Regulatory update (Dodd-Frank series) - Lombard · PDF fileRegulatory update (Dodd-Frank series) “Derivative regulatory reform in ... 30th April: Self certification ... obligation

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Regulatory update (Dodd-Frank series)

“Derivative regulatory reform in

Hong Kong and Singapore”

Wednesday 17th July 2013

Lombard Risk - Managing collateralised trading | Enabling regulatory compliance

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Introduction Rebecca Bond, Group Marketing Director

Key speaker: Gavin McConville, Business Matter Expert

Derivative regulatory reform in Hong Kong and Singapore

Questions & Answers

Online questionnaire

Webinar agenda – < 60 min


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Dodd-Frank act webinar series: webinar business briefings

29th March Impact on Swap market - regulatory update and look at technological

challenges in achieving Dodd-Frank Act Title VII compliance

31st May Update on Dodd-Frank Act Title VII: Definition, record-keeping and

cross-border issues

17th July Derivative regulatory reform in Hong Kong and Singapore

Next To be announced

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2 streams: Regulatory updates | Collateral management series

19th April: “COREP…”

30th April: “Self certification … 9th May: “Impact of the PRA … 16th May: “Collateral management … 22nd May: “COREP and regulation … 13th June: Regulatory update 26th June: “FINREP … 11th July: “COREP … 17th July: Today’s webinar

More … to December and beyond - 2014

www.lombardrisk.com/events

(and past events) https://twitter.com/LombardRiskM http://www.linkedin.com/company/lombard-risk


http://www.lombardrisk.com/events/

http://www.lombardrisk.com/events

https://twitter.com/LombardRiskM



http://www.linkedin.com/company/lombard-risk






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Managing collateralised trading | Enabling regulatory compliance

Summary and slides of previous

briefing(s) are available upon

request

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Let’s get started …. with a short introduction


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Lombard Risk today: a leading player in global risk and compliance solutions

Founded in 1989

– Trusted providers for more than 23 years

300+ banks, hedge funds, commodity trading and fund management clients in 25 countries

– Solutions for global financial services institutions

Experts in Dodd-Frank Swap reporting

A market leader in Collateral Management solutions

No.1 provider of Regulatory Compliance solutions in both the United States and United Kingdom - with global coverage

Leading Liquidity Analysis provider

Ticker: LRM

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New York and New Jersey 489 Fifth Avenue New York, NY 10017 Tel: +1 212 682 4930 One Gateway Center 26th Floor New Jersey, NJ 07102 Tel: +1 973 648 8402

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Shanghai 34th Floor Hai Tong Securities Tower 689 Guang Dong Road Shanghai 200001 P.R.China Tel: +86 (0)21 6341 1230

Hong Kong Unit 2105, 21st Floor Harcourt House 39 Gloucester Road Wanchai, Hong Kong Tel: +852 2598 0099

Global presence @ 270+ in 10 global offices

Luxembourg

R&D and Testing centre

Headquarters

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Tokyo Level 14, Hibiya Central Building 1-2-9 Nishi-Shimbashi Minato-ku, Tokyo 105-0003 Tel: +81 3 5532 7454

Singapore 30 Raffles Place #20-04 Chevron House Singapore 048622 Tel: +65 6720 1012

Asia Pacific and Japan operations

US operations

Mumbai

Miami and Atlanta


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Global client base: 300+

mailto:[email protected]

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Integrated solution: Regulatory risk and

compliance,

collateral management,

liquidity analysis,

management

information,

transaction reporting

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Handing you over ….

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Regulatory update: Derivative regulatory reporting in

Hong Kong and Singapore

Monetary Authority of Singapore / HKMA

Mandatory reporting

Mandatory trading

Mandatory clearing

Asia and beyond

USA, Japan and Australia

Lombard Risk experience and solution


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Polling question #1

What OTC derivative initiatives are of interest to your institution?

A Dodd-Frank act

B European Markets Infrastructure Regulation (EMIR)

C Hong Kong Monetary Authority (HKMA) transactional reporting

D Monetary Authority Singapore (MAS) transaction reporting

E Australian Securities & Investments Commission (ASIC) transactional reporting


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Monetary Authority of Singapore -

MAS


http://www.mas.gov.sg/


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MAS: SF(A) Act 2012

Monetary Authority Singapore (MAS)

15th November 2012

– Securities and Futures (Amendment) Act 2012 (SF(A) Act) 2012 passed by parliament

– Gave effect to policy proposals relating to regulation of Over-The-Counter (OTC) derivatives




http://www.parliament.gov.sg/sites/default/files/Securities and Futures (Amendment) Bill 31-2012.pdf

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MAS: OTC Consultation Paper (OTC CP)

Key proposals

– Mandatory central clearing of OTC Derivative Contracts (DCs)

– Mandatory reporting of OTC DCs

– Licensing of derivatives market operators, clearing facilities and Trade Repositories (TRs)

– Licensing of market intermediaries for OTC derivatives


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MAS: Scope of OTC CP

MAS proposes to implement the changes by expanding the scope of Chapter 289 of the Securities and Futures Act (SFA) to regulate OTC derivatives activities

– Introduce Derivative Contracts (DCs)

– Encompassing 5 major asset classes: (1) Commodities (2) Credit (3) Equities (4) Foreign exchange (5) Interest rates

MAS considered amendments to relevant parts of the SFA arising from the regulation of OTC derivatives

– Will make changes to align the treatment of OTC derivatives with that for securities and futures contract where appropriate


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MAS: Under OTC CP proposals

Mandatory reporting

– A party, subject to the reporting mandate, would be required to report OTC DCs to an eligible TR WITHIN ONE BUSINESS DAY of the contract being

• entered into

• or amended


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MAS: Mandatory reporting

Scope: DCs must be reported to a TR if:

– The contract relates to any product that is required to be reported

– The contract is booked or traded in Singapore


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MAS: Mandatory reporting - scope

Products required to be reported

– ALL OTC DCs asset classes will need to be reported

Phased approach – Prioritised by significance of products on the Singapore OTC

derivatives market

• Interest Rate Swaps (IRS)

• Foreign exchange derivatives (FX)

• Oil derivatives

• Others ….


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MAS: Entities covered

The reporting mandate is proposed to cover all:

– Financial Entities (FEs)

– Non-Financial Entities (NFEs)


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MAS: Entities covered - FEs

All Financial Entities (FEs)

– Financial institutions regulated by the MAS

– That exceed relevant thresholds (taking into account the size of its derivative exposure

• In aggregate or

• By product)


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MAS: Entities covered - NFEs

All Non-Financial Entities (NFEs)

– Persons resident, or with a presence in, Singapore

– NOT regulated by the MAS

– That exceed relevant thresholds (taking into account the size of its derivative exposure

• In aggregate or

• By product)

N.b. Hedging transactions will be EXCLUDED when determining threshold


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MAS: Entities exempted from clearing mandate

Public bodies (i.e. central banks, central governments and supra-nationals organisations)

– Also exempt from mandatory REPORTING obligations, while Singapore-incorporated banks would need to report on a group-wide basis

Intra-group transactions – Such transactions WILL be subject to collateralisation requirements

similar to EU

Pension schemes

Reportable transaction CAN be reported by JUST ONE OF THE PARTIES, or by a 3RD PARTY (e.g. CCP)


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MAS: International standards

Supports Legal Entity Identifiers (LEIs)

Supports product classification system

– As recommended in the CPSS-IOSCO Data Aggregation Report


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MAS: Mandatory TRADING

No mandatory trading is currently proposed by MAS

MAS has not set out proposals for mandatory trading of OTC DCs on exchanges/electronic trading platforms

– Also a G20 objective

Opted to consult on mandatory trading at a later stage, after undertaking further study of local market conditions

– US and EU - discussions on mandatory trading are more advanced

– Hong Kong - regulators are also not imposing a mandatory trading obligation at the outset, pending further assessment of the local market


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MAS: Mandatory CLEARING

Under the OTC CP, an OTC DC WOULD need to be cleared through a Central Clearing Counterparty (CCP) if:

– DC relates to any product that is required to be centrally cleared

– At least ONE leg of the contract is booked in Singapore

– At least ONE of the parties is resident or have a presence in Singapore

AND

– Both parties are either subject to the clearing mandate

OR – If it is NOT resident, or does NOT have a presence in Singapore, would

have been subject to the clearing mandate IF IT WERE resident or had a presence in Singapore


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PRODUCTS required to be centrally cleared:

– MAS has proposed a bottom-up, top-down approach

– Similar to that proposed in the US, EU and Hong Kong

– The proposed criteria for approving a product for mandatory clearing also follows criteria proposed by other jurisdictions

– such as the US and Australia

– Initial products that MAS are considering for mandatory clearing are:

– Singapore Dollar (SGD) Interest Rate Swaps (IRS)

– US Dollar (USD) IRS and

– certain Asian currency Non-Deliverable Forwards (NDFs)

– FX forwards and swaps (as opposed to currency options, NDFs and currency swaps) are expressly proposed to be excluded


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ENTITIES covered

– Financial Entities

– Non-Financial Entities


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Polling question #2

What do you see as the major challenges to your institution in meeting both local and global requirements of OTC transactional reporting regimes?

A Connectivity to trade repositories and swap data repositories.

B Application of cross-border rules and extraterritoriality issues.

C Consolidation of local solution into a global framework.

D Changes in policies and procedures.

E Adaption of trade workflows to meet you requirements on an ongoing basis


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Hong Kong Monetary Authority –

HKMA and Securities and Futures

Commission (of Hong Kong) - SFC


http://www.hkma.gov.hk http://www.sfc.hk

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HKMA / SFC: Joint proposal

Joint proposal on a regulatory regime for the OTC derivatives market in Hong Kong Regulation of the Hong Kong OTC derivatives market


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HKMA / SFC: Regulation of Hong Kong OTC market

Legislative and regulatory framework

– The regime will be jointly overseen and regulated by the HKMA and SFC


HKMA SFC

• Authorised Institutions (AIs)

• Approved Money Brokers (AMBs)

The HKMA will be granted the relevant investigation and disciplinary powers under the SFC to ensure that it is able to take action in respect of any breach of the proposed regulatory regime by AIs and AMBs

• Licensed Corporations (LCs)

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HKMA / SFC: Regulation of Hong Kong OTC market

OTC product coverage and mandatory REPORTING obligations

– Interest rate swaps and non-deliverable forwards

OTC product coverage and mandatory TRADING obligations

– Government will conduct further studies to assess how best to implement the requirements in Hong Kong

– Having regard to the liquidity level and number of trading venues in the market


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HKMA / SFC: Mandatory REPORTING

Irrespective of whether they are centrally cleared, or not, LOCALLY incorporated AIs, AMBs and LCs will have to report all reportable transactions that:

– They are counterparty to OR

– They have executed or originated AND

– The transaction has a Hong Kong nexus/connection


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OVERSEAS incorporated AIs will have to report all reportable transactions that:

– They are counterparty to, acting through their Hong Kong branch OR

– They have executed or originated, acting through their Hong Kong branch AND

– Have a Hong Kong nexus/connection


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Hong Kong nexus A reportable equity and credit derivative transaction has a Hong Kong nexus if:

– They are counterparty to, acting through their Hong Kong branch the underlying entity or the reference entity is listed in Hong Kong (and where there is more than one underlying or reference entity, a specified percentage of the entities are listed in Hong Kong)

– The reference entity is wholly owned by the government of Hong Kong OR

– The underlying is an index, and a specified percentage of the underlying companies are listed in Hong Kong


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Hong Kong nexus A reportable transaction for “all other derivatives” has a Hong Kong nexus if:

– The underlying asset, currency or rate is denominated in or related to Hong Kong dollars or Renminbi*


* The Renminbi (CNY) is the national currency of the People's Republic of China (legal tender in China but not in Hong Kong)

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‘other’ Hong Kong persons

– Only if the transactions exceed a specified reporting threshold (to be determined later)

– Will however be exempted from the reporting obligations if an AI, AMB or LC is also subject to a reporting obligation in relation to the same transaction

Overseas persons – Will NOT be subject to any mandatory reporting obligations under

Hong Kong law


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HKMA / SFC: Mandatory CLEARING

HKMA and SFC

– Propose to introduce a mandatory clearing obligation in Hong Kong whereby certain specified OTC derivatives transactions (i.e. clearing eligible transactions) must be cleared through a designated CCP

– Different from mandatory REPORTING obligations


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Mandatory CLEARING obligations differ from REPORTING obligations, specifically:

– Mandatory clearing obligation should apply to ALL CLEARING-ELIGIBLE TRANSATIONS WHENEVER:

– An AI, LC or Hong Kong person is a counterparty to the transaction OR An AI or LC has originated or executed the transaction (in the case of an overseas-incorporated AI), its involvement as a counterparty or person originating or executing the transaction must be through its Hong Kong branch AND

– Both counterparties to the transaction (irrespective of whether or not they themselves are AIs, LCs or Hong Kong persons) have exceeded the specified threshold


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Mandatory CLEARING EXEMPTION

– Exemptions should be given where:

– Both counterparties to the transaction are overseas persons (e.g. when an AI/LC originated a clearing-eligible transaction between two overseas persons) AND The transaction is either:

– Subject to mandatory clearing under the laws of an acceptable overseas jurisdiction, and has been centrally cleared in accordance with those laws OR

– Exempted from mandatory clearing under those laws


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Locally-incorporated AIs vs overseas-incorporated AIs

– The mandatory clearing obligation will apply differently to locally-incorporated AIs and overseas-incorporated AIs


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Mandatory Locally-incorporated AIs

– Mandatory clearing obligations will apply in respect of all its activities in clearing-eligible transactions irrespective of whether such activities are conducted through their Hong Kong office or through any overseas branch

– To facilitate the HKMA’s consolidated supervision of locally-incorporated AIs, the HKMA may require a locally-incorporated AI to comply with the mandatory clearing obligation on an entity level or on a consolidated group basis


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Mandatory Overseas-incorporated AIs

– Mandatory clearing obligations will only apply in respect of activities in clearing-eligible transactions conducted through the Hong Kong branch

In other words, it will only apply if the AI has become a counterparty to, or has originated or executed, the transactions through the Hong Kong branch


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EXEMPTION: Where both parties are overseas persons

– Limited exemption from the mandatory clearing obligation where

– the transaction is between two overseas persons and is already subject to, or exempt from, mandatory clearing under the laws of an acceptable overseas jurisdiction

– The requirement that the transaction either be centrally cleared in accordance with the laws of an acceptable overseas jurisdiction, or exempt from such laws, is essentially

– to ensure that even if the transaction is not cleared in accordance with Hong Kong law, it is cleared in accordance with the laws of an acceptable overseas jurisdiction.

– Alternatively, if the transaction is exempt from mandatory clearing under those laws, then that right to exemption should not be denied by Hong Kong law


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Asia and beyond


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Asia and beyond

There is widespread global support for OTC derivative markets transparency Other regulators are moving ahead:


United States America Japan Australia

Trade reporting live across all asset classes

Mandatory clearing now in force for certain instruments

Working closely with regulators globally regarding extraterritorial aspects of global OTC regulation

Legal framework for trade reporting established; under the law, J-FSA can collect trade data or delegate that authority to an off-shore entity

Officials indicate they prefer to use established repository providers

Reporting started 1st November 2012 (non-mandatory)

Transition period to mandatory ended on 31st March 2013

Mandatory reporting began 1st April 2013

CP205 covers issues such as what institutions will need to report to trade repositories, what information will need to be reported, and when the reporting obligation will start for different classes of reporting entities

ASIC has also considered the transaction reporting regimes being implemented in other parts of the world including the EU, USA, Singapore, Hong Kong and Canada to ensure consistency

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Polling question #3

What trade repository to you plan on reporting to?

A DTCC-GTR Depository Trust & Clearing Corporation-Global Trading Repository

B HKMA-TR Hong Kong Monetary Authority-Trade Repository

C CME Europe London-based European Derivatives Exchange

D REGIS-TR Joint venture by Spanish Central Securities Depository (CSD), Iberclear and Clearstream, an International Central Securities Depository (ICSD)

E Do not know …


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Lombard Risk

REFORM transactional

reporting solution Cross-asset, rules-based and event-driven


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Implications of DFA for BBVA Cross-asset, rules-based, event-driven solution

Firm’s multiple data sources

APIs for major: • Trading systems • Back/middle office

databases • Valuation systems

for MtMs etc. • Collateral systems • Others ….

“Out-of-the-box” HKMA, MAS, ASIC solution

Adapt for: • Client-specific requirements • Regulatory changes e.g. EMIR • Internal scenarios (MIS), In-

house SDR • Others ….

Clearing houses

Counterparties

Swap Execution Facilities (SEFs) e.g. Markitwire, ICAP, ICE etc

ALL Swap Data Repositories (SDRs) - covering ALL asset classes

Receiving/transmitting Unique Swap Identifiers

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Implications of DFA for BBVA Cross-asset, rules-based, event-driven solution

Firm’s multiple data sources

APIs for major: • Trading systems • Back/middle office

databases • Valuation systems

for MtMs etc. • Collateral systems • Others ….

“Out-of-the-box” HKMA, MAS, ASIC solution

Adapt for: • Client-specific requirements • Regulatory changes e.g. EMIR • Internal scenarios (MIS), In-

house SDR • Others ….

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Implications of DFA for BBVA Summary of key features of the Lombard Risk

Dodd-Frank solution: REFORM

Regulatory expertise of Lombard Risk

“Out-of-the-box” HKMA, MAS, ASIC transaction reporting:

REFORM

Cross-asset

Real-time

Fully configurable

System agnostic

Event-driven

Rules-based

Connectivity (to SEFs, DCOs, TRs, SDRs)

Scalable to meet future regulatory changes

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Implications of DFA for BBVA Questions & Answers

Questions submitted in advance:

“What TR connectivity do you offer?”

“What is the implementation time of REFORM?”

Questions raised during the webinar?

Open for additional questions now ….


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Documents

Regulatory update (Dodd-Frank series) - Lombard · PDF fileRegulatory update (Dodd-Frank series) “Derivative regulatory reform in ... 30th April: Self certification ... obligation