Uncleared Margin Rules (UMR)

Euroclear triparty solutions

Phase 5 - Operational Workshop

16 December

1

Uncleared Margin Rules – Phases 5 & 6

2

Sept-2016 Sept-2017 Sept-2018 Sept-2019 Sept-2020Feb-2017

Phase 1 Phase 1.5 Phase 2

EU

€0.75tr

€1.5tr

€2.25tr€3tr

Phase 3 Phase 4 Phase 5Sept-2021Phase 6

€50bn

€8bn

±600 pairs

live in Euroclear ±600 pairs

live in Euroclear ±600 pairs

live in Euroclear

±1,000 pairs

live in Euroclear

(**) Est: ± 2,000 pairs

Total industry

(**) Est: ± 1,650 pairs

Total industry

Buy-Side firms pulled into exchanging IM… Challenge: combination of both the type of

counterparties (non traditional Euroclear clients)

and quantity still in scope

Educational effort for the industry globally will be

extremely significant

ALL Sell-Side firms have opted for Triparty solutions

• Euroclear Bank triparty:

o USD 70 bn (Sep 2019) or close to 50% of regulatory

IM as published by ISDA

o +/- 2,800 pairs across first 4 Phases

• Streamlined onboarding process

o less steps required, no need of SWIFT messages

anymore to activate eligibility profiles²

(*)(*)

(*)

(*)

(*)

(*)

1,000 Newly In-Scope Counterparties,

10,000 relationships, 20,000 pairs, of which

+/- 3,600 reaching €50mio IM threshold

requiring documentation and custodian

arrangements

(*) Thresholds based on the aggregate average

notional amount (AANA) of non-cleared derivatives

(**) ISDA estimates

3

UMR Phase 5

Connecting to Euroclear Bank?

Connecting to Euroclear Bank

4

UMR Set-up

Triparty documentation, accounts opening and

activation of triparty relations

Define your operating model. If Triparty, as Pledgee:

1. Set up with your Pledgee Representative

OR

2. Start your admission process in Euroclear Bank

Build your knowledge of Euroclear Bank and Triparty

Digital stand-alone training modules

Now 01 Feb 01 March 31 July

Bilateral negotiation & documentation

ISDA & Euroclear Bank joint documentation

Is UMR new to you ?

5

• Define your operating model for UMR Phase 5 for posting and collecting Reg IM (Third-Party? Triparty?)

► Sell Side will use triparty to post collateral

As Pledgor

• Liase with your current location of collateral, i.e. your Global Custodian or Depository

Bank.

• Euroclear offers various solutions (e.g. Portfolio Model) also allowing custodians and

similar institutions to support you in pledging collateral in favor of your counterparty

As Pledgee (collecting party)

• Sell Side (as pledgors) continue using existing collateral ecosystems (Triparty

Collateral Management)

• Your custodian as gateway to the ecosystem of your counterpart (Pledgee

Representative model)

• Maintain your bilateral counterparty relation and OPS setup while relying on an

existing Euroclear infrastructure through your custodian to collect UMR collateral

Phase 5 firms – Who and how many are you?...

6

• If you want to receive Reg IM collateral in Euroclear Bank Triparty environment, use your

custodian to act as Pledgee Representative on your behalf

► Engage early (now !) in discussions with your custodians and counterparts about your

best setup

• We can only support you if…we know who you are !

► Please, disclose yourself to us as soon as possible before 01 February to ensure

admission in Euroclear !

► We also invite existing Euroclear UMR clients, i.e. Phases 1 to 4 Pledgors, to provide us

a list of Phase 5 counterparties to ensure earliest involvement of all parties

• Assess quickly if you are able to meet the admission criteria in Euroclear Bank

► financial resources, operational and technological capacity, legal capacity, internal

control and risk management, ethical standards etc.

77

A Custodian acts as Pledgee Representative for its Buy Side Client

Euroclear Bank

Buy Side

Pledgee

Representative

EB Third party pledge holder a/c(1 MultiSeg a/c per Pledgee)

Sub div Pledgor 1

Sub div Pledgor 2

Sub Div Pledgor nPledgor n

Pledgor 2

Pledgor 1

Euroclear Bank

Buy Side as direct

Client of Euroclear Bank

Sub div Pledgor 1

Sub div Pledgor 2

Sub Div Pledgor n

Collect Reg IM in Euroclear Bank triparty

Sell Side will most probably want to keep

existing Triparty set-up to post collateral

Triparty Collateral Management

Pledgor n

Pledgor 2

Pledgor 1

Pledgee

EB Third party pledge holder a/c(1 MultiSeg a/c)

Triparty Collateral Management

Buy Side

Start your admission process

8

• If becoming a direct Client of Euroclear Bank is a realistic option, start your

admission process asap

• Financial Institutions should contact their Relationship Manager

• Buyside Clients are welcome to contact Relationship Management further

clarification of Admission Criteria and Acceptance Process

► Christian Goossens, for Europe (christian.goossens@euroclear.com)

► Paul Noordam, for the US and Americas (paul.noordam@euroclear.com)

► Fennie Kwok for APAC region (fennie.kwok@euroclear.com)

Build your operational knowledge of Euroclear

9

• Start building your knowledge of Euroclear Bank and its Triparty service

► We invite you to start your journey of the Euroclear Bank environment by building your

knowledge of the Euroclear system and of the Triparty service in general

► Digital stand-alone training modules on background, functional, technical, legal, and operational setup and process flow of Triparty Collateral Management will be made

available as of early February

• To prepare yourselves to:

► Understand how to operate a direct account in Euroclear Bank

► Manage the UMR onboarding steps: documentation to complete and submit

► Understand the life cycle of a UMR transaction

► Instruct your UMR transactions and understand how to read available reports

► Communicate via Easyway

You will be able to independently operate and monitor your activity in the Euroclear Bank

triparty environment

Your UMR Operational set-up in Euroclear Bank

How does it look like?

10

• Collateral

Profile

1. Bilateral negotiation of the

margin terms between the

parties

2. Legal entity signoff on the

Triparty documentation

(to subscribe to the

EB Triparty services)

3. Triparty accounts activation

(Pledgor and pledgee)

Bilateral negotiation &

documentation

ISDA & Euroclear Bank

joint documentation

Triparty documentation

Euroclear Bank single

form of agreement

Opening of a

multiseg

pledged

account & reporting

subscription

Activation of

Triparty relation+

11

•By end-May, provide:

signed documentation (single form of agreement and reporting subscription)

List of counterparty pairs

“tailor made” collateral profiles

May

• By end-July, provide :

Account activation details

Activation of “tailor made” profiles

Activation of a “standard” profile or a “high-grade” profile, or

replicate a collateral profile

July

•Processing of legal doc and reporting subscription as of 01 March

March - April

•FINALISATION IN EB

August

Final deadline 31 July

Your UMR Operational set-up in Euroclear Bank

Timeline

Detailed timeline

12

13

UMR Phase 5

« Deep Dive » on Euroclear Bank solutions

1414

MultiSeg account structure

Collateral

EB Third party pledge holder a/c

(1 single MultiSeg a/c)

Sub div Pledgor 1

Sub div Pledgor 2

Sub Div Pledgor nPledgor n

Pledgor 2

Pledgor 1

1 Pledgeen Pledgors

Triparty Collateral Management

Euroclear Bank

• Under a MultiSeg account structure, Euroclear Bank is acting as pledge holder, exerting required controls on the pledged account:

►One pledged account in which collateral is received from all pledgors

►Collateral is segregated at “subdivision” level, each with a unique identifier, relating to a specific pledgor

►Each transaction is treated independently legally & operationally, and collateral in each subdivision is ring-fenced legally & operationally

►Validated with ISDA members & supported by relevant bilateral documents and Legal opinions

►Supported by a specific (optional) MT535 triparty

pledge positions report

Pledgee Representative structure – Description

• In order for two parties to enter into a regulatory initial margin

arrangement pursuant to which the Pledgor directly provides eligible

collateral via Euroclear to a Pledgee, both parties must be direct

participants within the Euroclear System

•However, some entities may not currently be direct participants of

Euroclear and may not become direct participants

•The Pledgee Representative structure is a method by which a Pledgorcan provide collateral for the benefit of a Pledgee which is not a

direct participant – the Pledgee will appoint a third entity to act as an

intermediary on its behalf, which entity is itself a direct participant of

Euroclear

15

Pledgee Representative structure – Description

•The pledgor posts collateral to an account ultimately pledged in

favour of the pledgee

•This account is opened in the books of Euroclear Bank, acting in its

own name but for the account of the pledgee Representative, which

in turn acts in its own name but for the account of the specific

pledgee

•Euroclear recognises that the Pledgee Representative is not acting for its own account but on behalf of the specified underlying Pledgee

and will interface with the Pledgee Representative (but not the

Pledgee) in the daily running of the account (e.g. MT527, reporting,

default process, etc.)

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1717

Sell Side 2

Sell Side 1

Euroclear Bank

Pledgor

Sell Side X

Buy Side A…

Subdivision X

Subdivision 1

Representative

Pledgee Representative structure

•MutiSeg a/c opened in the books of Euroclear

Bank, acting in its own name but for the account

of the pledgee Representative, which in turn

acts in its own name but for the account of the

specific pledgee

• Sell Side pledgor

► leverage existing set-up using triparty

collateral management and Euroclear Bank

as pledge location

• Buy Side pledgee access to triparty

► use an intermediary (e.g. their custodian) as

Representative

• Pledge and Account Control Agreement (*) in the books of Euroclear Bank ((*) SPPA and

Amendment agreements)

Sell side to Buy side

Triparty Collateral Management

1818

Collateral Transfer Agreement (CTA) Ridder to allow the option of a Pledgee Representative

RG812 - Single form of agreement (One-off) - Collateral Service Agreement- SPPA & Amendment agreement, including the Pledgee Rep

Euroclear Security Agreement (ESA) Ridder to allow the option of a Pledgee Representative

- Collateral Profiles

ISDA Bilateral Documentation and legal opinions

Euroclear TripartyDocumentation and legal opinion

Legal opinion on Custodian insolvency and segregation

Legal opinion on validity & enforceability of the Belgian Pledge, including the Pledgee Rep structure

The Pledgee Representative’s role is expressly envisaged and recognised under the Belgian Financial Collateral Law (Article 5)

Belgian Financial Collateral Law

Legal framework

Legal comfort … end-to-end !...

Pledgee Representative – Legal opinions

• ISDA

►Legal opinion on validity & enforceability of the Belgian Pledge

(provided by A&O to ISDA, for the benefit of the ISDA members)

►Collateral Giver and Collateral Taker opinions

•Euroclear

►Legal opinion on Euroclear insolvency and segregation (provided by

NautaDutilh for the benefits of Euroclear clients)

•Pledgee Representative

►Legal opinion on insolvency of Pledgee Rep. not claiming an interest

in the pledged assets (conflicts of law analysis)

Euroclear will provide a legal opinion for UK and US, Pledgee Rep

need to provide the legal opinions for other jurisdictions19

2020

Custodian

Buy Side 1Sell Side 2

Sell Side 1

Sell Side X

Buy side to Sell side

Collateral

Portfolio

Collateral Portfolio service

Triparty Collateral Management

•The Collateral Portfolio service is designed for Buy-Side clients acting as Pledgors

•The Collateral Portfolio service allows Global

Custodians to leverage the existing Eurocleartriparty collateral management services with the pledge and account control taking place in their own books

►Buy Side can pledge margin collateral in the books of their Custodian, maintaining existing custody relationship

►Reduced frictions for the Buy-Side clients: leveraging existing custodian relationship

►Reduced operational burden for the Sell Side dealers (leveraging existing triparty connectivity)

•Expandable to other exposure types, e.g. Financing

21

UMR Phase 5

Set-Up of UMR agreements and pairing

22

+Legal

Pack

(RG812)

Collateral

Profile

RG148

Pledgor

Pledgee

Pairs

Account Opening &

Reporting subscriptionContract Activation

@

FastTrack Activation

details

1 3

6

Confirmation +

Subdivision id

Service Activation

FastTrack Activation

details

@

@

@

FYI – confirmation

of a/c opening &

reporting & pairs

4

Legal

Pack

(RG812)

1

Clients on-boarding process

5

@

Confirmation +

Subdivision id

@

FYI

a/c nbr & reporting

@

2

2

4 5

23

@

Legal

Documentation

RG812

• Provides two signed

copies per legal entity

Fast Track Activation

• Provides Excel RG1011 and

send it via e-mail (accounts

and activation details)

• Provides one signed copy

of each profile

Collateral

Profile

Once per legal entity Once per legal entity Per batch

@

Per batch

Counterparty list

(pairs) RG1003

• Provides list of

counterparties

OTCD Set-up – Overview of documentation

Legal

Documentation

RG812

• Provides two signed

copies per legal entity

Once per legal entity

PLEDGOR

PLEDGEE

@

Fast Track Activation

• Provides Excel RG1011 and

send it via e-mail (accounts

and activation details)

Per batchOnce per legal entity

Account Opening

RG148 & Reporting info

• Provides one signed copy

per legal entity (RG148)

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• With our EasyWay solution for Collateral Contracts Management, all triparty collateral profiles available in electronic format and human readable

• Benefits

► Faster set up and easier amendment: Clients can negotiate, amend and create their profiles online, with electronic or wet signature

► Easy monitoring: Consult and query all profiles, able to see a Dashboard with contract status

► More efficient and faster replication: easy to copy sets from existing ones

• Bilateral ISDA contracts available in electronic format on ISDA Create

EasyWay Contract Management

We strongly recommend the usage of EasyWay to speed up the set up and implementation of eligibility sets

Phase 4, around 350 profiles (on 1.100) were drafted directly by clients using EasyWay

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• We have created several templates of collateral profiles for your

convenience in order to help you (guideline) create your own tailor made

collateral profile(s)

They are already implemented in our system and can be quickly

signed and activated

They can serve as a base for negotiation and tailoring to your needs

You can find these templates under the Euroclear Bank triparty

documentation section on the following link:► https://my.euroclear.com/eb/en/reference/services/collateral-

management/otc-derivatives-margin-service/non-

cleared_otc_derivative_margining_service.html

You remain responsible to create collateral profile compliant with the

regulations applicable to you

Collateral profile – Templates

26

• You can

1. build your own collateral profile (“tailor made”) using the

building blocks of the different templates shared with you or profiles activated in previous waves

2. Independently customize your collateral profile directly in

EasyWay (without the intervention of Euroclear)

3. copy an existing profile as many time as you may require

4. agree to have your counterparty's collateral profile applied to

your triparty contract

Building your tailor-made collateral profiles (1)

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• You can create 1 “tailor-made” collateral profile per counterparty

and reuse it as a standard profile across your counterparties

In order to easily create and negotiate a profile with your counterparty, we suggest you start by using the wider profile

possible (in the framework of your acceptable risks)

Then, take out the items / criteria that are not accepted

between you and your counterparty

It is easier, especially when using EasyWay, for you and your counterparty to take out items / criteria rather than starting with

a restrictive one and add criteria

Building your tailor-made collateral profiles (2)