During the DerivSource webinar on “Managing OTC Derivatives Documentation in a Central Clearing Environment” hosted May 17th we had several questions from the audience that we were not able to answer in the time allotted. Some of the speakers offer the following personal responses to questions posed from the audience during this Web-event.
If you have more questions, please feel free to login and use the comments feature to pose new questions or responses. We encourage your participation. Please read disclaimer at the bottom.
You may also contact Paul Nelmes of Exari Systems (event sponsor) at pnelmes@exari.com if you have additional questions or queries or email DerivSource at editor@derivsource.com
Q&A
Q. With regard to bilateral trades that are centrally cleared; will we see any changes in terms and conditions of the agreements or documentation, so that it is acceptable to clearing houses?
The streamlining of the documentation process will make it easier to match and confirm trades. Also, I am a big fan of having just one contract signed instead of matching as bilateral contracts expose the possibility of risk if the matching process does not work. (Tim Baros)
My understanding is that these will also follow the structure below in the following question (Paul Nelmes)
Q. If not already on the agenda, would appreciate an overview of the client clearing documentation that will be in the US, given that client clearing would be a principal-agency model (futures/FCM model). What is the status of such documentation?
My understanding of the documentation required under the ‘Principal’ and ‘Agency’ models (Paul Nelmes)
Documentation ‘Principal model’
1. Existing ISDA for uncleared transactions remains,
2. New ISDA and CSA between CM and Client for client clearing transactions
3. New set of documentation for each CCP
4. Security Deed/Agreement whereby the CM grants to its Client a security interest in respect of client account at the CCP
5. New security arrangement for each CCP
6. Give-Up agreement – agreement between the Clearing Member and Broker whereby the CM agrees to accept give-up transactions in relation to underlying clients
7. Compensation Agreement s (if a transaction is not cleared) – a fall back to the previous Give-Up, which covers compensation arrangements between the Executing Broker and the client in the event that a transaction is not accepted by the CM for clearing
6 & 7 above are between the three parties until the transaction clears and/or in the event that it doesn’t
• There are Potentially further agreements required detailing on the fees charged to the client for clearing – prepared by the CM
Documentation ‘Agency’ Model
• Futures Agreement – with addendum for Clearing transactions
• Give-Up Agreement between FCM, Client and Executing Broker
• End-User License Agreement for use of electronic systems
• There are Potentially further agreements required detailing on the fees charged to the client for clearing – prepared by the CM
Q, What are the formal ” filing “requirements for submission of an OTC derivatives document?
Any filing requirements should be mentioned in the ISDA Master Agreement.
(Tim Baros)
Q. If the typical OTC option user decides to trade their vanilla options trades using a securities account would a CCP doc be needed?
Yes, a contract would be needed, as it is the binding agreement between the parties that stipulates the economics of the trade. (Tim Baros)
Q. So we will still need to execute a Master with each CP even though we will clear and only have exposure for moments?? Was thinking a give -up agreement would replace.
My understanding that you would require an ISDA Master in place for non-clearing transactions. (Paul Nelmes)
In my opinion, yes, we would need to execute a master agreement as there is a lot of ground covered in the master, which are not covered in the trade confirmations. (Tim Baros)
Q. If the documents in BO are not cleared in time and are pending execution, would it affect the reserves that FO has for trading?
It should not as documents are not always executed in a timely manner (especially for structured transactions). Reasons for this include differences in time zones, booking discrepancies, insufficient staff etc. (Tim Baros)
Q. Will there be changes to existing Listed Derivatives documentation? Will these become more in line with ISDA?
At this point, it is really hard to say as it is still early days. (Tim Baros)
*Please note: These responses are opinion and for informational purposes only and are not meant as business or authoritative advice.
