html5-img
1 / 14

Coalition for Derivatives End-Users Briefing of House Committee on Agriculture Staff

Coalition for Derivatives End-Users Briefing of House Committee on Agriculture Staff. January 29, 2013. Coalition Comments on Proposed Rules. The Coalition for Derivatives End-Users has submitted comments on proposed rules:

nijole
Télécharger la présentation

Coalition for Derivatives End-Users Briefing of House Committee on Agriculture Staff

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Coalition for Derivatives End-UsersBriefing of House Committee on Agriculture Staff January 29, 2013

  2. Coalition Comments on Proposed Rules • The Coalition for Derivatives End-Users has submitted comments on proposed rules: • CFTC & SEC joint advance notice of proposed rulemaking on Definitions Contained in Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act • Treasury request for comments on Determination of Foreign Exchange Swaps and Forwards • CFTC proposed rule on Process for Review of Swaps for Mandatory Clearing • CFTC advance notice of proposed rulemaking on Protection of Cleared Swaps Customers Before and After Commodity Broker Bankruptcies • CFTC proposed rule on Real-Time Public Reporting of Swap Transaction Data • CFTC proposed rule on Swap Data Recordkeeping and Reporting Requirements • CFTC & SEC joint proposed rule on Further Entity Definitions • CFTC proposed rule on End-User Exception to Mandatory Clearing of Swaps • CFTC proposed rule on Core Principles and Other Requirements for Swap Execution Facilities • CFTC proposed interpretive order on Antidisruptive Practices Authority • CFTC proposed rule on Swap Data Recordkeeping and Reporting Requirements: Pre-Enactment and Transition Swaps • Prudential Regulators’ proposed rule on Margin and Capital Requirements for Covered Swap Entities • CFTC proposed rule on Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants • CFTC & SEC joint proposed rule on Further Product Definition • CFTC proposed rule on Clearing Exemption for Swaps Between Certain Affiliated Entities • CFTC proposed interpretive guidance on Cross-Border Application of Certain Swaps Provisions of the CEA • BCBS/IOSCO consultation on Margin Requirements for Uncleared Derivatives • Prudential Regulators’ proposed rule on Advanced Approaches Risk-based Capital Rule; Market Risk Capital Rule • Limited time to comment has limited the Coalition’s ability to comment on every rule proposal that affects end-users.

  3. New Derivatives Regulation under Title VII:Extraordinary Changes Execution Voice & Manual Systems Electronic Trading Clearing Central Clearing Bilateral Risk Management Margin Negotiated Margin Agreements Required Margin Collection Reporting Limited Transparency Swap Data Repositories

  4. Overview of Swaps Market Under the Dodd-Frank Act Fixed Rate Payments (e.g., 5% fixed payment on $100 million) PARTY A PARTY B Floating Rate Payments (e.g., 3-month LIBOR on $100 million) Background • A swap is the exchange of cash flows between counterparties. • e.g., an interest rate swap (the most common type of swap) is an agreement between two parties to exchange interest rate cash flows (e.g., fixed rate for floating rate), calculated on a notional principal amount, at specified intervals (i.e., payment dates) during the life of the agreement. • Asset classes include: interest rate, credit, equity, foreign exchange and other commodity. • Title VII of the Dodd-Frank Act granted jurisdiction of the swaps market to the CFTC and the SEC, with the CFTC having jurisdiction over the vast majority of the swaps market. • As a result of Title VII and the CFTC’s regulations, all swaps must be reported to swap data repositories (“SDRs”) and many swaps will be subject to clearing, execution and margin requirements.

  5. Overview of Swaps Market Under the Dodd-Frank Act Clearing • When a swap is executed, the two counterparties can send the trade to the clearinghouse (through a clearing member) and the clearinghouse will assume the legal risk of making payments on the trade (essentially guaranteeing the payments to each of the counterparties). • The swap counterparty is required to have an account with a “clearing member” firm and deposit margin in the account with the clearing member firm. The clearing member firm then interacts directly with the clearinghouse. • The margin that must be required to clear a swap is required by clearing rules and not by margin rules. • CFTC determines which swaps must be cleared. At this time, interest rate swaps and credit default index swaps are required to begin clearing in March 2013. • Title VII explicitly provides an exception for end-users to the mandatory clearing requirements. Execution • Standardized swaps will be required to be executed on a swap execution facility (“SEF”) or a designated contract market, as opposed to traditional bilateral contracts. • The CFTC has not yet finalized rules for SEFs or for which swaps are required to be executed on a trading platform. • Title VII explicitly provides an exception for end-users to the mandatory execution requirements.

  6. Overview of Swaps Market Under the Dodd-Frank Act Reporting • All swaps, whether cleared or uncleared, must be reported to an SDR, including internal transactions related to the risk management activities within a particular company. • Most swap data will be publicly disseminated (on an anonymous basis) for those that want to view or use the data. Margin for Uncleared Swaps • Title VII requires that swap dealers be required to collect margin (i.e., collateral) with respect to swaps with certain counterparties. • Collecting margin on swaps is aimed at reducing systemic risk. • Congress has communicated repeatedly both throughout the legislative process and in the text of the Dodd-Frank Act that end-users should not be subject to margin requirements.

  7. Implementation Timeline Expected in first half of 2013: Trading, Execution and Block Trade Requirements Cross-Border Guidance • Margin Requirements • Definition of “swap” is effective • Becomes unlawful for ECPs to enter off-exchange swaps • Reporting and Recordkeeping rules become final • Treasury excludes FX from “swap” definition • Swap Dealer Registration • • Some SD/SMP Reporting and Recordkeeping effective • • Obtain Unique Identifier Numbers • • End-User Reporting and Recordkeeping • • External business conduct standards • • Financial end-users must clear IR and credit default swaps • • Non-financial end-users must elect clearing exception Nov Dec Jan 2013 Feb Mar Apr May Jun Jul Aug Sep Oct Oct 2012

  8. How Do End-Users Use Swaps? • End-users do not use derivatives to take on risk for speculative investment purposes and therefore do not meaningfully contribute to systemic risk. • End-users use swaps to hedge or mitigate commercial risks associated with their companies’ operations. • The use of swaps to hedge risk benefits the global economy by allowing a range of businesses – from manufacturing to health care to agriculture to technology – to improve their planning and forecasting and offer more stable prices to customers. • Imposing undue regulatory burdens on end-users could increase costs and reduce liquidity that would prevent end-users from using the derivatives markets efficiently or may cause end-users to stop using derivatives altogether. • Either result is contrary to the clear objectives of Congress who have created exemptions that would allow end-users to continue managing risks in the swaps markets effectively and efficiently.

  9. Centralized Hedging Units Enhances safety and efficiency for a broad range of end-users Bank B Bank A Bank C Traditional swaps » ABC Corp Deriv. Unit Matched affiliate trades » ABC Corp US Affiliate ABC Corp UK Affiliate ABC Corp Asia Affiliate ABC Corp US Affiliate Common control Additional benefits arise in a default scenario • De-centralized Model • All ISDA contract counterparties settle separately • Some entities would owe the bankruptcy estate …others become unsecured creditors • Netting not possible … multiple claims • More complicated … greater risk • Centralized Model • ISDA contracts consolidated with one entity • Netting permits a single exposure or credit with the bankruptcy estate • Facilitates settlement and resolution • Streamlined resolution … less risk Treating inter-affiliate trades like external swaps would push firms back to a decentralized model … increasing risk. Creates scale and efficiency while reducing risk Centralizes expertise and consolidates execution Presents single/limited number of faces to the market End-user transaction platform Does not create or increase systemic risk

  10. Centralized Hedging Units • The Dodd-Frank statutory language limits to those centralized hedging units “acting on behalf of the person as an agent” which the CFTC has interpreted to not include swaps executed by centralized hedging units acting as principal. • Such swaps between the centralized hedging unit (as principal) and a third party would not be eligible for the end-user exception because the centralized hedging unit is considered a “financial entity” • Many end-users that use a centralized hedging unit model execute trades on a principal basis to: • Reduce risk (i.e., fewer external transactions), reduce costs, reduce duplication, centralize oversight of swaps activities, enable netting • Treating these two forms of execution differently can create a competitive disadvantage and would discourage end-users from using this proven risk mitigation technique.

  11. Agent Centralized Hedging Unit Acting as Agent/Principal Hedging Unit can choose not to clear swaps ABC Corp. (Nonfinancial) Market-facing swaps in name of ABC Corp. (Hedging Unit as agent) Bank ABC Hedging Unit Affiliate (Financial) Principal Hedging Unit must clear swaps ABC Corp. (Nonfinancial) Internal, affiliate trades Market-facing swaps in name of ABC Derivatives Unit (Hedging Unit as principal) Bank ABC Hedging Unit Affiliate (Financial)

  12. Inter-Affiliate Trades Inter-affiliate trades matched to market-facing swap ABC Corp. Market-facing, arm’s length swap $150 MM Notional Floating Rate A ABC Corp Deriv. Unit ABC Corp Affiliate #1 $250 MM Notional Floating Rate A Bank $150 MM Notional Fixed Rate B $100 MM Notional Floating Rate A $250 MM Notional Fixed Rate B ABC Corp Affiliate #2 $100 MM Notional Fixed Rate B Common Control Characteristics of Inter-Affiliate Trades No change in beneficial ownership. Inter-affiliate transactions do not face the market. Reduces demands on an entity’s financial liquidity and operational assets. Inter-affiliate transactions do not create or increase systemic risk. Promotes efficiency in mitigating risk within an entity.

  13. Relevant Dates for End-User Compliance

  14. Companies and organizations that support various initiatives of the Coalition for Derivatives End-Users Companies Organizations

More Related