Uncleared Margin Rules (UMR) Euroclear triparty solutions Phase 5 - Operational Workshop 16 December 1
Uncleared Margin Rules – Phases 5 & 6 EU Phase 1 Phase 1.5 Phase 2 Phase 3 Phase 4 Phase 5 Phase 6 Sept-2016 Feb-2017 Sept-2021 Sept-2017 Sept-2018 Sept-2019 Sept-2020 Buy- Side firms pulled into exchanging IM… Challenge : combination of both the type of (*) € 3tr (*) € 2.25tr counterparties (non traditional Euroclear clients) (*) and quantity still in scope € 1.5tr ±600 pairs Educational effort for the industry globally will be ±600 pairs live in Euroclear live in Euroclear extremely significant ±600 pairs (*) live in Euroclear € 0.75tr ±1,000 pairs live in Euroclear (*) € 50bn ALL Sell-Side firms have opted for Triparty solutions (**) Est: ± 2,000 pairs Total industry • Euroclear Bank triparty: o USD 70 bn (Sep 2019) or close to 50% of regulatory IM as published by ISDA o +/- 2,800 pairs across first 4 Phases • Streamlined onboarding process (*) € 8bn o less steps required, no need of SWIFT messages (**) Est: ± 1,650 pairs anymore to activate eligibility profiles² Total industry 1,000 Newly In-Scope Counterparties, 10,000 relationships, 20,000 pairs, of which +/- 3,600 reaching € 50mio IM threshold (*) Thresholds based on the aggregate average notional amount (AANA) of non-cleared derivatives requiring documentation and custodian arrangements (**) ISDA estimates 2
UMR Phase 5 Connecting to Euroclear Bank? 3
Connecting to Euroclear Bank Define your operating model. If Triparty, as Pledgee: 1. Set up with your Pledgee Representative OR 2. Start your admission process in Euroclear Bank Build your knowledge of Euroclear Bank and Triparty Digital stand-alone training modules 01 March 31 July Now 01 Feb Bilateral negotiation & documentation ISDA & Euroclear Bank joint documentation UMR Set-up Triparty documentation, accounts opening and activation of triparty relations 4
Is UMR new to you ? • Define your operating model for UMR Phase 5 for posting and collecting Reg IM (Third-Party? Triparty?) ► Sell Side will use triparty to post collateral As Pledgor • Liase with your current location of collateral, i.e. your Global Custodian or Depository Bank. • Euroclear offers various solutions (e.g. Portfolio Model) also allowing custodians and similar institutions to support you in pledging collateral in favor of your counterparty As Pledgee (collecting party) • Sell Side (as pledgors) continue using existing collateral ecosystems (Triparty Collateral Management) • Your custodian as gateway to the ecosystem of your counterpart (Pledgee Representative model) • Maintain your bilateral counterparty relation and OPS setup while relying on an existing Euroclear infrastructure through your custodian to collect UMR collateral 5
Phase 5 firms – Who and how many are you?... • If you want to receive Reg IM collateral in Euroclear Bank Triparty environment, use your custodian to act as Pledgee Representative on your behalf ► Engage early (now !) in discussions with your custodians and counterparts about your best setup • We can only support you if…we know who you are ! ► Please, disclose yourself to us as soon as possible before 01 February to ensure admission in Euroclear ! ► We also invite existing Euroclear UMR clients, i.e. Phases 1 to 4 Pledgors, to provide us a list of Phase 5 counterparties to ensure earliest involvement of all parties • Assess quickly if you are able to meet the admission criteria in Euroclear Bank ► financial resources, operational and technological capacity, legal capacity, internal control and risk management, ethical standards etc. 6
Collect Reg IM in Euroclear Bank triparty Sell Side will most probably want to keep existing Triparty set-up to post collateral Buy Side as direct A Custodian acts as Pledgee Representative for its Buy Side Client Client of Euroclear Bank Triparty Collateral Management Triparty Collateral Management Pledgee Buy Side Representative Pledgee Pledgor 1 Pledgor 1 Sub div Pledgor 1 Sub div Pledgor 1 Pledgor 2 Buy Side Sub div Pledgor 2 Pledgor 2 Sub div Pledgor 2 Sub Div Pledgor n Sub Div Pledgor n Pledgor n Pledgor n EB Third party pledge holder a/c EB Third party pledge holder a/c (1 MultiSeg a/c per Pledgee) (1 MultiSeg a/c) Euroclear Bank Euroclear Bank 7
Start your admission process • If becoming a direct Client of Euroclear Bank is a realistic option, start your admission process asap • Financial Institutions should contact their Relationship Manager • Buyside Clients are welcome to contact Relationship Management further clarification of Admission Criteria and Acceptance Process ► Christian Goossens, for Europe ( christian.goossens@euroclear.com ) ► Paul Noordam, for the US and Americas ( paul.noordam@euroclear.com ) ► Fennie Kwok for APAC region ( fennie.kwok@euroclear.com ) 8
Build your operational knowledge of Euroclear • Start building your knowledge of Euroclear Bank and its Triparty service ► We invite you to start your journey of the Euroclear Bank environment by building your knowledge of the Euroclear system and of the Triparty service in general ► Digital stand-alone training modules on background, functional, technical, legal, and operational setup and process flow of Triparty Collateral Management will be made available as of early February • To prepare yourselves to: ► Understand how to operate a direct account in Euroclear Bank ► Manage the UMR onboarding steps: documentation to complete and submit ► Understand the life cycle of a UMR transaction ► Instruct your UMR transactions and understand how to read available reports ► Communicate via Easyway You will be able to independently operate and monitor your activity in the Euroclear Bank triparty environment 9
Your UMR Operational set-up in Euroclear Bank How does it look like? 2. Legal entity signoff on the 3. Triparty accounts activation 1. Bilateral negotiation of the Triparty documentation (Pledgor and pledgee) margin terms between the (to subscribe to the parties EB Triparty services) Opening of a Bilateral negotiation & Triparty documentation multiseg documentation Activation of pledged + Triparty relation Euroclear Bank single account & ISDA & Euroclear Bank form of agreement reporting joint documentation subscription • Collateral Profile 10
Your UMR Operational set-up in Euroclear Bank Timeline Final deadline 31 July March - April August • By end-May , provide: • Processing of legal doc and • FINALISATION IN EB signed documentation reporting subscription as of 01 (single form of March agreement and • By end-July, provide : reporting subscription) Account activation List of counterparty details pairs Activation of “tailor “tailor made” made” profiles collateral profiles Activation of a “standard” profile or a May “high - grade” profile, or replicate a collateral profile July 11
Detailed timeline 12
UMR Phase 5 « Deep Dive » on Euroclear Bank solutions 13
MultiSeg account structure • Under a MultiSeg account structure , Euroclear Bank is acting as pledge holder, exerting required Triparty Collateral Management controls on the pledged account: ► One pledged account in which collateral is received from all pledgors 1 Pledgee n Pledgors ► Collateral is segregated at “ subdivision ” level, Collateral each with a unique identifier , relating to a Sub div Pledgor 1 Pledgor 1 specific pledgor Sub div Pledgor 2 ► Each transaction is treated independently legally Pledgor 2 & operationally, and collateral in each subdivision Sub Div Pledgor n is ring-fenced legally & operationally Pledgor n EB Third party pledge holder a/c ► Validated with ISDA members & supported by (1 single MultiSeg a/c) relevant bilateral documents and Legal opinions Euroclear Bank ► Supported by a specific (optional) MT535 triparty pledge positions report 14 14
Pledgee Representative structure – Description • In order for two parties to enter into a regulatory initial margin arrangement pursuant to which the Pledgor directly provides eligible collateral via Euroclear to a Pledgee, both parties must be direct participants within the Euroclear System • However, some entities may not currently be direct participants of Euroclear and may not become direct participants • The Pledgee Representative structure is a method by which a Pledgor can provide collateral for the benefit of a Pledgee which is not a direct participant – the Pledgee will appoint a third entity to act as an intermediary on its behalf, which entity is itself a direct participant of Euroclear 15
Pledgee Representative structure – Description • The pledgor posts collateral to an account ultimately pledged in favour of the pledgee • This account is opened in the books of Euroclear Bank, acting in its own name but for the account of the pledgee Representative, which in turn acts in its own name but for the account of the specific pledgee • Euroclear recognises that the Pledgee Representative is not acting for its own account but on behalf of the specified underlying Pledgee and will interface with the Pledgee Representative (but not the Pledgee) in the daily running of the account (e.g. MT527, reporting, default process, etc.) 16
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