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Presenting a live 90-minute webinar with interactive Q&A

Swap Collateral Documentation and the New

Final Margin Regulations for Uncleared Swaps Preparing for Profound Changes to Swap Activities,

Revising Collateral Documentation to Comply With New Rules

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, SEPTEMBER 29, 2016

Conrad G. Bahlke, Partner, Stroock & Stroock & Lavan, New York

Claire L. Hall, Partner, DLA Piper, Los Angeles

Yvette D. Valdez, Counsel, Latham & Watkins, New York

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New Margin Regulations:

Revising Collateral

Documentation

Conrad G. Bahlke

Benjamin F. Smyser

September 29, 2016

6

New Rules for Margin for

Uncleared Swaps

• CFTC Final Rule: On December 16, 2015, the Commodity Futures Trading

Commission (“CFTC”) adopted a final rule and interim final rule establishing

margin requirements for uncleared swaps for swap dealers (“SDs”) and major

swap participants (“MSPs”) that do not have a prudential regulator.

• Prudential Regulators Final Rule: In October 2015, the Department of the

Treasury’s Office of the Comptroller of the Currency, Board of Governors of the

Federal Reserve System, Federal Deposit Insurance Corporation, Farm Credit

Administration and Federal Housing Finance Agency (collectively, the

“Prudential Regulators”) jointly adopted a final rule and interim final rule that

addressed, among other topics, margin requirements for uncleared swaps for SDs

and MSPs that fall under their prudential regulation. A final rule implementing

the interim final rule with regard to exempt transactions under the Terrorism Risk

Insurance Program Reauthorization Act of 2015 (“TRIPRA”) was adopted

August 2, 2016.

7

What Is Margin?

• Two kinds of margin: initial margin and variation margin.

• “Initial margin is intended to address potential future exposure. That

is, in the event of a counterparty default, initial margin protects the non-

defaulting party from the loss that may result from a swap or portfolio of

swaps, during the period of time needed to close out the swap(s).” (CFTC

Final Rule)

• “Initial margin augments variation margin, which secures the current

mark-to-market value of swaps.” (CFTC Final Rule)

8

CFTC Final Rule vs. Prudential

Regulators Final Rule

• The CFTC Final Rule and the Prudential Regulators Final Rule regarding

initial margin and variation margin are similar, but not the same.

• Both Final Rules impose varying requirements depending on whether or

not a covered swap entity’s (“CSE’s”) counterparty to an uncleared

swap transaction is: (1) a swap entity; (2) a financial end user with

material swaps exposure; or (3) a financial end user without material

swaps exposure.

• Both Final Rules also contain a transaction-based exemption from these

requirements for certain uncleared swap transactions that qualify for an

exception or exemption from the mandatory clearing requirement.

• However, the definitions associated with these have key differences.

9

Swap Entity and Covered Swap

Entity

• Swap Entity (Prudential Regulators): (1) A swap dealer or major swap

participant registered with the CFTC; or (2) a security-based swap dealer

or major security-based swap participant registered with the Securities

and Exchange Commission (“SEC”).

• Swap Entity (CFTC): A swap dealer or major swap participant

registered with the CFTC.

• The Prudential Regulators Final Rule defines a CSE to be a “swap

entity” that is supervised by one of the Prudential Regulators.

• The CFTC Final Rule defines a CSE to be a “swap entity” that is not

supervised by one of the Prudential Regulators.

10

Financial End User

• Treatment of an entity that is (1) a security-based swap dealer or major

security-based swap participant registered with the SEC, but (2) not an

SD or MSP registered with the CFTC.

o Under the CFTC Final Rule, such an entity qualifies as a financial end user.

o Under the Prudential Regulators Final Rule, such an entity is a CSE subject

to the margin requirements for uncleared swaps and does not qualify as an

end user.

• Certain specified entities qualifying as financial end users:

o Certain bank holding companies, banks and similar entities

o Certain brokers, dealers, investment advisers and similar entities

o Certain investment entities

o Certain insurance companies and federally regulated entities

o Analogous foreign entities

11

Entities Qualifying as Financial End Users:

Certain Bank Holding Companies, Banks, and

Similar Entities

• A bank holding company;

• An affiliate of a bank holding company;

• A savings and loan holding company;

• A U.S. intermediate holding company established or

designated for purposes of compliance with 12 CFR

252.153;

• A nonbank financial institution supervised by the Board

of Governors of the Federal Reserve System under Title

I of the Dodd-Frank Wall Street Reform and Consumer

Protection Act (12 U.S.C. 5323);

• A depository institution;

• A foreign bank;

• A Federal credit union or State credit union as defined

in section 2 of the Federal Credit Union Act (12 U.S.C.

1752(1) and (6));

• An institution that functions solely in a trust or fiduciary

capacity as described in section 2(c)(2)(D) of the Bank

Holding Company Act (12 U.S.C. 1841(c)(2)(D));

• An industrial loan company;

• An industrial bank or other similar institution described

in section 2(c)(2)(H) of the Bank Holding Company Act

(12 U.S.C. 1841(c)(2)(H));

• An entity that is state-licensed or registered as a credit

or lending entity, including a finance company, money

lender, installment lender, consumer lender or lending

company, mortgage lender, broker, or bank, motor

vehicle title pledge lender, payday or deferred deposit

lender, premium finance company, commercial finance

or lending company, or commercial mortgage company,

except entities registered or licensed solely on account

of financing the entity’s direct sales of goods or services

to customers;

• An entity that is state-licensed or registered as a money

services business, including a check casher, money

transmitter, currency dealer or exchange, or money

order or traveler’s check issuer.

12

Entities Qualifying as Financial End Users: Certain

Brokers, Dealers, Investment Advisers and Similar

Entities

• A broker or dealer

• An investment adviser as defined in section 202(a) of the Investment

Advisers Act of 1940 (15 U.S.C. 80b-2(a));

• A commodity pool operator;

• A commodity trading advisor;

• A floor broker;

• A floor trader;

• An introducing broker;

• A futures commission merchant.

13

Entities Qualifying as Financial End

Users: Certain Investment Entities

• An investment company registered with the SEC under

the Investment Company Act of 1940 (15 U.S.C. 80a-1

et seq.);

• An entity that would be an investment company under

section 3 of the Investment Company Act of 1940 (15

U.S.C. 80a-3) but for section 3(c)(5)(C);

• An entity that is deemed not to be an investment

company under section 3 of the Investment Company

Act of 1940 pursuant to Investment Company Act Rule

3a-7 (17 CFR 270.3a-7) of the SEC;

• A private fund as defined in section 202(a) of the

Investment Advisers Act of 1940 (15 U.S.C. 80-b-2(a));

• A company that has elected to be regulated as a

business development company pursuant to section

54(a) of the Investment Company Act of 1940 (15

U.S.C.80a- 53(a));

• A securities holding company;

• A commodity pool;

• An employee benefit plan as defined in paragraphs (3)

and (32) of section 3 of the Employee Retirement

Income and Security Act of 1974 (29 U.S.C. 1002);

• CFTC Final Rule: An entity, person, or arrangement

that is, or holds itself out as being, an entity, person, or

arrangement that raises money from investors, accepts

money from clients, or uses its own money primarily for

investing or trading or facilitating the investing or

trading in loans, securities, swaps, funds, or other

assets;

• Prudential Regulators Final Rule: An entity, person,

or arrangement that is, or holds itself out as being, an

entity, person, or arrangement that raises money from

investors, accepts money from clients, or uses its own

money primarily for the purpose of investing or trading

or facilitating the investing or trading in loans,

securities, swaps, funds, or other assets for resale or

other disposition or otherwise trading in loans,

securities, swaps, funds or other assets.

14

Entities Qualifying as Financial End Users: Certain

Insurance Companies and Federally Regulated

Entities

• An entity that is organized as an insurance company, primarily engaged in

writing insurance or reinsuring risks underwritten by insurance

companies, or is subject to supervision as such by a State insurance

regulator or foreign insurance regulator;

• A regulated entity as defined in section 1303(20) of the Federal Housing

Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C.

4502(20)) or any entity for which the Federal Housing Finance Agency or

its successor is the primary federal regulator;

• Any institution chartered in accordance with the Farm Credit Act of 1971,

as amended, 12 U.S.C. 2001 et seq., that is regulated by the Farm Credit

Administration.

15

Entities Qualifying as Financial End

Users: Analogous Foreign Entities

• An entity that would be a “financial end user” or a “swap entity” if it were

organized under the laws of the United States or any State thereof.

16

Entities Excluded from Financial

End User Status

• Certain specified entities excluded from financial end-user status:

o A sovereign entity

o A multilateral development bank

o The Bank for International Settlements

o Small banks, savings associations, farm credit system institutions and credit

unions that are exempt from the definition of “financial end user” under

section 2(h)(7)(C)(iii) of the Commodity Exchange Act (“CEA”) and

implementing regulations

o Certain affiliates of entities that qualify for the end-user exception to the

mandatory clearing requirement, as set forth in section 2(h)(7)(D) of the CEA

17

Exclusion of Treasury Affiliates

from Financial End User Status

• The CFTC Final Rule also provides that any “eligible treasury affiliate” that the

CFTC exempts from the margin requirements for uncleared swaps by rule will

not be categorized as a financial end user.

• The CFTC stated, in the preamble to its Final Rule, that it intends to issue a rule

exempting certain treasury affiliates from the margin requirements for uncleared

swaps, to be similar to the relief from the mandatory clearing requirement granted

in CFTC No-Action Letters 13-22 and 14-144.

• The Prudential Regulators agreed, stating in the preamble to their Final Rule that,

to the extent the CFTC acts to exempt certain treasury affiliates “from clearing by

rule, these entities would also be excluded from the definition of financial end

user for purposes of this rule.”

• The Prudential Regulators’ August 2, 2016 final rule takes account of the

exemption in the Consolidated Appropriations Act of 2016 for treasury affiliates

satisfying certain requirements.

18

Material Swaps Exposure

• Under both Final Rules, an entity has “material swaps exposure” if the entity

and its affiliates have an average daily aggregate notional amount of uncleared

swaps, uncleared security-based swaps, foreign exchange forwards and foreign

exchange swaps with all counterparties for June, July and August of the previous

calendar year that exceeds $8 billion, where such amount is calculated only for

business days.

• An entity is required to count the average daily aggregate notional amount of a

transaction between the entity and an affiliate only one time.

• Applies on a calendar year-by-year basis. o If entity started below threshold but went over: Pre-existing swaps are not affected, but

new uncleared swaps are subject to the stricter requirements applicable to uncleared swaps

between a CSE and a financial end user.

o If entity started above threshold and dipped below: All uncleared swaps, including pre-

existing, are subject to the less strict requirements applicable to uncleared swaps between a

CSE and a financial end user without material swaps exposure.

19

Transaction-Based Exemption

• Transaction-based exemption from margin requirements for uncleared

swaps mandated by Title III of TRIPRA.

• Applies to swap transactions that qualify for:

o The end user exception to the mandatory clearing requirement set forth in

CEA § 2(h)(7)(A) and implementing regulations.

o The exception to the mandatory clearing requirement set forth in CEA §

2(h)(7)(D), for certain affiliates of entities that qualify for the end-user

exception.

o Any exemption from the mandatory clearing requirement for cooperative

entities issued by the CFTC pursuant to CEA § 4(c)(1), including the

exemption set forth in 17 CFR § 50.

20

Initial Margin

• Financial End Users with Material Swaps Exposure: CSEs are required to

both collect and post initial margin. The amount to be posted is required to be at

least as large as what the CSE would be required to collect if it were in the

place of the financial end user with material swaps exposure.

• Other Swaps Entities: CSEs are only required to collect, not post, initial

margin. However, there is functionally a requirement for CSEs in such

transactions to post initial margin as well, since all SDs and MSPs will be

obligated under the Final Rules to collect initial margin with respect to such

transactions.

• Initial Margin Threshold Amount: Initial margin would only need to be

collected when the aggregate credit exposure of all nonexempt uncleared swaps

or security-based swaps between the CSE (and its affiliates) and a counterparty

(and its affiliates) exceeds the “initial margin threshold amount” of $50 million.

21

Calculation of Initial Margin

• Initial margin may be calculated in one of two ways: o (1) based on a standardized initial margin table set forth in each Final Rule;

o (2) based on a customized risk-based model developed by the CSE.

• Customized Risk-Based Model: o Assumes a 10-business day close-out period

o Must receive written approval from either the applicable Prudential Regulator or, for CFTC-

governed CSEs, either the CFTC or the National Futures Association. In case of dual

registration, or where one affiliate is governed by the CFTC while another is governed by a

Prudential Regulator, the CFTC will coordinate with the appropriate agency.

o CFTC and Prudential Regulators intend to monitor CSEs to guard against “cherry picking”

for least required margin between a customized risk-based model and the standardized

initial margin.

o Rules for extension to additional products and changes to approved model.

o Quantitative requirements; periodic review; control, oversight, and validation mechanisms;

documentation; escalation procedures.

• Haircuts: Value of assets reduced by applicable haircut percentage.

22

Holding of Initial Margin

• Under the Final Rules, any initial margin required to be collected or posted needs

to be held by one or more custodians not affiliated with either counterparty.

• Custodian may not rehypothecate, repledge, reuse or otherwise transfer the

collateral. • Limited exception if the collateral is held in a general deposit account, the funds in that

account are used, with a reasonable period, to purchase certain types of assets that would

qualify as eligible collateral and those assets are held in compliance with the custodial

requirements of the Final Rules.

• Custodian may substitute or reinvest collateral, but the substituted or reinvested

assets remain subject to all collateral requirements in the Final Rules.

• Each custodial agreement must be a legal, valid, binding and enforceable

agreement under the laws of all relevant jurisdictions (e.g., of custodian and

counterparty), including in the event of bankruptcy, insolvency or a similar

proceeding.

23

Variation Margin

• Calculation: The CFTC Final Rule provides that variation margin shall be

calculated “using methods, procedures, rules, and inputs that to the maximum

extent practicable rely on recently-executed transactions, valuations provided by

independent third parties, or other objective criteria.” The Prudential Regulators

Final Rule has no equivalent provision. o CSE to have alternative methods, with certain specific control mechanisms, for calculating

variation margin in the event of the unavailability or failure of any inputs.

• Posting of Variation Margin: o Between a CSE and a Swap Entity: Only cash (U.S. dollars, another major currency, or

currency of settlement); 8% haircut if not in currency of settlement.

o Between a CSE and a Financial End User: Any asset that that may be collected or posted

as collateral for initial margin, subject to the same haircuts as in initial margin rules.

24

Timing of Transfers and

Minimum Transfer Amount

• Timing of Transfer: Any initial margin and variation margin required under the

Final Rules must be calculated, collected and (as applicable) posted on each

business day following the “day of execution” of the relevant uncleared swap. o If counterparties are in different days at the time they enter into an uncleared swap, “the day

of execution is deemed the latter of the two dates[.]”

o If an uncleared swap is entered into after 4:00 p.m. in the location of either counterparty or

is entered into on a day that is not a business day in the location of either counterparty, the

uncleared swap will be “deemed to have been entered into on the immediately succeeding

day that is a business day for both parties, and both parties shall determine the day of

execution with reference to that business day.”

• Minimum Transfer Amount: If, on any business day, the combined amount of

initial and variation margin to be collected from or posted to a party is less than

the “minimum transfer amount” of $500,000, no margin needs to be collected or

posted until the next business day when such amount is equal to or greater than

the minimum transfer amount.

25

Inter-Affiliate Swaps: Variation

Margin

• Both Final Rules require CSEs to collect and post variation margin for

nonexempt uncleared swaps with all affiliates on the same basis as for

uncleared swaps with unaffiliated counterparties.

26

Inter-Affiliate Swaps: Initial Margin

Prudential Regulators Rule

• CSEs to collect initial margin for non-exempt uncleared swaps from all affiliates that are swap

entities or financial end users with material swaps exposure. However, initial margin would

only need to be collected from any such affiliate to the extent that the affiliate’s aggregate credit

exposure under all non-exempt uncleared swaps or security-based swaps with the CSE

(ignoring any other affiliates) exceeds an initial margin threshold amount of $20 million. o If the initial margin collected by such a CSE is in the form of cash collateral, it is subject to the third-party

custodian and segregation requirements set forth in the Prudential Regulators Final Rule (including the

requirement that cash initial margin collateral be promptly reinvested or substituted); however, the CSE or any

affiliate may serve as custodian for any non-cash initial margin collateral collected from an affiliate (subject to

the other limitations imposed on custodians of initial margin under the Prudential Regulators Final Rule).

• Reduction for inter-affiliate swaps exempt from mandatory clearing requirement. CSEs using

the standardized initial margin table can reduce the amount of margin required for such

uncleared swaps by 30 percent. CSEs using a customized risk-based model can assume a five-

business day close-out period in calculating margin for such uncleared swaps.

• CSEs are not required to post initial margin to affiliates that are financial end users with

material swaps exposure. Instead, CSEs are required to calculate the amount of initial margin

that would have been required to be posted, if the counterparty were not an affiliate, and to

provide that information to the affiliate on a daily basis.

27

Inter-Affiliate Swaps: Initial Margin

CFTC Rule

• CSEs are generally not required to collect initial margin for uncleared swaps from any affiliate

provided that the uncleared swaps are subject to a “centralized risk management program that is

reasonably designed to monitor and to manage the risks associated with the inter-affiliate

swaps[.]”

• Exception for financial end user affiliate that: (1) directly or indirectly (including through a

series of transactions) enters into swaps with third parties that would be subject to the Final

Rules if the affiliate were a swap entity; (2) is located in a jurisdiction that has not been

determined by the CFTC to be eligible for substituted compliance with the margin

requirements; and (3) does not collect initial margin for such swaps as required by the CFTC

Final Rule. The CSE or an affiliate may serve as custodian for such initial margin collateral

(subject to the other limitations imposed on custodians of initial margin under the CFTC Final

Rule).

• CSEs are generally not required to post initial margin to any affiliate for uncleared swaps; the

only exception to this rule is that CSEs are required to post initial margin to a swap entity

subject to the Prudential Regulators Final Rule, in the amount required to be collected pursuant

to the Prudential Regulators Final Rule.

28

Netting

• Netting Allowed: Netting is allowed under both of the Final Rules pursuant to an “eligible

master netting agreement” (“EMNA”) that creates a single legal obligation and (subject to

certain laws) allows acceleration, termination and close-out upon an event of default, including

an event of receivership, conservatorship, insolvency, liquidation or similar proceeding.

• No Walkaway Clause: EMNA cannot contain a walkway clause allowing the Non-defaulting

Party to make a lower payment based on the default (e.g., the First Method under a 1992 ISDA

Master Agreement (Multicurrency — Cross Border)).

• Legal Review: To rely on an EMNA, a CSE must conclude with a well-founded basis, based

on sufficient and ongoing legal review subject to written procedures, that the EMNA meets all

requirements specified in the Final Rules and that in the event of a legal challenge, the relevant

court and administrative authorities would find the agreement to be legal, valid, binding, and

enforceable under the law of the relevant jurisdictions.

• Items to be Netted: Three items may be netted within a portfolio of uncleared swaps: (1)

variation margin; (2) an initial margin collection amount determined by a risk-based model; and

(3) an initial margin posting amount determined by a risk-based model. None of these items

may be netted against each other, however, and none of these items may be netted against other

products or exposures.

29

Deadlines for Compliance

• The first compliance date under the Final Rules was September 1, 2016

(extended to October 3, 2016 with respect to unaffiliated custodian requirements

for initial margin—CFTC No-Action Letter No. 16-70 (Sept. 1, 2016)). o Both initial and variation margin requirements commence where both (1) any CSE,

combined with all its affiliates, and (2) its counterparty, combined with all its affiliates,

have an average daily aggregate notional amount of nonexempt uncleared swaps, uncleared

security-based swaps, foreign exchange forwards and foreign exchange swaps for March,

April and May of 2016 that exceeds $3 trillion.

• Variation margin requirements commence for all other CSEs with respect to

uncleared swap transactions entered into with any other counterparty subject to

the Final Rules on March 1, 2017.

• Initial margin requirements for other covered swap transactions commence

between September 1, 2017 and September 1, 2020, depending on average

daily aggregate notional amount for March, April, and May of relevant year.

Conrad G. Bahlke

212-806-6555

[email protected]

Benjamin F. Smyser

212-806-6057

[email protected]

mailto:[email protected]


Swap Collateral Documentation

and the New Final Margin

Regulations for Uncleared

Swaps: Cross Border Issues

Claire Hall

Partner

September 29, 2016

Global Margin Rules - Overview

Basel Committee/IOSCO international framework for margin

requirements for uncleared swaps

Create an international margin standard for uncleared swaps

globally

Each jurisdiction is publishing its own rules to address the

Basel/IOSCO framework – market participants potentially have

to be aware of several sets of rules

To date – US, Canada, Japan, EU (delayed) and HK

Within the US there are two sets of rules (CFTC and PR)

How do the rules apply in a cross-border situation?

32

US Rules – Cross border application

Two sets of margin rules – Prudential Regulators and the

CFTC; cross border application of both

The CFTC margin rules apply to swap dealers and major swap

participants that are not subject to oversight by a prudential

regulator

Only “covered entities” are directly subject to the rules

although all swap market participants who transact “covered

swaps” will be affected as they will be required to post and/or

collect margin in accordance with the new margin

requirements when transacting with a covered entity

What if you are a non-US entity?

33


“PR” Exclusion

What if the “PR” entity is a non-US entity or you are a non-US

entity? Do the “PR” margin rules apply?

The “PR” exclusion applies where a “foreign covered swap entity” enters

into a “foreign uncleared swap”

Foreign covered swap entity is an entity that is not:

An entity organized under US federal or state law, including a US branch,

agency or subsidiary of a foreign bank

A branch or office of an entity organized under US federal or state law

A subsidiary of an entity organized under US federal or state law

Not available for foreign branches of a US bank or a US branch/subsidiary

of a foreign bank

34


“PR” Exclusion contd.

Foreign covered swap is a swap where the counterparty/its

guarantor is not:

Organized under US federal or state law

A branch or office of an entity organized under US federal or state law

A PR covered entity that is a subsidiary of an entity organized under

US federal or state law

35


“PR” Rules

A US entity subject to PR oversight will be required to comply

with the PR margin rules whether it faces a US or non US

counterparty even if it is a US branch of a foreign bank if it has a

US guaranty

If you face a PR covered entity that is a US branch of foreign

entity with no US guaranty – substituted compliance may be

available

If you face a PR covered entity that is not a US entity and does

not have a US guarantee – substituted compliance of

counterparty is US/Non US plus US guaranty

PR rules not applicable if PR covered entity that is not a US

entity and does not have a US guarantee faces non US

counterparty without a US guaranty

36


The CFTC Exclusion

What if the CFTC entity is a non-US entity or you are a non-US

entity? Do the CFTC margin rules apply?

Rules apply if the covered entity enters into an uncleared swap

with a US person

(1) Natural person resident in the US

(2) Estate of a decedent who was resident in the US at time of death

(3) Corporation, partnership or other business entity (excl. pension plan

or trust described below) that is organized under US law or has its

principal place of business in the US, including a branch of such legal

entity

(4) Any pension plan for the employees, officers or principals of a

business entity described above unless the plan is primarily for foreign

employees

37


US Person definition continued

(5) Any trust governed by US law if a court within the US is able to

exercise primary supervision over the trusts’ administration

(6) Any legal entity (other than an LLC, LLP or similar where all

owners have limited liability) that is directly or indirectly majority-

owned by one or more US persons described in prongs 1-5 and in

which such US persons bear unlimited responsibility for the

obligations and liabilities of the legal entity owners which are

responsible for the entity’s liabilities

Any individual or joint account, whether discretionary or not where

at least one beneficial owner is a US person

38


“PPB” is the location of the officers, partners or

managers that primarily direct, control and coordinate

the activities of the legal person

For investment funds – look to the senior personnel

that direct, control and coordinate the fund’s activities

39


US covered entity facing a US Person or non US person with US

guaranty – CFTC margin rules apply

Non-US covered entity with US guaranty (incl. US branch of

foreign covered entity) facing a US Person or non US person with

US guaranty – CFTC margin rules apply

FCS without a US guaranty – substituted compliance may be

available

US branch of non-US covered entity - substituted compliance may

be available

Non US covered entity facing a US counterparty/non US

counterparty with US guaranty - substituted compliance may be

available

40

Foreign Consolidated Subsidiary

an uncleared swap entered into by a non-U.S. covered entity

with a non-U.S. counterparty is excluded from the CFTC

margin rules, provided that neither counterparty’s obligations

under the relevant swap are guaranteed by a U.S. person and

neither counterparty is a Foreign Consolidated Subsidiary

nor a U.S. branch of a non-U.S. covered entity.

FCS is an entity whose financial statements are included in

those of a U.S. ultimate parent entity

41

Information

Your covered entity counterparty will require that you indicate

whether you are a US person; FCS or have a US guaranty

May achieve this through ISDA non disclosure letter (option to

use ISDA Amend platform) or provide the information in some

other format

What is a guaranty - an arrangement pursuant to which one

party to a swap transaction with a non-US counterparty has

rights of recourse against a US person guarantor (whether

such guarantor is affiliated with the non-US counterparty or is

an unaffiliated third party)

42

Substituted Compliance

A covered entity can avail itself of substituted compliance by

complying with the margin requirements of the relevant foreign

jurisdiction

CFTC/PR need to determine that a foreign jurisdiction’s margin

requirements are comparable to the CFTC/PR margin

requirements

Case-by-case determination

43

PR Rules

Substituted compliance can allow a covered entity to comply

with local rules in full satisfaction of PR rules or allow only

compliance with local margin posting requirements

“Full compliance” available if the covered entity is (i) non US or

US branch of foreign entity and does not have a US guaranty

US bank facing non US entity without a US guaranty – if a

substituted compliance determination has been made.

Covered entity must collect IM under US rules but can post IM

in accordance with foreign rules

44

CFTC Rules

Non US covered entities with no US guaranty can have full

sub. compliance as long as counterparty is not a US covered

entity/covered entity with US guaranty

US covered entity/non US covered entity with US guaranty can

achieve sub. Compliance if counterparty is non US person

without US guaranty but only for IM posting obligations not

collection requirements

45

Cross border differences

Scope

foreign exchange forwards and foreign exchange

swaps (per the Treasury exemption) are not “swaps”

Not subject to margin rules (but are counted in

determining MSE status)

Such products are in scope in other jurisdictions rules

such as EU and Hong Kong

Impact on ability to net

46


Inter-affiliate swaps

EU exclusions

US approach

Segregation

Thresholds

47


Timing of rules EMIR - final draft RTS published on March 8, 2016 – these have not

yet been endorsed by the European Commission and are subject to

change

Unlikely to be finalized until the end of 2016

Feedback from EU is that March 1, 2017 deadline for variation margin

may be missed. The deadline for the first phase-in of IM has already

been missed

Other jurisdictions not yet published final rules

Timing of substituted compliance determinations

48


Timing of transfers

US requires T+1 for all margin

EU allows T+2 for variation margin

Hong Kong T+3?

Others?

49

Thank You

Claire Hall

DLA Piper LLP (US)

2000 Avenue of the Stars

Suite 400 North Tower

Los Angeles, CA 90067-4704

[email protected]

50


Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom,

France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. The Law Office of Salman M. Al-Sudairi is Latham & Watkins’ associated office in the Kingdom of Saudi Arabia.

© Copyright 2016 Latham & Watkins. All Rights Reserved.

Swap Collateral Documentation and the New Final Margin Regulations

for Uncleared Swaps: Impact on Swap Documentation Between

Covered Entities and Their Swap Counterparties

Yvette D. Valdez

September 29, 2016

I. ISDA Documentation . . . . . . . . . . . . . . . . . . . . . . . . 3

A. New ISDA Credit Support Annexes . . . . . . . . . . . . . . 4

B. Regulatory Margin Self-Disclosure Letter . . . . . . . . . 17

II. ISDA 2016 Variation Margin Protocol . . . . . . . . . 21

A. Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

B. Adherence Methods . . . . . . . . . . . . . . . . . . . . . . . . . 23

C. Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

D. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

OVERVIEW

52

A. New ISDA Credit Support Annexes . . . . . . . . . . . . . . . 4

1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

2. 2016 Credit Support Annex for Variation Margin . . . . . . . . .7

3. 2016 Phase One Credit Support Annex for Initial Margin . 13

B. Regulatory Margin Self-Disclosure Letter . . . . . . . . . 17

1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

2. Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

3. ISDA Amend 2.0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

53

I. ISDA Documentation

1. Overview

− Separate regulatory CSAs (or Credit Support Deeds for UK

security interest) for each specific margin type:

o Regulatory VM

o Unregulated IM/VM (i.e., “Old” or Existing CSA)

o Regulatory IM

− New regulatory CSAs designed to be capable of addressing

different and potentially inconsistent margin rules (i.e., when 2+

uncleared swap margin regimes apply to the parties’ trades

covered by the CSA)

A. New ISDA Credit Support Annexes

54

1. Overview (continued)

− Parties could potentially have up to four CSAs governing their

trades under their ISDA Master Agreement

* Note that parties could also choose to amend their existing CSA to contain

regulation-compliant terms, in the interest of operational simplicity.


Types of Trades CSA Governing VM CSA Governing IM

Legacy Trades Existing CSA

Trades Subject to Regulatory

VM Requirements Only (i.e.,

not subject to regulatory IM)

New CSA for

Regulatory VM

Either (i) Existing CSA or (ii)

New CSA for Unregulated IM

Trades Subject to Both

Regulatory VM and IM

Requirements

New CSA for

Regulatory VM

Pre-Compliance Positions:

Either (i) Existing CSA or (ii)

New CSA for Unregulated IM

Post-Compliance Positions:

New CSA for Regulatory IM

55

1. Overview (continued)

− Changes driven by:

o General compliance with new margin rules, depending on elections

o New CSA documentation architecture

o Market updates

− New CSAs do not represent a general review of or updates to

predecessor forms

* Include recommended provisions for Japanese parties (for VM CSAs) and/or Japanese

securities/collateral (for IM documentation)


New VM Documentation New IM Documentation

2016 NY Law VM CSA* 2016 NY Law Phase One IM CSA*

2016 English Law VM CSA* 2016 English Law Phase One IM Credit Support Deed

2016 Japanese Law VM CSA 2016 Japanese Law Phase One IM CSA

+ optional Trust Scheme Annex

Euroclear Security Agreement and Collateral Transfer

Agreement* + Clearstream Security Agreement and

Collateral Transfer Agreement

56

2. 2016 ISDA Credit Support Annex for Variation Margin

a. Scope

Parties determine scope of CSA by specifying Covered Transactions

definition in Paragraph 13

oAccounts for differences across applicable margin regimes

However, new VM CSA is not, in and of itself, margin rule-compliant

oParties may choose to include all Transactions

oCovered Transactions definition included to determine “Exposure”

Covered Transactions are excluded from “Exposure” determinations under any Other

CSA between the parties under the same ISDA Master Agreement (e.g., an existing

CSA for legacy trades or a regulatory IM CSA)

b. Credit Support Obligations

Revised to reflect fact CSA only governs VM (i.e., not IM or Independent

Amount)

o Base Currency is USD, unless parties specify otherwise

o No “Threshold” amount


57

2. 2016 ISDA CSA for VM (continued)

c. Collateral Value

o Value of Eligible Collateral subject to FX Haircuts and Valuation

Percentages (specified in Paragraph 13)

o Valuation Percentage is 100%, unless otherwise specified or such

percentage exceeds the legally permitted maximum amount

o FX Haircut Percentage is 8%, except the “FX Haircut Percentage”

is 0% if the Eligible Collateral (VM) or Posted Collateral (VM) is in

the form of cash in a Major Currency3 or is denominated in a

currency that matches the settlement currency

_____

1 Major Currency means (i) US Dollar (USD), (ii) Canadian Dollar (CAD), (iii) Euro, (iv) UK

Pound (GBP), (v) Japanese Yen (JPY), (vi) Swiss Franc, (vii) New Zealand Dollar, (viii)

Australian Dollar (AUD), (ix) Swedish Kronor, (x) Danish Kroner, (xi) Norweigan Krone or (xii)

any other specified currency


58


d. Collateral Eligibility

o Parties may describe collateral eligibility conditions in Paragraph 13

o Legal Ineligibility Notice in new Paragraph 11(g) (must be “turned

on” by parties in Paragraph 13)

Allows collecting party to declare a form of previously agreed collateral to

be ineligible due to applicable law

− Credit quality determinations

− Concentration limits (EU)

May be total or partial ineligibility

Posting party may request reconsideration

e. Transfer Timing

Unless otherwise specified, Transfer must be made by: (i) close of business

on the same day, if demand made by Notification Time; or (ii) next Local

Business Day4 if demand made after Notification Time

o Posting requirement is daily; may need to reconsider Notification Time __________

2 Note that the new NY Law CSA for VM contains a new definition of Local Business Day (LBD)


59


f. Calculating Value and Exposure

Calculations made by Valuation Agent as of the Valuation Time on each

Valuation Date, based on market information and recent data

reasonably available for close of business in the relevant market

o Valuation Time

The time as of which the Valuation Agent computes its end of day valuations of

derivatives transactions in the ordinary course of its business (or such other

commercially reasonably time on the relevant day as determined by the

Valuation Agent), or as otherwise specified by the parties in Paragraph 13

Flexibility for market practice based upon different time zones and portfolios

o Valuation Date

Each day on which commercial banks are open for business (including dealings

in foreign exchange and foreign currency deposits) in at least one location

specified by each of the parties, or as otherwise specified by the parties in

Paragraph 13

o Valuation Time and Valuation Date will be based on location of collateral

operations


60


g. Interest Payments

Paragraph 6(d) provides for two methods of paying interest

i. Interest Transfer

Interest Payer will Transfer the interest due, but parties may elect (in Paragraph

13) to net any Delivery Amount or Return Amount due to the Interest Payer

(i.e., not straight interest payment)

ii. Interest Adjustment

Parties may elect in Paragraph 13 to allow the amount of Posted Collateral held

by the Secured Party to be adjusted (i.e., for negative interest rates) either

(i) upward, if the Interest Amount is a positive number, or (ii) downward, if

the Interest Amount is a negative number

Effectively electing to incorporate the Negative Interest Rate Protocol (NIR

Protocol)


61


h. Credit Support Offsets

o Parties may specify CSAs across which to offset opposite flows of VM

and unregulated (i.e., unsegregated) IM (Other CSAs)

NB: Banks are not currently set up operationally to support this mechanic

o Parties notify each other of collateral they intend to transfer under VM

CSA and Other CSA

o If collateral is fully fungible the two opposite transfer obligations are

automatically satisfied and discharged

Does not apply to transfers of collateral required to be segregated (Other

CSA Excluded Credit Support)

i. Set-Off

Paragraph 8 has been revised to permit Set-Off against credit support

posted under any Other CSA, so long as the Other CSA(s) do(es) not

prohibit such Set-Off or credit support is not required to be segregated

o Secured Party may Set-Off IM/VM posted to Pledgor under Other CSA

o Pledgor may Set-Off IM/VM posted to Secured Party under Other CSA


62

3. 2016 ISDA Phase One Credit Support Annex for IM

a. Notable Differences from CSA for Regulatory VM

o Credit Support Amount

Amended to address separation of VM and IM

Based on regulation (as opposed to Credit Support Amount being based

on Exposure for VM)

o Segregation

IM CSA accommodates collateral held in tri-party

b. Scope

Parties determine scope of CSA by specifying Covered Transactions

definition in Paragraph 13

o Accounts for differences across applicable margin regimes

o Parties may choose to include all Transactions

o “Covered Transactions” definition included to determine IM

Covered Transactions are excluded from “Independent Amount”

determinations under any “Other CSA” between the parties under same

ISDA Master Agreement (e.g., existing CSA for legacy trades)


63

3. 2016 ISDA Phase One CSA for IM (continued)

c. Credit Support Amount

Amount by which IM under all applicable regulatory regimes exceeds

the Value of Posted Credit Support as determined under all applicable

regulatory regimes

oMargin Amount (IM) calculated using the method for calculating the IM for

the relevant asset class/category identified by each applicable margin regime

oValue of Eligible Collateral calculated similarly to CSA for regulatory VM

oIf 2+ margin regimes apply, parties calculate IM for each regime, with the

amount to be posted/collected under the CSA being the “worst” of such

calculations (i.e., largest Delivery Amount applies, while smallest Return

Amount applies)


64


d. Segregation

IM posted by the Pledgor will be maintained by third-party custodians

in a Segregated Account pursuant to a Control Agreement

e. Custodial Arrangement and Control Agreement

Pledgor liable for acts/omissions of the Custodian (IM); accordingly, a

failure by the Custodian would constitute an EoD by Pledgor

f. Substitutions

On the Substitution Date, Pledgor may Transfer to the Secured Party

substitute Eligible Credit Support (IM), and the Secured Party will

Transfer to Pledgor the items of Posted Credit Support (IM) specified

in Pledgor’s notice

oSecured Party only obligated to Transfer Posted Credit Support (IM) with a

Value as close as practicable to (but not more than) the Value of the Substitute

Credit Support


65


g. Optional Control Notices

Parties may elect to include covenants with respect to the control of

collateral, which must be coordinated with both (i) the terms of the

Control Agreement and (ii) the Custodian’s operational practices

oUpon a “Secured Party Enforcement Event”5, Notice of Exclusive Control

provides Secured Party the exclusive right to direct Custodian to block

withdrawals or control collateral

oUpon a Pledgor Enforcement Event, Pledgor Access Notice provides Pledgor

the exclusive right to direct Custodian to block withdrawals or control collateral

_____

3 Secured Party Enforcement Events and Pledgor Enforcement Events are elected/specified

by the parties in Paragraph 13 and address when Secured Parties or Pledgors, respectively,

can give such notice and/or instruction to the Custodian regarding enforcement on the collateral

after an event (which has been mutually agreed in Paragraph 13) has occurred that would

permit the Secured Party or Pledgor, as applicable, to exercise its rights and remedies


66

1. Overview

a. Purpose

Provide market participants with information about their counterparties

sufficient to determine if and when their trading relationships are or will

become subject to uncleared swap margin rules

oWho am I for purposes of a margin regime?

oWho is my counterparty for purposes of a margin regime?

oWhich requirements apply to me/you/us with respect to IM and/or VM? Which

granular rules apply? What happens when rules conflict?

oWhen do uncleared swap margin rules apply?

oWhich transactions are affected by the applicable margin regime(s)?

b. Scope

Currently covers the following margin regimes: (i) Canada; (ii) Japan and

(iii) US; EU and Switzerland will be added once finalized.

o Others to be added as other regulators finalize their rules

B. Regulatory Margin Self-Disclosure Letter

67

2. Structure

a. General Biographical Information of Principal (intended to

be completed by all users)

o Principal Information

o Multibranch Entity Information

o Contact Information

o Designed to include embedded logic to allow users to answer the

fewest number of questions, while providing counterparties with

information sufficient to determine which margin regimes apply

b. Jurisdiction-Specific Information

Principal to complete depending on information required by its

counterparty (Recipient), depending on jurisdiction and regulatory

status of both parties

o Sections require jurisdiction- or regulator-specific information

o Appendices contain jurisdiction- or regulator-specific definitions

o Structured as “modules” in ISDA Amend 2.0 that users elect to complete


68

2. Structure (continued)

* PR refers to the uncleared swap margin rules promulgated by the Prudential Regulators (i.e., the

Board of Governors of the Federal Reserve System, the Office of the Comptroller of the

Currency, the Federal Deposit Insurance Corporation, the Farm Credit Administration and the

Federal Housing Finance Agency)


Biographical Information

Canada

Canada Entity/ Cross-Border

Status AANA

EU

EU Entity/ Cross-Border

Status AANA

US

PR

PR Entity/ Cross-Border

Status

Hedging Exemption

AANA

CFTC

CFTC Entity/ Cross-Border

Status

Hedging Exemption

AANA

Japan

Japan Entity/ Cross-Border

Status AANA

Switzerland

Swiss Entity/ Cross-Border

Status AANA

69

3. ISDA Amend 2.0

a. Process

o Pre-Launch

Dealers (SDL Receivers) must provide which jurisdiction(s)/module(s) must be

filled out by counterparties of each dealer entity

o Post-Launch

Buy-Side Users (SDL Providers)

− Review and complete module(s) requested by SDL Receiver counterparties

− “Sign” (i.e., complete signature block) and share responses

SDL Receivers

Review received SDLs and track received/pending jurisdiction(s)/module(s)

b. Pre-Populated Responses

SDL questions that correspond to questions completed for previous

Protocol Questionnaires in ISDA Amend will be “linked”

o Previously provided responses will “pre-populate” the SDL form in ISDA

Amend 2.0

o Example: “SEC Issuer/Filer” response for ISDA August 2012 DF Protocol will

pre-populate response to “Swaps Hedging Exemption” question for US module


70

NB: ISDA Amend 2.0 functionality

expected end of October

A. Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

B. Adherence Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

1. Effect on Pre- and Post-Compliance Date Positions . . . . . 23

2. Pros/Cons of Each Adherence Method . . . . . . . . . . . . . . . 24

3. Matching Adherence Methods . . . . . . . . . . . . . . . . . . . . . . 25

C. Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

1. Key Matching Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

2. Types of Matching . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

3. Condition Precedent Matching . . . . . . . . . . . . . . . . . . . . . . 28

4. Additive Matching . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

5. Matching with Fallbacks . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

D. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

1. Amend and Replicate-and-Amend (A/R&A) Exhibits . . . . 30

2. New CSA Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

71

II. ISDA 2016 Variation Margin Protocol

1. Protocol Text

2. Questionnaire

3. Protocol Exhibits

a. For NY Law-Governed CSA:

Exhibit NY-NEW (for New CSA adherence method)

Exhibit NY-AMEND (for Amend and Replicate-and-Amend

adherence methods)

b. For English Law-Governed CSA:

Exhibit English-NEW (for New CSA adherence method)

Exhibit English-AMEND (for Amend and Replicate-and-Amend

adherence methods)

c. For Japanese Law-Governed CSA:

Exhibit J-NEW (for New CSA adherence method)

Exhibit J-AMEND (for Amend and Replicate-and-Amend

adherence methods)

A. Structure

72

NB: ISDA Amend 2.0 functionality

expected in November

1. Effect on Pre- and Post-Compliance Date Positions

Adherence method determines which terms govern parties’ pre-

and post-compliance date positions

B. Adherence Methods

Adherence Method Pre-Compliance

Positions Post-Compliance Positions

Amend

Covered CSA, incorporating only those amendments to existing

CSA necessary in order to be compliant with applicable VM

requirements

Replicate-and-Amend Existing CSA

Replica CSA, incorporating only those

amendments to existing CSA necessary

to be compliant with applicable VM

requirements

New CSA Existing CSA

New CSA, populated with standard

terms (and certain optional terms)

produced through parties’

Questionnaires (a New CSA)

73

2. Pros/Cons of Each Adherence Method


Adherence

Method Pros Cons

Amend

Operational simplicity (i.e., there will

be only one capital call for VM as

between the parties)

Maintain benefit of previously

negotiated bargain for both pre- and

post-compliance positions only insofar

as Existing CSA complies with

applicable VM requirements

Replicate-

and-Amend

Maintain the benefit of previously

negotiated bargain for both pre- and

post-compliance positions, to the

fullest extent permitted by applicable

margin rules

Operational complexity (i.e., there will

be two capital calls for VM as between

the parties)

New CSA

Maintain the benefit of previously

negotiated bargain for pre-compliance

positions

More operational complexity than

“Amend” method; lose the benefit of

previously negotiated bargain for post-

compliance positions

74

3. Matching Adherence Methods

− Protocol adherents may choose any or all of the adherence

methods with respect to any particular counterparty

o Parties will have the option in ISDA Amend 2.0 to choose ≥1

adherence method(s) with respect to matching Questionnaires with

one counterparty, while choosing 2+ other adherence methods for

another counterparty

− Both parties must have some overlap in their chosen adherence

methods in order to “match” Questionnaires in ISDA Amend 2.0

(i.e., Condition Precedent Matching)

o If no overlap, parties may “retract” Questionnaires and redeliver

until ISDA Amend 2.0 indicates that parties have “matched”

adherence methods


75

1. Key Matching Variables (by adherence type)

C. Elections

Election Amend Amend-and-

Replicate New CSA

Adherence Method X X X

Covered Margin Regime X X X

CSA Type X X X

Protocol Master Agreement X X X

Effective Date X - -

Independent Amount X X -

Covered Transactions - X X

Negative Interest - - X

Regime-Agnostic New CSA - - X

Principals and Agents X X X

76

2. Types of Matching

In exchanging Questionnaires via ISDA Amend 2.0, parties will be

faced with three different types of “matching” when making their

elections in ISDA Amend 2.0

a. Condition Precedent Matching

Elections in the Questionnaire upon which parties must mutually agree to

successfully “match” and thus produce an effective agreement

b. Additive Matching

Elections (x) upon which parties are not required to agree in order to successfully

“match” in order to produce an effective agreement and (y) for which the result

in the resulting agreement is the sum of each of the parties’ inputs

c. Matching with Fallbacks

Elections upon which parties are not required to agree to successfully “match” and

for which there is a prescribed “fallback” (i.e., an automatically applicable

provision) in the event parties do not agree

C. Elections

77

3. Condition Precedent Matching

− Adherence Method

− Protocol Master Agreement

Plus, if no governing law (i.e., CSA Type) mutually specified, no

Protocol Master Agreement created under Protocol

− Regime-Agnostic New CSA (New CSA Only)

− Negative Interest (New CSA only)

4. Additive Matching

− Covered Margin Regime

− Principals and Agents

C. Elections

78

5. Matching with Fallbacks

C. Elections

Election Applicable Fallback

Notification Time 10:00a NY time for NY law CSA; 12:00p London time

for English law CSA

Effective Date The earliest Relevant Compliance Date (VM) (as

defined in relevant Protocol Exhibit)

Independent Amount The Independent Amount specified in the relevant

Covered CSA or Replica CSA

Covered Transactions

(i.e., Product Set)

Baseline Rule (i.e., Covered Transactions not

expanded to include all Transactions (except Excluded

FX Spot Transactions))

79

1. Amend and Replicate-and-Amend (A/R&A) Exhibits

a. Purpose

Represent form of amendment to existing CSAs and Replica CSAs under

the VM Protocol

o Parties are responsible for determining if the A/R&A Exhibit works with their

existing CSA

o A/R&A Exhibits created to turn provisions in the parties’ existing CSA “on” or

“off,” depending upon the relevant margin regime(s)

b. Relevant Provisions

o Regulatory caps/filters:

o Effectiveness/scope of amendments or Replica CSA, as applicable

o Updated Transfer Timing

NY Law CSA: Earlier of 10:00a and whatever was agreed previously

D. Exhibits

80

Eligible Collateral

Valuation Percentages

Minimum Transfer

Amounts

Thresholds

Valuation Dates

1. Amend and Replicate-and-Amend (A/R&A) Exhibits

b. Relevant Provisions (continued)

o Expanded rights and remedies under Paragraph 8 (Certain Rights

and Remedies)

o New provisions re: Legally Ineligible Credit Support and Credit

Support Offset

o (Potentially) updated Notification Time

o Updated “Value” definition (i.e., to account for regulatory haircuts)

2. New CSA Exhibits

a. Purpose

Create new CSA as between parties from relevant form ISDA 2016 CSA

for VM, supplemented by an “Elections and Variables” paragraph that

is tailored to the Covered Margin Regime(s) selected by the parties

D. Exhibits

81

2. New CSA Exhibits (continued)

b. How It Works

o Standard elections and variables provided by Protocol for all parties

choosing the New CSA adherence method (e.g., assumes collateral

is cash in base currency)

o Automatically tailored elections and variables based on parties’

chosen Covered Margin Regime(s) (e.g., option to add up to 11

other major currencies as Eligible Collateral)

o Variables to be further tailored through Questionnaire matching

(e.g., option to match on sovereigns)

D. Exhibits

82

2. New CSA Exhibits (continued)

c. Provisions

o Covered Transaction

Varies based on whether the parties have elected to apply either:

− Baseline Rule

CSA applies to any Transaction entered into on or after the earliest compliance

date for such Transaction

− Broad Product Set

CSA applies to any transaction entered into on or after the earliest compliance

date for any Transaction under the parties’ ISDA Master Agreement

Protocol populates Baseline Rule and Broad Product Set based on

parties’ chosen Covered Margin Regime(s) (unless parties have mutually

elected “Regime-Agnostic New CSA” in Questionnaire)

o Conditions Precedent

For NY Law and Japanese Law CSAs, Events of Default (EoDs) and

Potential EoDs are conditions precedent to delivery obligations, unless

parties mutually elect to disapply them in their matched Questionnaires

D. Exhibits

83

2. New CSA Exhibits

c. Provisions (continued)

o Base Currency

If parties have mutually selected a single Termination Currency in their

matched Questionnaires, the “Base Currency” is that Termination

Currency

If no mutual selection, then the “Base Currency” will be the fallback

currency matching the CSA Type

o Eligible Currency

The Base Currency, plus any of up to 11 other major currencies if mutually

selected by parties in their matched Questionnaires

o Credit Support Offsets

Not applicable, due to operational issues

D. Exhibits

CSA Type Fallback Base Currency

NY Law US Dollar

English Law Euro

Japanese Law Japanese Yen

84

2. New CSA Exhibits


o Eligible Collateral (VM)

While not automatically included in New CSAs, parties may mutually select

(i) debt issued by the European Central Bank (ECB) and/or (ii) sovereign

debt of the following countries in their matched Questionnaires to qualify as

“Eligible Collateral (VM)” (i.e., eligible non-cash collateral):

o FX Haircuts

0%, unless required to be 8% under any Covered Margin Regime applicable to

the parties (i.e., under US rules)

o Valuation Agent

Baseline is party making demand under Paragraph 3 (Credit Support

Obligations) of CSA, unless the parties mutually specify one party as

Valuation Agent in their matched Questionnaires

D. Exhibits

Australia

Canada

France

Germany

Japan

United Kingdom

United States (Treasuries only)

85

2. New CSA Exhibits


o Valuation Percentage

Collateral tables included for each Covered Margin Regime selected by the

parties, providing minimum haircuts (i.e., maximum Valuation Percentages) for

different types of Eligible Collateral (i.e., different types of sovereign debt)

New CSAs with 2+ Covered Margin Regimes

Valuation Percentage” is the lowest applicable percentage listed in the applicable

collateral table (i.e., applying the highest applicable haircut)

Savings Clause

If any Covered Margin Regime selected by the parties in their Questionnaires caps the

maximum permitted valuation at a number lower than provided by the applicable

collateral table, such lower number applies

Regime-Agnostic New CSAs

“Valuation Percentage” is the highest permitted under all laws applicable to either party

and any Covered Transaction

o Valuation Dates

Each day that is a LBD in both locations specified by the parties in their

respective Questionnaires

D. Exhibits

86

2. New CSA Exhibits


o Valuation Time

Specified in Paragraph 12 of the relevant 2016 ISDA CSA for VM for the

CSA Type applicable as between the parties

o Notification Time

Specified in Paragraph 12 of the relevant 2016 ISDA CSA for VM for the CSA

Type applicable as between the parties, unless the parties mutually select

another time from the list provided in their matched Questionnaires

o Legally Ineligible Credit Support (VM)

Applicable to each party

If toggle turned on in matched Questionnaires, parties may eliminate any

newly ineligible collateral via written notice

D. Exhibits

CSA Type Standard Notification Time

NY Law 10:00a NY time

English Law 12:00p (noon) London time

Japanese Law 11:00a Tokyo time

87

2. New CSA Exhibits


o Holding and Using Posted Collateral

Each party permitted to hold Posted Collateral directly, unless it is a

Defaulting Party

Parties may designate their respective Custodians via matched

Questionnaires or otherwise by written notice

Interest Provisions

− Interest payable in cash

− Standard interest rates are set for each Eligible Currency

− One-month interest periods apply

− Interest payable in arrears on or before the 5th LBD of each month

− Negative Interest applicable if (i) parties have adhered to the NIR Protocol, (ii) an

existing CSA between the parties provides for Pledgor payments or (iii) parties

have mutually elected for Negative Interest to apply in their matched

Questionnaires

o Rounding

Delivery Amounts rounded up and Return Amounts rounded down by small

amounts (e.g., by US$10,000)

D. Exhibits

88

US-EU MARGIN RULES REFERENCE GUIDE

This reference guide will help

financial institutions and financial

end-users, that enter into

uncleared derivative transactions

with US- and EU-regulated

entities, determine applicable

initial and variation margin

requirements.

As regulators and market

practice clarify the scope and

application of the rules in the

coming months, we will update

this chart to reflect the most

current understanding.

Bookmark https://www.lw.com/thoughtLeadership/US-

EU-margin-rules-reference-guide to ensure access to

the most version of the guide.

89

https://www.lw.com/thoughtLeadership/US-EU-margin-rules-reference-guide











Yvette D. Valdez

90

Counsel, New York

T +1.212.906.1797 E [email protected]

Yvette Valdez is counsel in the New York office of Latham and Watkins. Ms. Valdez is a member of the firm's Financial Institutions Industry Group and the Derivatives Practice Group.

Profile

Ms. Valdez has significant

experience in the representation of

dealers, intermediaries and end-

users in connection with

derivatives legal and regulatory

matters under the Dodd-Frank Act

as well as related CFTC, SEC and

prudential regulation. Ms. Valdez

has extensive experience

representing the sell-side and buy-

side as well as intermediaries in

commodity derivatives, fixed-

income derivatives, foreign

exchange transactions, total return

swaps and futures and options

contracts. Ms. Valdez also has

substantial experience in

representing clients in structuring

finance-linked hedging structures

in the energy, infrastructure and

asset finance industry as well as

representing agriculture, power

and energy participants with their

commodity transactions on and off-

exchange.

Ms. Valdez’s regulatory practice

consists of assisting foreign and

domestic investment banks,

futures commission merchants,

brokers and commodity pools with

their regulatory compliance

requirements under the Dodd-

Frank Act as well as advising buy-

side clients in connection with their

exchange-trading, clearing and

trade execution requirements. She

has also advised clients in

connection with the registration

and compliance obligations of

swap execution facilities and

designated contracts markets.

Experience

Ms. Valdez’s experience includes:

■ Dodd-Frank and CFTC

regulatory requirements in

respect of swap dealer and

commodity pool operator/trading

advisor regulation

■ Fixed-income, foreign

exchange, credit derivatives,

commodity and total return swap

derivatives transactions

■ Creation of an options trading

and derivative platforms and

general representation in relation

to such platforms

■ Hedging documentation in

commodity transactions,

including emission allowances,

power and fuel

■ Clearing and trade execution on-

boarding

■ Hedging and credit

enhancement transactions and

risk management structures

involving derivatives, including

total return swaps, credit default

swaps and forward delivery

agreements

Education

JD, Columbia University School of

Law, 2005, Harlan Fiske Stone

Scholar

BA, Emory University, 2000, magna

cum laude

Bar qualifications

New York

Languages

English

Spanish

DISCLAIMER

Although this presentation may provide information concerning potential

legal issues, it is not a substitute for legal advice from qualified counsel.

The presentation is not created or designed to address the unique facts or

circumstances that may arise in any specific instance, and you should not

and are not authorized to rely on this content as a source of legal advice and

this seminar material does not create any attorney-client relationship

between you and Latham & Watkins.

© Copyright 2016 Latham & Watkins. All Rights Reserved.

91

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