to source different data fields for the same client but with trades falling
within different jurisdictions would be onerous.
Global Trade Repository: we would question the effectiveness of having multiple TR
across many jurisdictions and would advocate that regulations are designed to
encourage the use of a global TR.
Distinction between OTC and ETD: We consider that the technical standards fail to
adequately reflect the different characteristics of OTC derivatives and Exchange Traded
Derivatives (ETD). Specifically, there are a large number of reporting fields in Table 1
Counterparty Data that are not relevant to ETD. We support the views in the Futures &
Options Association (FOA) response to this CP with regard to this issue.
We also consider that, with respect to ETD reporting, ESMA should consider sourcing
data from exchanges as this will reduce duplication of reporting and should mitigate the
burden of reporting many fields for ETD and is likely to improve data quality.
We would furthermore welcome clarification on the following points:
Annex V, Article 3 details to be reported: We are unclear as to the interaction of
paragraphs 3. and 6. of this Article. Paragraph 3 indicates that where one report is
made on behalf of both counterparties, the information in Table 1 of the Annex must
be provided in relation to each of the counterparties but the information in Table 2 of
the Annex should be submitted only once. However, paragraph 6. indicates that where
one counterparty reports on behalf of the other counterparty, or a third party entity
reports on behalf of both counterparties, the report must contain the full set of details
that would have been reported had each counterparty reported separately. This need to
report for each counterparty separately seems to conflict with the paragraph 3.
requirement that the information in Table 2 of the Annex should be submitted only
once. We consider the paragraph 3. requirement to be appropriate as this will avoid
duplication of reporting and we propose that the Article is amended accordingly.
Response from UBS Page 38 of 43
Timing of reporting: We would appreciate clarification of what T+1 means in terms of
actual business hours. Does ESMA consider the concept of business day? We would
advocate for a definition of business day based on local trading hours to be included in
the technical standards. For example we would anticipate that if a trade was traded in
London at 4.30pm, UBS would have until 5pm the following day to report the
transaction to the TR.
“Following the conclusion of the contract”: We are unclear what exactly is meant by
this term. For example, if it refers to the point at which the trade has been i) executed,
ii) confirmed or iii) matched. We are of the view that the most appropriate definition is
once final agreement between the two counterparties has been reached and believe the
technical standards should be amended to clarify this.
Reporting of ISINs: Annex VI, Recital 3 notes that OTC Derivatives are typically not
uniquely identifiable by single International Securities Identification Numbers (ISINs).
However, Annex VI, Recital 4, which relates to baskets, states that “The underlying itself
should be identified using a single identifier, however there is currently no market wide
standardised code to identify the underlying within a basket. Counterparties should
therefore be required to indicate at least that the underlying is a basket and use ISINs
for standardised indicies where possible”. We consider this requirement unclear and
would appreciate clarification of exactly what ISIN is expected to be reported – we
assume it is the ISIN of the index (where such an ISIN exists) and not of the underlying
components.
Additional Points
Trade Identification: To effectively match counterparties to a trade, where those
trades are reported separately by each counterparty (potentially to two different trade
repositories), a Unique Trade Identifier (“UTI”) or other trade ID, for example the Unique
Swap Identifier (‘USI’) should be reported with each counterparty. We would advocate
the use of the USI as the agreed technical standard.
Pricing and fees: Three essential elements considered useful to authorities: a.
price/rate/spread; b. price multiplier; and c. up-front payment.
Risk mitigation and clearing: Number of fields to be reported to facilitate the
monitoring of market participants compliance with EMIR obligations.
Response from UBS Page 39 of 43
Specific asset classes: Whilst counterparties are expected to report all applicable
information in relation to the parties to the contract, the contract type, details of the
transaction, risk mitigation, clearing and the exposure of a contract, additional fields are
needed to correctly identify the relevant asset class. These additional fields will only
apply to the specific asset class and are proposed for a. interest rate derivatives and b.
currency derivatives.
Non-deliverable forwards would be captured by a UPI or by the taxonomy outlined in
the ITS. A derivative on a derivative would be captured by the fields already listed under
“contract type”. The “underlying” field would capture the information for CDS.
Regarding option types and swaptions, ‘put or call’ options were considered sufficient.
The UPI should capture the information under forex however additional fields have been
included in the event that a UPI is not available.
No additional fields are proposed for the reporting of credit and equity derivatives.
Data on exposures: While ESMA is aware of the challenges involved in reporting, it
takes the view that collateral needs to be reported, in order to properly monitor
concentration of exposures and systemic risk.
Information on type, amount and currency of collateral is to be provided. Where
counterparties exchange collateral on a portfolio basis and it is not possible to report
collateral exchanged for an individual contract, counterparties may report to a TR
collateral exchanged on a portfolio basis.
Daily updated information about the mark-to-market valuation of the outstanding
contract is considered necessary to quantify the counterparty’s exposure more
accurately.
UBS View on Collateral / Reporting of Exposure Data:
We strongly believe that exposure/collateral reporting should be at a portfolio level, not
at a transaction level.
However, trade repositories to date are structured to receive data not on a portfolio
basis but at a trade level. Adapting to report portfolio level data such as collateral held
on a trade level would be difficult. We therefore propose that the portfolio reporting of
Response from UBS Page 40 of 43
collateral should be in a separate report from the transaction report. We propose that a
portfolio collateral report could be submitted on a daily basis. We also support the ISDA
proposal, set out in its March 2012 comment paper, for a ‘Counterparty Exposure
Repository’ to store the net mark-to-market exposure and collateral for counterparty
portfolios.
V.II Application for registration
V.III Transparency and data availability (Art 81) (Annex V)
ESMA sets out the elements to be reported in the application for registration of TRs and
the scope of the data to which authorities and public will have access.
UBS view on Transparency and data availability
We support public reporting on a weekly basis and see no issue with this and agree with
the importance of providing information on an aggregated level only.
Response from UBS Page 41 of 43
Annex I – Proposed drafting changes to Chapter II, Indirect Clearing Arrangements Please note that our proposed amendments to the articles are shown in blue. The text we propose to delete is struck-through and proposed new text is underlined. CHAPTER II INDIRECT CLEARING ARRANGEMENTS Article 1 ICA Indirect clearing arrangements An indirect clearing arrangement meets the conditions referred to in the second subparagraph of paragraph 3 of Article 4 of Regulation 2012/XXX [EMIR] if it complies with the requirements of this Chapter. Article 2 ICA Structure of indirect clearing arrangements 1. Any client of a clearing member of a CCP shall be permitted to provide clearing services to one or more of its own clients, provided that the client of the clearing member is subject to appropriate regulatory requirements, including authorisation. 2. The contractual terms of an indirect clearing arrangement shall be defined by the client providing the service. They shall include an obligation on the clearing member to honour any obligations between the client and its indirect clients following the default of the client. Justification for amendment: We do not believe that the CCP should have to honour the clearing member's obligations. Rather, they should just have to go through a process as agreed in their CCP rules for porting / closing it out. Article 3 ICA Obligations of authorised CCPs 1. Indirect clearing arrangements shall not be subject to business practices by the CCP which act as a barrier to their establishment on reasonable commercial terms. The indirect clearing arrangements shall ensure that, at the request of a clearing member, the CCP maintains separate records and accounts enabling each client to distinguish in accounts held with the CCP the assets and positions of the client from those held for the accounts of the indirect clients of the client. 2. A CCP shall not be required to enter into direct contractual relationships with indirect clients. It shall identify, monitor and manage any remaining material risks arising from indirect clearing arrangements that could affect the resilience of the CCP. Justification for amendment: We believe the objective here should be to ensure that there are no additional risks arising - i.e. the clearing member is the risk guarantor to the CCP on behalf of their client base and the direct client is the risk guarantor to the clearing member of behalf of their client base.
Response from UBS Page 42 of 43
Article 4 ICA Obligations of clearing members and clients 1. A clearing member shall be required to facilitate indirect clearing arrangements on reasonable commercial terms. These terms shall be publicly disclosed by the clearing member. Justification for amendment: We do not believe that the provision of indirect clearing should be mandatory. The rules need to ensure that it is workable option for clearing members, and then it will be potentially be an attractive business in its own right (as it is currently given that the direct client consolidates lots of activity in a way that is a lower operational / KYC burden than if the clearing member had to face each smaller client directly). 2. When facilitating indirect clearing arrangements, a clearing member shall implement the following segregation arrangements as indicated by the client: a. keep separate records and accounts enabling each client to distinguish in accounts with the clearing member the assets and positions of the client from those held for the accounts of its indirect clients; b. keep separate records and accounts enabling each client to distinguish in accounts with the clearing member the assets and positions held for the account of an indirect client from those held for the account of other indirect clients. Justification for amendment: We strongly believe a gross client omnibus should be the minimum standard for indirect clearing. We do not consider that there should be a mandatory obligation to have individual accounts (the indirect clients can choose direct clearing instead to achieve this if they wish). 3. The requirement to enable each client to distinguish in accounts with the clearing member between assets held for different persons is met if the arrangements provide for the conditions specified in Article 39(9) of Regulation 2012/XXX [EMIR] to be met. The clearing member shall cooperate with each client that provides indirect clearing services Any direct client offering indirect clearing services shall to ensure that indirect clients are informed of the risks associated with the alternative segregation options described in paragraph 2. Such information shall include a description of the main legal implications of the respective levels of segregation offered including information on the insolvency law applicable in the relevant jurisdictions. 4. A clearing member shall establish robust procedures to manage the default of a client that provides indirect clearing services. These procedures shall be supported by the CCP and shall allow the transfer of such assets and positions to an alternative client or clearing member, or support the prompt liquidation of assets and positions of indirect clients. An alternative client or clearing member shall not be obliged to accept these assets and positions unless it has entered into a prior contractual agreement to do so. 5. Where the clearing member maintains records and accounts in accordance with paragraph 2(a), the procedures described in paragraph 4 shall include arrangements for obtaining the agreement of all of the indirect clients affected by the transfer. Where the clearing member maintains records and accounts in accordance with paragraph 2(b), the procedures described in paragraph 4 shall allow each indirect client to identify the client or clearing member to which its positions and assets will be transferred.
Response from UBS Page 43 of 43
6. In circumstances where the positions and assets of indirect clients cannot be successfully transferred, the clearing member shall offer to hold directly the positions and assets in an equivalent account with the CCP for a period of at least 30 days and on reasonable commercial terms. These terms shall be specified in advance as part of the contractual relationship between the clearing member and the client. Justification for amendment: This is not in line with the protections offered for direct clients. Again, our view is that the offering for indirect clients should not attempt to provide better protection than that offered for direct clients. 7. The client shall provide sufficient information for the clearing member to evaluate and manage the counterparty risk that it could reasonably expect to incur in view of meet the requirement for contacting indirect clients and gaining authorisation for a transfer of positions in the event of a direct client default in indirect clearing arrangements. The clearing member shall establish robust internal procedures to ensure this information cannot be used for commercial purposes. Details of these procedures shall be disclosed to clients and indirect clients on request. Justification for amendment: There should not be any additional counterparty risk because the direct client guarantees the positions. However we would need information in some form on all the individual clients as we would need to reach out to them for authorisation to transfer accounts in the event of a direct client default. 8. A client that provides indirect clearing services shall keep separate records and accounts that enable it to distinguish between its own assets and positions and those held for the account of its indirect clients. It shall offer indirect clients a choice between the position and account segregation options described in paragraph 2 and cooperate with the clearing member and the CCP to ensure that indirect clients are fully informed of the risks associated with each option. 9. A client that provides indirect clearing services shall request the clearing member to open a segregated account at the CCP. The account shall be for the exclusive purpose of holding the assets and positions of its indirect clients. The client shall not be required to disclose information on individual indirect clients to the clearing member, except for the purposes specified in paragraph 7 or in the event of default. In the event of default, all information held by a client in respect of its indirect clients shall be made immediately available to the clearing member.
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