Mitja Siraj, Vice President of Legal Europe at FIA, discusses the recent publication by FIA of eight sets of contractual indirect clearing terms.
Why has FIA recently published indirect clearing terms?
FIA has played an active advocacy role in the area of indirect clearing since the MiFIR indirect clearing requirements for exchange-traded derivatives (ETDs) were initially proposed in draft MiFIR. Our members were instrumental in providing responses to all ESMA and EC consultations on this topic and we had a number of meetings with policy-makers in the EU and national competent authorities to make sure that the final rules work in practice, achieve the desired policy objectives and have as few unintended consequences as possible. I think no one would disagree with a statement that the indirect clearing requirements, as designed under MiFIR and EMIR, are intellectually challenging and technically difficult to implement, so a lot of effort has gone into designing the rules that work and are ‘implementable’, and also in trying to assist firms with implementation, where possible. Most challenges that clearing firms in Europe have had with implementing these requirements are exacerbated when the indirect clearing chain leaves the EU/EEA and when third-country clearing firms participate in a MiFIR/EMIR indirect clearing arrangement.
After the indirect clearing rules had been agreed and adopted, FIA was asked by its clearing member firms to assist with creating a number industry standard contractual and non-contractual documents to negate the need for each firm to draft those documents individually. FIA worked together with members and external counsel on drafting a number of industry standard documents to help firms comply with the indirect clearing requirements as set out in the MiFIR and EMIR RTS on indirect clearing arrangements. The table below summarises the FIA indirect clearing documentation offering, namely (i) the indirect clearing jurisdictional questionnaires, (ii) the indirect clearing CM risk disclosures, (iii) the indirect clearing DC risk disclosures and (iv) the FIA Indirect Clearing Terms.
The FIA Indirect Clearing Terms complement and complete FIA’s suite of indirect clearing documentation. They form part of the wider FIA Documentation Library, which includes the soon-to-be-launched 2018 Terms of Business and a number of different legal opinions.
What are some of the complexities that derivatives participants face when entering indirect clearing arrangements?
While indirect clearing arrangements are less common (if not non-existent) in the world of cleared OTC derivatives, they are well known in the context of exchange-traded derivatives (ETDs), where ultimate end-users often access global markets via a local broker that is typically not a clearing member of the CCPs where ETDs are cleared, but instead it accesses those markets via an affiliated or third-party clearing member firm. Such clearing chains can also be longer in practice, however the MiFIR and EMIR indirect clearing requirements now prescribe very explicit conditions under which longer chains are still permitted. So, while the offering of MiFIR and EMIR indirect clearing services remains voluntary, in practice for ETDs the requirements are mandatory, because the indirect clearing arrangements that are subject to the MiFIR requirements already exist and therefore firms do not really have a choice as to whether they wish to offer them or not. As long as they facilitate such arrangements, they must comply with the requirements.
The MiFIR and EMIR RTS on indirect clearing prescribe very detailed requirements for CCPs, clearing members that facilitate indirect clearing arrangements and their clients that offer this service all with a view to provide additional protection to indirect clients, who now have a choice to choose between two levels of segregation – basic omnibus segregation and gross omnibus segregation (as defined in the RTS). There are of course operational complexities when setting up new account structures and legal work/documentation that needs to be put in place to underpin new features of clearing relationships. As the requirements are not limited in scope to clearing firms in the EU/EEA and a lot of MiFIR indirect clearing arrangements do include third-country firms, where such requirements are unknown, there are additional challenges that need to be resolved and analysis that needs to be done before ensuring compliance with the MiFIR RTS indirect clearing requirements. This becomes extremely important especially in a client default scenario for which the RTS prescribe an explicit default management regime that clearing members are subject to. This is when local insolvency law analysis becomes critical to ensure that the clearing member understands what it can and cannot do in the event of its client default in a particular jurisdiction and also to allow the indirect client to make an informed decision as regards the level of segregation it wishes to choose.
What are the key documents that FIA has published and how do these assist market participants?
|Clearing member indirect clearing risk disclosure||This document outlines risks for indirect clients in the event of the clearing member’s default, depending on the level of segre¬gation they choose. These disclosures are specific to the clearing member’s jurisdiction and build on the existing FIA/ISDA EMIR Article 39(7) risk disclosure.|
|Direct client indirect clearing risk disclosure||This document outlines risks for indirect clients in the event of the direct client’s de¬fault, depending on the level of segregation they choose. These disclosures are specific to the direct client’s jurisdiction and are similar in structure to the existing FIA/ISDA EMIR Article 39(7) risk disclosure.|
|Indirect clearing jurisdictional questionnaire||The purpose of the indirect clearing questionnaire is to ascertain how laws of the direct client’s jurisdiction treat certain indirect clearing requirements (e.g. segregation, porting, leapfrog) and whether they give them legal effect pre- and post-direct client’s insolvency, either by way of statutory protections or otherwise (e.g. private con¬tractual interest arrangements). The indirect clearing questionnaires are jurisdiction specific and inform clearing members as to whether the MiFIR RTS default manage¬ment requirements are legally effective in a specific client jurisdiction and what they or their clients may need to do to make them legally effective.|
|FIA Indirect Clearing Terms||The FIA Indirect Clearing Terms are designed to supplement contractual terms based on either the 2011 Professional Client Agreement or the soon-to-be-launched 2018 Terms of Business. Different versions of the indirect clearing terms have been prepared depending on the FIA documentation being supplemented, whether the terms will apply between the CM and DC or the DC and IC, and whether they will be used with Basic OSAs only or Basic OSAs and GOSAs. The terms have been drafted for use with simple chains (CCP-CM-DC-IC) although separate advice has been given about how the terms can be modified for use with longer chains.|
FIA also published three supplementary memoranda on (i) longer chains, (ii) indirect clearing segregation/the concept of netting sets and (iii) the impact of FIA Indirect Clearing Terms on the FIA netting and collateral opinions. In addition, we published a number of template documents for use by US FCMs when they participate in MiFIR indirect clearing arrangements.
Interviewed by Emma Millington.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.