Banks Shun EMIR's Indirect Clearing Service |

Banks shun Emir's indirect clearing service

Indirect clearing allows the clients of a clearing member to take on clients of their own, but the member remains the ultimate guarantor of the risk, and Emir requires both groups of customers to be treated the same. That means giving the so-called end-clients a choice of at least two forms of collateral protection. The first of these, omnibus accounts, is cheaper for clearing members to offer; the second, individual segregation, is more expensive. Members are so far refusing to offer individual segregation to end-clients, which they have no direct contact with, and argue the European Securities and Markets Authority (Esma) will need to intervene if anything is to change.

Top 10 Challenges that Clients, FCMs and CCPs are Facing

challengesSince the G20 regulators reached the agreement to strengthen regulatory oversight on financial market reform through various measures. The implication of the reform affects every stakeholder in the financial industry, either directly or indirectly, from front-end trade registration, to back-end settlement and collateral management from corporate entities to international banks.

When the rules gradually come into effect more and more implementation challenges start to surface.

Challenge 1: Customer funds segregation
One of the core changes of the rule is protect customer asset, FCM is prohibited to use one customer’s surplus funds to cover other deficient customer. In case of double default of a client and Clearing Member, the survival customer’s collateral would have enhanced protections against fellow risk.

Both CCP and FCM have to offer various customers funds segregation models at customer’s choice. Under U.S. CFTC rule, FCMs have to offer LSOC model to their Swap customers, which is broadly equivalent to European ESMA rule individual client segregation. Each of these models requires significant workflow changes,system enhancement and operational control on both FCM and CCP sides in order to meet the regulatory conditions.

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Client Clearing Explained | EU Model

EU: Client Clearing

· CCPs and clearing members must offer both:

a) Omnibus client segregation: Separate records / accounts distinguishing between clearing member's assets and positions and assets and positions of its clients

b) Individual client segregation: Separate records / accounts distinguishing between assets and positions of each client of clearing member and any excess margin posted to CCP

CCPs must allow clearing members to open further accounts

– Requirement to distinguish involves recording in separate accounts, not netting across accounts and not exposing assets in one account to losses in another

CCPs and clearing members must disclose levels of protection and costs - must be reasonable commercial terms

CCPs must commit to trigger procedure for porting - if clearing member defaults and client requests, transfer client positions and assets to another clearing member that has agreed to step in - omnibus and individual accounts

CCPs can actively manage their risks by liquidating positions and assets if this cannot be done within a pre-defined timeframe

Client collateral can only be used to cover positions held for relevant client account and any surplus on a clearing member default should be returned to client or, if not possible, to clearing member for relevant client account

Neutrality on principal to principal versus agent model: domestic issues are separate

Client Cleared OTC Derivatives Addendum | European

Client Cleared OTC Derivatives Addendum

skyThe International Swaps and Derivatives Association (“ISDA”) and the Futures and Options Association have finalised the long overdue standard “Client Cleared OTC Derivatives Addendum” (the “European Addendum”) designed to enable clearing members to sign up clients and so facilitate central clearing in Europe.