Zanders Academy, Presentation Treasury regulations

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Zanders Academy “Treasury Regulations”

EMIR &

IFRS 13

Bussum, 3rd of September 2013

Jaco Boere - Associate Director

Pierre Wernert – Senior Consultant

Marcos Barrabés-Rebollo - Consultant

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• 08:30 – 09:00 Registration

• 09:00 – 09:15 Welcome and Introduction - Jaco Boere (Zanders)

• 09:15 – 10:00 EMIR - Marcos Barrabés-Rebollo (Zanders)

• 10:00 – 10:30 Coffee break

• 10:30 – 11:15 IFRS13 - Pierre Wernert (Zanders)

• 11:15 – 11:45 Discussion

Agenda

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Agenda

1 Welcome and Introduction

3 Coffee Break

4 IFRS13

2 EMIR

5 Discussion

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Zanders, Treasury & Finance Solutions is founded in 1994

Independent and specialised advisory firm

Focusing on Treasury Management, Corporate Finance and Risk Management

Over 160 qualified treasury consultants

Our advisory services range ‘from ideas until implementation’

Focusing on treasury strategy, organisation, processes and systems

Strong network of offices in Europe (Netherlands, Belgium, Switzerland and United Kingdom)

Leading advisory firm with global experience gained on treasury projects across Europe, North America and Asia

Long-term business relationships with corporations, financial institutions, public sector as well as NGOs based on highest levels of ethics and trust

“...Zanders believes that treasury and finance solutions should be

advised in an independent, innovative and entrepreneurial

manner based on thought leadership and conforming to the constantly changing demands of

the market...”

Zanders Company Overview – Where we are Today

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Since Enron scandal and the resulting introduction of Sarbanes Oxley (SOX), regulatory compliance is coming more and more on the agenda.

On the back of the financial crises new regulations are introduced with the main objective to:

– Reduce (counterparty) risk

– Increase transparency

The details are still being hammered out but a new wave of regulatory reforms is coming and the consequences will be substantial for corporate treasurers.

– Impact on: strategies, systems, processes and results.

Regulations

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New or revised regulations will affect all areas of corporate treasury

Regulations

- Cash Flow Forecasting - Cash Management - SSC/IHB/Payment Factory - Financial Supply Chain

- Market Risk (FX, IR, commodity)

- Credit Risk - Earnings / Cash Flow at Risk - Operational Treasury Risk

- Debt & Capital Markets - Structured Finance - Intercompany Finance - Credit Rating & WACC

Treasury Operations Corporate Risk Management

Corporate Finance Information Managem

Treasury Strategy & Organization

Treasury Systems & Processes

Activities

Enablers

Treasury Performance & Control

Regulation

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Basel III IFRS9

EMIR SEPA

IFRS13

EU Financial Transaction Tax (FTT)

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Agenda


3 Coffee Break

4 IFRS13

2 EMIR

5 Discussion

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Implementation guide to

EMIR compliancy


Marcos Barrabés-Rebollo - Consultant

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Agenda

2 Implementation plan to become EMIR compliant

1 Impact of EMIR on Corporates

Overview of Systems, Trade Repositories and Central Counterparties 3

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What is EMIR? The impact on Corporates

≤ NFC-

>

NFC+

EUR 1 billion • Credit derivative contracts • Equity derivative contracts EUR 3 billion • Interest rate derivative contracts • Foreign Exchange derivative contracts • Commodity derivative contracts

Central Clearing Range (Gross Notional)

Threshold

• Select CCP(s)

• Comply with CCP terms & conditions

Risk Mitigation Techniques: 1. Timely Confirmation 2. Portfolio reconciliation 3. (Portfolio compression) 4. Dispute resolution

Centr

al Cle

aring Bilateral Settlement

Risk Mitigation Techniques:

!5 Daily calculation of MtM or MtModel

N/A

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What is EMIR? The impact on Corporates (2)

• Parties to the contract Ids • Trading capacity • Clearing Threshold • Mark-to-market • Collateralization • Notional amounts • Currency • Details on transaction • Details on mitigation • Details on clearing • Details per derivative class

Content examples How Who needs to report

Report

ing

Suitable option depends on volume: • MQ • SFTP • Web • Upload

One of the following needs to report:

• Each counterparty reports common & counterparty data directly to the TR itself

• The two counterparties agree that one of them will take partial/full responsibility for reporting

• One of the counterparties engages the services of a third party for partial/full reporting, while the other counterparty reports itself

• Both counterparties outsource their partial/full reporting to different third parties

• Both counterparties outsource their partial/full reporting requirement to the same third party

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Agenda




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Implementation timelines overview S

ep

tem

ber

Octo

ber

No

vem

ber

Decem

ber

Jan

uary

Feb

ru

ary

March

Ap

ril

May

Ju

ne

Ju

ly

Au

gu

st

Sep

tem

ber

Objectives ObjectivesSelect TR Select CCPImplement TR Implement CCPTimeline Timeline1-3 months 3-6 months

Objectives Define processes Implement processes Timeline 1-2 months

RISK MITIGATION TECHNIQUES

2013 2014

CENTRAL CLEARINGREPORTING TO TRADE REPOSITORY

15

-09

-13

24

-09

-13

01

-01

-14

15

-03

-14

15

Implementation timelines risk mitigation techniques

(Electronic) Timely confirmation 1-2m

Portfolio reconciliation 4-6w

Dispute resolution 4-6w

Daily mark-to-market 4-6w

D E A D L I N E

15 - 09 - 13

Objectives • Define processes • Implement processes

Dependencies

• Processes: build on existing processes vs define brand new process

• System(s): • Build on current

system vs selection of new system

• Standard functionality vs custom development

• Scope (a.o. volume of derivatives, derivative classes, currencies)

NFC- NFC+

NFC- NFC+

NFC- NFC+

NFC+

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(Electronic) timely confirmation

Process following Best Practice

• Have a deal management process that includes the following:

o Four Eyes principle (deal execution – deal approval) (S) o Corrections to the deal are recorded (S) o Check of limit utilization (S) o (Electronic) timely confirmation (S)

• Follow the principle of “one confirmation, one trade” sending and storing electronic

confirmation of each derivative contract (S)

• Execute OTC derivative contracts with a signed ISDA Master Agreement and Credit Support Annex (S)*

• Capturing ISDA and CSA terms on systems (S)*

(S) System is needed to support the best practice * If compliant with ISDA, then it is best practice to capture this in a system

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Portfolio reconciliation


• Agree with counterparty which resources will be allocated to working on reconciliations. Exchange organization charts and contact lists with each counterparty and agree on trigger points for escalation.

• Define formal escalation procedures

• Define roles and responsibilities across all relevant front, middle and back office areas involved in the portfolio reconciliation

• Agree in writing/electronic means with counterparty on the terms of the portfolio

reconciliation (i.e. when the portfolio is valued, when files are available and the methods for transmission and communication)

• Use of systems to support the portfolio reconciliation (S)


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Portfolio reconciliation (2)


• Follow the principle of “One confirmation, One trade” (S)

• Files for reconciliation should be sent in a commonly available industry standard format (i.e. excel, CSV, and text formats) (S)

• Agree the tolerances to determine what constitutes a significant MtM difference

• Parties should agree the time by which files are to be exchanged or uploaded (S)

• Exchange results by no later than the business day following the reconciliation taking place (S)

• Agree in writing/electronic means with each counterparty on the results of the portfolio reconciliation

• Document and archive the results of the portfolio reconciliation

(S) System is needed to support the best practice

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Dispute resolution


• Set up governance and/or escalation procedures to ensure proper senior management visibility into collateral disputes and associated resolution activities

• Define roles and responsibilities across all relevant front, middle and back office areas involved in the resolution of a collateral dispute

• Age collateral disputes on a calendar basis from two perspectives; the first being from one’s own exposure perspective and the second being from the counterparty’s exposure perspective (S)

• Specify in the CSA which derivative contracts are included in the collateral call process

• Execute daily revaluation of collateral with haircuts applied consistent with CSA*


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Dispute resolution (2)


• Investigate the source of a collateral dispute after the portfolio reconciliation is completed (S)

• Define authorizations for sales and trading personnel to access post reconciled portfolio data (S)

• Monitor and report dispute resolution status (S) • Document and archive the results of the dispute resolution


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Daily mark-to-market

Process following Best Practices

• Automated daily market data feed (S)

• Use correct yield curves for estimating future cash flows and discounting (i.e. OIS curve if applicable, basis spread if applicable) (S)

• Assign correct yield curves depending on the derivative (S)

• IFRS13 compliance (S)


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Implementation timeline Trade Repository

Reporting to TR 1-3m

D E A D L I N E

01 -

01 -

14

Objectives • Select TR • Implement TR

Dependencies

• System(s): • Build on current system vs selection of new system • Standard functionality vs custom development • Scope (a.o. volume of derivatives, derivative

classes) • Third parties:

• TR • Middelware • Outsourcing reporting party

S T A R T

24 -

09 -

13

NFC- NFC+

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Selection of Trade Repository

Check list selection of TR

• Decide whether reporting to TR is partially/fully delegated to a third party

• Short list TR candidates

• Contact TRs

• Evaluate volume of derivatives to report & available connectivity methods

• Evaluate pricing

• Evaluate readiness of Testing environment

• Evaluate implementation timelines

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Implementation of Trade Repository

Check list implementation of TR

• Agree with third party on methodology to share reporting data*

• Agree with counterparty on common data to be reported

• Decide connectivity method based on reporting volume (S)

• Onboarding TR team establishing connectivity (S)

• Identify source of data in the system (S)

• Test creation of file (S)

• Test Inbound communication TR (S)

• Test connectivity between TR and middleware (S)

• Test Outbound communication TR (S)

• Test reconciliation by TR (S)

(S) System dependency

* If reporting is delegated partially/fully to a third party

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Implementation timeline Central Clearing

Central Clearing 4-6m

D E A D L I N E ? - ? -

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Objectives • Select CCP • Implement CCP

Dependencies

• System(s):

• Build on current system vs selection of new system • Standard functionality vs custom development • Scope (a.o. volume of derivatives, derivative

classes) • Third parties:

• CCP • Middleware • Clearing Member

S T A R T

15 -

03 -

14

NFC+

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Selection of Central Counterparty

Check list selection of CCP

• Calculate whether threshold is exceeded (S)

• Shortlist CCP candidates

• Evaluate CCP margin requirements

• Evaluate fees (i.e. clearing member, clearinghouse, execution)

• Evaluate clearing members

• Evaluate terms & conditions

• Evaluate available connectivity methods

• Evaluate implementation timelines


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Implementation of Central Counterparty

Check list implementation of CCP

Preparation Clearing Firm: • Choose affirmation platform • Choose clearing form • Define and choose role and apply for accounts at affirmation platform • Prepare connectivity to affirmation platform (S)

At CCP • Apply for registration to get access to CCP • Prepare connectivity to CCP (S) • Contact and instruct third party software vendors, if used (S)


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Implementation of Central Counterparty (2)


Legal Review

Clearing Firm: • Review and negotiate Clearing Firm Agreements • Review and prepare affirmation platform forms • Review and prepare further forms and agreements

At CCP • Review Clearing Conditions, Clearing Agreements and Forms • Prepare agreements and forms for production

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Testing Clearing Firm: • Connect to UAT environment (S) • Request for mapping to EBs and Clearing House (S)

At CCP: • Connect to Interfaces (S) • Define and request simulation setup (S) • Receive and check reports (S) • Search for trades in Reports (S) • Upload test portfolio (S)


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Preparation for Go Live Clearing Firm: • Connect to production environment (S) • Provide legal forms and agreements

At CCP: • Apply for production setup and provide forms and agreements • Define Fee-Model • Define Netting-Settings


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Agenda




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Systems

Reporting

Reporting, Central Clearing, Risk

Mitigation Techniques

Central Clearing

Integrates EMIR requirements with Treasury & Risk Management • Calculation and

reporting of the clearing thresholds

• Execution of central clearing with CCP

• Reporting to TR • Electronic confirmation,

(portfolio reconciliation, dispute resolution), daily mark-to-market

Integrates EMIR reporting with Treasury & Risk Management

EMIR reporting stand alone solution

Central clearing solution with potential integration to other Misys products

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Trade Repositories

Trade Repositories

Annual Cost Estimate*

0 to 3K trades p.a.

3 to 50K trades p.a. > 50K trades p.a.

8000 – 18000 EUR

22000 – 36000 EUR

> 50000 EUR

• No official list of TRs who have applied for an ESMA license exists

• At the moment it is not known which other TRs different from the above have applied for a license to ESMA

• ESMA is expected to officially publish the TRs who have been given a license on the 24th of September 2013

* Based on information disclosed by one TR. The estimate does not take into account group discount for

subsidiaries. The estimate assumes no ETD are reported

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Central Counterparties


• No official list of CCPs who have applied for an ESMA license exists

• At the moment it is not known which other CCPs different from the above have applied for a license to ESMA

• ESMA is expected to officially publish the CCPs who have been given a license at the end of Q1 2014

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CCP Country Commodity Credit Equity Interest rate

FX

CME Clearing US

USA

CME Clearing EU

UK

ECC Germany

Eurex Clearing

Germany

ICE Clear Credit

USA

ICE Clear EU

UK

KDPW_CCP Poland

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CCP Country Commodity Credit Equity Interest rate

FX

LCH.Clearnet Ltd

UK

LCH.Clearnet SA

France

MEFF Spain

Nasdaq OMX

Sweden

OMI Clear

Portugal

Holland Clearing House

The Netherlands

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QUESTIONS?

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Agenda


3 Coffee Break

4 IFRS13

2 EMIR

5 Discussion

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Agenda


3 Coffee Break

4 IFRS13

2 EMIR

5 Discussion

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IFRS13-Fair Value

Measurement


Pierre Wernert – Senior Consultant

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Agenda

1 IFRS13-Highlights

3 Determination of Fair Value

4 Valuation Techniques

2 Definitions of Fair Value

5 Disclosure

6 Definition CVA/DVA

7 Impacts for corporates

8 Example/Case

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• IFRS13-Fair Value Measurement

single source of guidance for fair value measurement under IFRSs

no requirements in which situations fair value

measurement is required

it prescribes how fair value is to be measured

applied to both financial or non-financial items for

which IFRSs require or permit fair value measurement

Effective for annual periods beginning on or after

1 January 2013

IFRS13-Highlights

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• IAS39 (previous definition):

The amount for which an asset could be exchanged, or a liability settled between knowledgeable willing parties in an arm’s length transaction

• IFRS13:

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

notion of “exit price”

Definitions

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• For a financial asset under both definitions, an entity is required to include counterparty credit risk (Credit Value Adjustment)

• For financial liability: in practice there was some divergence, now IFRS13 uses the term non-performance risk (which includes entity’s own risk Debit Value Adjustment)

In the past the divergence came from the term settlement value versus transfer

IFRS13-Definitions (2)

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• IFRS13 indicates that an entity must determine the following to arrive at an appropriate measure of fair value:

– Asset or liability being measured

– For non-financial asset, the appropriate valuation technique(s) (focusing on inputs)

– Assumptions used when pricing

– Principal market in which a transaction would take place

• Principal market:

– Market with greatest volume and level of activity for that asset or liability

– Market in which the entity normally transacts would be presumed to be the principal or most advantageous market

IFRS13-Determination of fair value

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• IFRS13 requires the price within the bid-ask spread (when existed) to be used mid-price

• Fair value of a liability or equity instrument is determined under the assumption that the instrument would be transferred on the measurement date but would remain outstanding transfer value

• If a quoted price is not available: fair value from the perspective of a market participant holding the item as an asset is used

IFRS13-Determination of fair value (2)

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• Market approach: uses of quoted prices (Bonds)

• Income approach: converts future amounts to a single current (discounted) amount (IRS/CCIRS)

• Cost approach: reflects the amount that would be required currently to replace the service capacity of an asset (current replacement cost) (Properties)

valuation technique should be used to maximize the use of relevant observable inputs, minimize unobservable inputs.

IFRS13-Valuation techniques

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• 3 levels hierarchy:

– Level 1: more robust: based on quoted market price

– Level 2: based on valuations technique where all significant inputs are based on observable market data

– Level 3: based on valuations technique where at least 1 significant inputs are based on unobservable market data

IFRS13-Disclosures

Quoted Price? Level 1 Yes

No

Unobservable inputs?

No Level 2

Level 3 Yes

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Impacts for corporates

– Valuation of the CVA and DVA adjustments

– Transition: impact goes to P&L in the current year earnings when first applied

– Hedge accounting: change in credit risk affecting the fair value of the derivative may be a source of hedge ineffectiveness

– DVA may shift from level 2 to level 3. Level 3 requires extra disclosure information

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Impact on hedge accounting

• Hedge relation involves an hedged item (exposure) and a hedging instrument (financial instrument)

• Under IFRS13 the hedging instrument will carry CVA/DVA adjustment

• What about the hedged item?

Does the CVA/DVA adjustment apply on it?

Different opinions from the auditors

Economically, if the hedge is perfect, the hedging instrument is the mirror of the exposure. If the hedging instrument is carrying the CVA/DVA solely, the results of the hedge test will not be 100%.

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IFRS13 does not recommend a specific methodology for the valuation of the CVA/DVA. The IFRS standard only uses the term adjustment

– At instrument level or at counterparty level

– Take into account collateral agreement

– Need of new market data – observable credit spreads

– Need a system which can handle the valuations

– Difficulties for instruments which may be an asset or a liability during their lifetime (IRS/CCIRS)

CVA/DVA-How to value it?

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CVA/DVA-How to value it? (2)

• Simplest approach:

– CVA: the credit spread curve is add to the discount curve

– DVA: the credit spread curve is add to the discount curve are the market data available? use of peer group

– Similar to a sensitivity scenario

– The CVA/DVA adjustments result will be the difference between the market value with credit spread and the market value at risk free rate

• CVA: intuitive: the market value of the asset will become lower (loss) in case of the counterparty rating goes down

• DVA: contra-intuitive: the market value of the liability will become lower (gain) in case of the company rating goes down

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• CVA example with a flat free rate of 2% and a flat Credit Default Swap (CDS) curve of 100bps.

Market value risk free: 238.90 Market value with spread: 233.63 CVA adjustment: -/- 5.27

Represents the potential loss in case of default of the counterparty

t=1 t=2

t=3

Cash Flows 50 75 125

Discount Factor Risk Free 98.0% 96.1% 94.2%

Discount Factor with CVA spread 97.1% 94.3% 91.5%

Discounted CF Risk Free 49.02 72.09 117.79

Discounted CF with CVA spread 48.54 70.69 114.39

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Example-Spread approach IRS

• Interest rate swap (may be an asset or a liability):

– Notional: kEUR 15,000

– Maturity: 1 January 2028

– Pay fixed: 3.50%

– Received floating: EURIBOR 3M

– Payment frequency: Quarterly

– Counterparty: ING

– Company AA rating

CDS Data ING 31 Dec 12

ING 31 May 13

DVA 31 Dec 12

DVA 31 May 13

5 Years 109 136 70 55

10 years 127 178 95 84

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Example-Spread approach IRS (2)

Issues with spread method:

– the impact is depending of the actual market value

– doesn’t take into account the change in market value in the future (asset or liability)

– miss one of the adjustment

– no probability of default

market value @ risk free

CVA Adjustment

DVA Adjustment

market value with

adjustments

31 Dec 2012 -/- € 3,499,695 -/- € 176,685 € 124,254 -/- € 3,375,171

31 May 2013 -/- € 3,044,005 -/- € 182,267 € 82,700 -/- € 2,961,305

Difference € 455,689 € 5,582 -/- € 41,823 € 413,866

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Example-Swaptions approach IRS

Issues with swaption method:

– static view: use of interest rate curve at valuation date

CVA Adjustment

DVA Adjustment

market value with

adjustments - Swaption

market value with

adjustments - Spreads

31 Dec 2012 -/- € 55,660 € 167,700 -/- € 3,387,654 -/- € 3,375,171

31 May 2013 -/- € 83,433 € 128,213 -/- € 2,999,225 -/- € 2,961,305

Difference -/- € 27,773 -/- € 39,487 € 388,429 € 413,866

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QUESTIONS?

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Agenda


3 Coffee Break

4 IFRS13

2 EMIR

5 Discussion

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• Credit Risk Seminar – 28th of November 2013

Zanders Academy – Next event

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distributed in whole or in part to any other person. All information contained

herein is confidential and proprietary to Zanders and any of its subsidiaries.

This material is not to be disseminated, reproduced in whole or in part without

the written prior consent of Zanders.

By furnishing this presentation to the recipient, Zanders is not committing to

any transaction. Although any indicative information is reflective of the terms

under which a transaction might be arranged, no assurance is given that such a

transaction will be executed on the specific terms indicated, due to changes in

circumstances or new understanding through further analyses.

Disclaimer

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Contact

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Economy & Finance

Zanders Academy, Presentation Treasury regulations