Central Clearing of OTC derivatives - OTC clearing from a Norwegian - PowerPoint PPT Presentation

Central Clearing of OTC derivatives - OTC clearing from a Norwegian perspective Johan Christian Kongsli

Introduction • EMIR – Implementation in Norway • Comparison with current Norwegian regulation • Some Norwegian perspectives on EMIR 2

EMIR – Implementation in Norway • Implementation procedure in Norway • Status update from the Norwegian FSA - ESMA working committees still operating from a end 2012 deadline... - …but meeting such a deadline becoming increasingly difficult 3

Comparison • EMIR • Norwegian Securities Trading Act • Norwegian CCP practice 4

Clearing obligation – Scope 5

Clearing obligation – Who? 6

CCP Ownership 7

Cross border activities 8

Risk managment Current EMIR proposal (September 2011) Norwegian law Margins Default fund (Defaulting member) CCP Resources Default fund (non-defaulting members) 9

Margin EMIR proposal Current (September 2011) Norwegian law • Sufficient to fulfill • Sufficient to cover losses contractual obligations or that result from at least 99 % of the exposures other guarantees (STA Section 13-4(1)) movements over an appropriate time frame • NOS and OSLO follow international recommendations. Calculation of margins on 99.0%/99.8 % of movements 10

Default fund EMIR proposal Current (September 2011) Norwegian law • No requirements • Default fund – sufficient to withstand default of a) the largest CM, or b) the • NOS/OSLO default funds second and third largest established or under CM’s combined establishment 11

CCP Contribution EMIR proposal Current (November 2011) Norwegian law • CCP first to absorb losses • CCP “skin in the game” if margin collateral proves insufficient • Default fund and CCP contribution combined sufficient to withstand default of two largest CMs 12

Capital Requirements EMIR proposal Current (September 2011) Norwegian law • Min NOK 50 million (ca • Min EUR 5 million EUR 6.4 million) • Proportional to risk (STA Section 13-2) • Sufficient to ensure orderly winding down • Adequate compared to level of activity 13

Client Segregation 14

Client segregation EMIR proposal Current (September 2011) Norwegian law • No requirements • CCP must be able to segregate its own assets from CM assets • NOS/OSLO segregate CM • CCP and CM must be able assets from CM client to segregate CM assets assets. from CM client assets • OSLO uses Individual • CCP must offer Individual Client Segregation Client Segregation 15

Client segregation • US/Dodd-Frank Act standard • UK/European standard • Oslo Clearing - OTC 16

Challenges related to client segregation • Mandatory pooling in the event of insolvency – MIFID Client money rules • Transfer of title vs. Security interest – Collateral usually taken by title transfer – Raises problems compared to segregation requirement – Security interest collateral arrangements more suitable but problematic compared to implementation of Collateral Directive in some jurisdictions 17

Norwegian perspective – Central Counter Parties • Norwegian CCPs see opportunities as well as challenges – Opportunities • Greatly expanded market • Innovative technology solutions • Expertise in niche products • Room for a nordic CCP – Challenges • Economies of scale and scope will lead to consolidation – What is the relevant scale? • Interoperability 18

Norwegian perspective – Financial Industry – Risk management – adequate controls for client trading – Funding - How much will interoperability lead to increased collateral requirements for default funds – Current Norwegian derivatives market relatively underdeveloped - standardization and new knowledge may bring new customers 19

Norwegian perspective – Financial Industry – Clearing obligation can lead to tighter margins compared to current bilateral arrangements • Increased costs for clearing and reportingv • Transparency of costs • Transparency of pricing – DNB holds position as ”the Norwegian kroner” bank in FX and interest derivatives market 20

Norwegian perspective • Buy side – Reduced counterparty risk – Standardization and increased knowledge leading to increased use – Increased costs for infrastructure and collateral… – …but tighter margins and less differentiation of customers Cleared OTC derivatives a competitive alternative for smaller companies? 21

Summary • Norwegian FSA Status update - officially no delays expected… • Stricter requirements for CCPs and risk management • Norwegian CCPs have made good start in preparing for EMIR • Opportunities for Nordic CCPs vs. Economies of scale • A lot to be learned for a lot of affected parties, but standardization and new knowledge may develop Norwegian derivatives market 22

Advokatfirmaet Grette Johan Christian Kongsli joko@grette.no (47) 92441935 Filipstad Brygge 2 Postadresse: Postboks 1397 Vika 0114 Oslo Tlf.: 22 34 00 00 Faks: 22 34 00 01 www.grette.no 23