Upload
willa-cori-palmer
View
216
Download
3
Tags:
Embed Size (px)
Citation preview
1
Risk Management Wholesale
Collateralization and
the EU Collateral landscape: a legal update
Budapest - September 26, 2002
David SuetensSenior Vice President, Risk Management WholesaleTel +31-20-383-22-08E-Mail: [email protected]
2
Risk Management Wholesale
Agenda
•What is collateralization - Business perspective
•Identifying collateral law issues in Europe
•Collateral Directive
•Way forward
3
Risk Management Wholesale
Definition of Collateralisation........
a form of credit enhancement where cash and securities are exchanged against the
value of a derivatives portfolio
4
Risk Management Wholesale
For Example...............
ABN AMRO
Net Exposure
Collateral
Counterparty
Interest Rate Swap - 5 mln (CP owes AAB)Cross Currency Swap 15 mln (AAB owes CP)
Net exposure 10 mln (AAB owes CP)
So CP calls for collateral from AAB to cover this net exposure of 10 mln
5
Risk Management Wholesale
CollateralizationBusiness Drivers
Collateralization
Creating Business Opportunities
Tool for Risk Management
Revenue Generator
6
Risk Management Wholesale
Market Access
Larger Transactions & Longer Maturities
More Volatile Transactions
European Debt Market
- Sovereign to sub-sovereign debt issuanceweaker creditsincreased solvency costs for banks
- Growth in corporate debt
– More non-European borrowers issuing in euros
Deeper and More Liquid Derivatives Market
Collateralization Collateral as a creator of business opportunities for you...
7
Risk Management Wholesale
Collateralization Collateral as a tool for risk management…credit risk is being transferred
into legal, operational and market risk
Legal Risk
Approved Netting Opinions
Enforceable Collateral Opinions
Operational Risk
Trade Matching identifies mis-booking of a trade
Market Risk
Reconciliation identifies mis-pricing of a trade
8
Risk Management Wholesale
Example 1: Standard 5 Year Interest Rate Swap
Uncollateralised CollateralisedPFE Low 6% 0.75%
Medium 8% 2%High 15% 3%
Low = EURO Medium = USD High = Emerging marketsExample 2: Standard 5 Year Cross Currency Swap
Uncollateralised CollateralisedPFE Low 30% 3%
Medium 55% 5%High 108% 10%
Low = EUR Medium = AUDHigh = Emerging Markets
Risk ManagementImpact on credit add-ons
9
Risk Management Wholesale
Legal and Documentation Requirements
• ISDA 1992 Master Agreement : •covers the trading relationship
• ISDA Confirmation•each transaction will be confirmed •each confirmation will refer to the ISDA Master
• ISDA Credit Support Annex (English Law - Transfer of Title)• describes the collateralised trading relationship
10
Risk Management Wholesale
Operational Requirements
• Value derivatives portfolio• Value collateral portfolio• Highlight margin call• Notify and agree collateral movement• Settle collateral
Custodian for securities and cashManage coupons and interest payments
• Resolve portfolio differences• Reconcile derivatives portfolio from time to time
11
Risk Management Wholesale
New Basle Capital Framework
“The Committee acknowledges the benefits that can accrue
from the use of credit risk mitigation techniques and the
key role they can play in prudent risk management.
Accordingly, the committee believes it is important that
the capital framework should provide a better
recognition of mitigation techniques.”
12
Risk Management Wholesale
Identifying collateral law issues
• 1999: ECB establishes the European Financial Markets Lawyers Group,
discussing possibilities that would lead to a harmonisation in EU
Financial markets activity, focusing a.o. on collateral.
• 2000: ISDA’s Collateral Law Reform Group publishes a paper ‘The Need
for National Law Reform’
•1999-2000: EU Commission establishes a Forum Group on Collateral
Conclusion: a complex and fundamental diversity of European national
laws dealing with creditor rights, property, contract and insolvency laws.
13
Risk Management Wholesale
Creating a Pledge
Cumbersome and impractical rules for creating, perfecting,
maintaining and enforcing pledge collateral: England, France , Greece,
Ireland, Netherlands, Portugal and Spain1
1: Based on ISDA’s Paper: The Need for National Law Reform Paper
14
Risk Management Wholesale
Use of Pledge
Legal restrictions on use of pledge collateral: all jurisdictions, except
England, Greece and Ireland (most positive view) 1.
1: Based on ISDA’s Paper: The Need for National Law Reform Paper
15
Risk Management Wholesale
Enforceability of title transfer
Uncertainty regarding the enforceability of title transfer
collateral:Denmark, Finland, Greece, Italy, Netherlands, Spain,
Luxemburg1
1: Based on ISDA’s Paper: The Need for National Law Reform Paper
16
Risk Management Wholesale
Title transfer versus 3th parties
Uncertainty regarding the vulnerability of title transfer collateral
arrangements against third parties: Spain, Finland, France, Germany,
Italy, Portugal1
1: Based on ISDA’s Paper: The Need for National Law Reform Paper
17
Risk Management Wholesale
MTM collateral arrangements
Material risk that top-up collateral may be vulnerable as a preference
during a suspect period: Denmark, France, Greece, Italy and Spain1
1: Based on ISDA’s Paper: The Need for National Law Reform Paper
18
Risk Management Wholesale
Why change collateral laws?As collateral managers we want ….
Effective and simple regime for pledge and title transfer
Simplify creation, perfection and enforcement
Confirm efficacy of title transfer collateral throughout Europe
Clarify conflict of laws rules
Confirm top-up and substitution
Right of use (‘rehypothecation’)
Part of Financial Services Action Plan
19
Risk Management Wholesale
Collateral Directive: first Commission’s proposal
all financial collateral
pledge and title transfer agreements covered
No recharacterisation for title transfer arrangements
both provider and taker must be either:-
1. public authority/central bank or
2. financial institution. under prudential supervision or
3. legal person of capital base exceed. EUR 100
million/gross assets exceed.EUR 1000 million)
20
Risk Management Wholesale
Collateral Directive: first Commission’s proposal
Limit rules on creation/enforce
Re-use of pledge?
Recognition of substitution/top-up
Recognition of close-out netting
Recognition of the PRIMA principle (‘place of the
relevant intermediary approach’) - EU (15) and Hague
(53)
21
Risk Management Wholesale
Collateral Directive: issues Scope
•the capital/gross assets test?
•apply test to one party only?
•Collateralized business among corporates?
Result:
•Financial institutions (including a.o. Sicav’s, Insurance companies)•Central Banks (including a.o. EIB, IMF, ECB)•Public Authorities•Central counterparty or clearing house•A person other than a natural person, including partnerships, provided that the other party is one of the above. But: OPT-OUT
22
Risk Management Wholesale
Collateral Directive: issues
Creation of a pledge/title transfer
•Occurs often through formal acts, such as:•Filing with an official body
•Registration in a public register
•Advertisement in a journal or newspaper
Result:
•Creation/validity not to be dependent on a formal act if:
•The financial collateral arrangement provides for
dispossession, ie the provision of the financial collateral
•The provision of collateral must be evidenced in writing
23
Risk Management Wholesale
Collateral Directive: issues Realization: if the Collateral Taker cannot realise collateral quickly, then
• Increased funding cost from re-hedging
• Additional collateral required to cover close out period
• Increased transaction costs
• Additional risk for Collateral Provider
Result:
•No restrictions on realization such as:
•Time period
•Official/Court Approval
•Public Auction or other prescribed sale procedure
•Appropriation: only if agreed by the parties in the collateral agreement
and its valuation. BUT: OPT-OUT
24
Risk Management Wholesale
Lifecycle of the directiveThe way forward 13/12/2001: political orientation agreed by ECOFIN
on compromise text under the Belgian presidency
March till June: Second reading by the European Parliament
6/06/2002: Voting by European Parliament in a plenary session
Publication: 27/06/2002
Implementation: 18 months after publication ,ie 27/12/2003
Conclusion: focus on local implementations, avoid carve outs,
discuss and convince your legislator of a broad scope