OTC Derivatives Market & the Regulatory Reform

OTC Derivatives Market & the Regulatory Reform

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Course Background Since the agreement by the G20 group of the world’s leading economies in 2009 to implement substantial reforms to the regulations governing OTC derivatives markets, financial institutions, end users and other market participants have experienced sweeping changes in preparation for compliance with the new regulations governing the global OTC derivatives marketplace, as enacted under legislation in the US and the European Union. Both sets of legislation, under the Dodd-Frank Act passed in the US, and in the European Union via European Market Infrastructure Regulations (EMIR) and revisions to MIFID, have led to a substantial number of new rules, the establishment of new regula…

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Course Background Since the agreement by the G20 group of the world’s leading economies in 2009 to implement substantial reforms to the regulations governing OTC derivatives markets, financial institutions, end users and other market participants have experienced sweeping changes in preparation for compliance with the new regulations governing the global OTC derivatives marketplace, as enacted under legislation in the US and the European Union. Both sets of legislation, under the Dodd-Frank Act passed in the US, and in the European Union via European Market Infrastructure Regulations (EMIR) and revisions to MIFID, have led to a substantial number of new rules, the establishment of new regulatory bodies, and a significant increase in the regulatory burden for market participants with wide ranging impact from front to back office, banks and clients alike. In particular, concerns remain regarding the costs of compliance, duplication of regulations, extraterritorial jurisdiction and the possibility of regulatory arbitrage as different countries introduce different regulatory standards. This programme seeks to provide participants with a comprehensive guide to the structure of the regulatory reforms in both legislative regimes, with respect to trading environments, clearing and reporting of OTC derivatives, margin collateral, capital requirements, disclosure and governance. The agenda will examine the scope of the regulations, by product and depending on the classification of market participants, and evaluate some of the implications for market makers, corporate and institutional end users, as well as some of the current persisting concerns within the industry as the compliance timeline moves towards its completion. This 2 day course will provide participants with a practical understanding of: Key elements of US and European Regulation of OTC derivatives Scope of regulations Regulatory requirements for market participants Mechanics of centralised clearing Margin collateral requirements Benefits and costs of regulatory changes Who Should Attend? This course has been specifically designed for the benefit of: Derivatives sales and trading personnel Middle office Client relationship management Derivatives operations Corporate treasury Back office and settlement Legal and compliance Prime brokerage
Day 1 Overview of Derivative Markets and Instruments OTC Derivative market structure and organisation Decentralised market Trade execution methods and platforms RFQ electronic trading platforms Documentation Standardisation of products and quotation conventions OTC Derivatives: Risk characteristics Market (interest rate risks) Counterparty risk Operational risks Operational infrastructure Trade matching and confirmations Downstream processing Centralised clearing Settlement mechanisms Physical and cash settlement Trade repositories G20 recommendations Exchange traded derivatives Standardised contract specifications Documentation Centralised clearing Counterparty risk and margin collateral Exchange traded Vs. OTC derivatives – key differences Overview of key OTC products and markets Interest rate and currency swaps Forward FX: Swaps and outright forwards; NDFs Equity derivatives - Total return swaps (TRS) - Variance swaps Credit derivatives: Single name Credit Default Swaps (CDS) Credit indices (iTRAXX, CDX) Options Interest rate, FX and Equity options Credit Default swap options Overview of the Dodd-Frank Act (Wall Street Reform and Consumer Protection Act) OTC Derivatives reform (Title VII) Regulation and disclosure requirements Centralised clearing Exchange trading; ‘swap exchange facilities’ Margin (collateral) requirements Trade repositories and regulatory reporting requirements Treatment of un-cleared transactions Volcker rule Proprietary trading Fund activities Bank capital rules Financial Stability Oversight Council (FSOC) Lincoln ‘Push Out’ rule Implications for credit, equity and commodity derivatives Extraterritorial jurisdiction Impact on US-based institutions Impact for non-US based market participants Scope of regulations Product scope and clearing/execution status Proposed exemptions (FX swaps and forwards) Designation of security based and non-security based swap types Regulatory jurisdiction (CFTC, SEC) Designation of market participants Banks and bank holding companies Swap dealers and major swap participants (MSPs) End users End user exemptions Treatment of buy-side institutions Regulatory requirements SEC/CFTC registration Business conduct and governance; disclosures Capital requirements Timetable for implementation of reforms: CFTC, SEC rules Mandatory clearing Current status – progress report on implementation Current industry concerns and issues Duplicate regulation; extraterritorial jurisdiction Regulatory arbitrage; competitive impact on US based institutions Margin collateral requirements Operational costs for buy-side Robustness of central counterparties; segregation and portability issues Day 2 Overview of European Market Regulatory Reforms European Market Infrastructure Regulation (EMIR) Markets in Financial Instruments Directive (MIFID II) Comparisons to Dodd-Frank legislation Product scope Clearing and reporting end user exemptions Thresholds Capital requirements Application to OTC and exchange traded products Reporting requirements European Markets and Securities Association (ESMA) – roles and responsibilities: Establishment of standards Supervision of credit rating agencies OTC Derivatives market changes Centralised clearing Trading platforms Trade repository reporting Timetable for implementation of reforms: European Parliamentary approval Text negotiation – European Council ESMA technical specifications Mandatory clearing What do Reforms Signal for Execution and Clearing of OTC Derivatives Electronic trading platforms: Single dealer and multi-participant ECNs Electronic inter-dealer broker platforms Cash and physical delivery Trade confirmations; ISDA short form confirmations for interest rate, equity, credit derivatives Trade matching and downstream processing for OTC derivatives Trade data repositories (e.g. DTCC) Centralised clearing for OTC Derivatives Changing from the OTC bi-lateral model Benefits and weaknesses of centralised clearing Centralised clearing platforms for interest rate, equity and credit derivatives Evolution of OTC clearing The role and functions of the clearing house The role and functions of clearing members - Agent and Principal models Collateral management - Initial and variation margin - Portfolio margining and cross-margining - Eligible collateral - Segregation (‘ringfencing’) of collateral - Portability of positions - Counterparty and operational risks in centralised clearing Benefits and Costs of Regulatory Changes Impact for sell-side and buy-side market participants Counterparty risk Portability Operational efficiencies; Portfolio compression CCP systemic risk Flexibility of contract terms and types System connectivity costs Legal documentation Collateral requirements Market liquidity and transparency Impact of Reforms on OTC Derivatives Documentation Key components of OTC derivatives documentation: Master agreement Confirmations Standardised definitions Termination; Novation protocols Close-out Netting agreements; Legal enforceability of netting arrangements Warranties and credit support: Credit Support Annex (CSA) – Collateral agreement Impact of Dodd-Frank on ISDA Documentation - Documentation requirements for CCP clearing models - Clearing Agreements - Cross-exchange issues Course Summary and close
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