Transcript No Slide Title

“Legal Framework for OTC
Derivatives in CEE Countries ”
ACI Annual Meeting
Dubrovnik, Croatia
May 11-13, 2007
Dr Peter M Werner
Policy Director
[email protected]
ISDA
®
International Swaps and Derivatives Association, Inc.
Risk reduction through close-out netting:
Evidence
All banks, 1998-2006
•
•
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Bank for International Settlements,
November 2006
– As of June 2006, total notional
amount of all outstanding OTC
derivatives was $369.9 trillion
– The total mark-to-market value of
these outstanding OTC derivatives
was $10.1 trillion (2.7% of
notional amount).
– After applying close-out netting,
the total mark-to-market credit
exposure was $2.0 trillion (0.5% of
notional amount), a reduction of 80
percent.
U.S. Department of the Treasury, Office
of the Comptroller of the Currency, 4th
Quarter 2006
– For federally chartered U.S. banks,
netting benefit as of December 30,
2006 was 83.7 percent
100
90
80
70
60
Reduction of mark-to-market exposure
50
40
Jun-98
100
Mar-99
Dec-99
Sep-00
Jun-01
Mar-02
Dec-02
Sep-03
Jun-04
Mar-05
Dec-05
US banks, 1996-2006
90
80
70
60
Reduction of mark-to-market exposure
50
40
Mar-96 Dec-96 Sep-97 Jun-98 Mar-99 Dec-99 Sep-00 Jun-01 Mar-02 Dec-02 Sep-03 Jun-04 Mar-05 Dec-05 Sep-06
ISDA
®
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COUNTRY
NETTING LEGISLATION AS OF FEBRUARY 2007
Anguilla
Adopted
Argentina
Under Consideration
Australia
Adopted
Austria
Adopted
Belgium
Adopted
Brazil
Adopted
British Virgin Islands
Adopted
Canada
Adopted
China
Under Consideration
The Czech Republic
Adopted
Denmark
Adopted
England
* See Footnote
Finland
Adopted
France
Adopted
Germany
Adopted
Greece
Adopted
Hungary
Adopted
Ireland
Adopted
Israel
Adopted
Italy
Adopted
Japan
Adopted
Luxembourg
Adopted
Malta
Adopted
Mauritius
Under Consideration
Mexico
Adopted
New Zealand
Adopted
Norway
Adopted
Poland
Adopted
Portugal
Adopted
Russia
Under Consideration
Slovakia
Adopted
South Africa
Adopted
South Korea
Adopted
Spain
Adopted
Sweden
Adopted
Switzerland
Adopted
United States
Adopted
Footnote: England, Hong Kong, Singapore, Netherlands allow for close-out netting as a matter of general principles of law. No specific legislation had to be enacted.
ISDA
®
Netting Legislation in CEE: Precedents
• Slovakia:
Sections 180 and 192 of the Act on Bankruptcy and Restructuring (No
7/2005 Coll, as amended) defines a close-out netting agreement for
derivatives (currencies, interest rates), repos, securities lending and
also allows for close-out netting to be governed by foreign law and
according to the terms of the contract.
• Romania:
Article 2 of Regulation No 31/2006 in connection with Article 2(1) No
12 of the Capital Markets Act defines derivatives in a generic way as
options, futures, forwards, swaps and “any other derivative” contract
relating to currencies, securities, interest rates, credit ratings, indices
etc which may be settled physically or financially. Article 3 of Law No
278/2004 on Banking Insolvency as amended by Government
Ordinance No 10/2004 on Bankruptcy of Credit Institutions) allows for
the application of “bilateral netting” and also defines netting
agreements. Article 2 of Government Ordinance No 9/2004 in
connection with Law No 222/2004 implements the EU Collateral
Directive and ensures equal treatment of title transfer and security
interest collateral arrangements
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ISDA
®
Netting Legislation in CEE: Precedents
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•
Hungary:
Act CXX of 2001 on the Capital Markets (as amended on 10 June 2004)
contains a definition of close-out netting, derivative transactions, repo and
reverse repo transactions plus commodities. It amends the Bankruptcy Act
to give effect to close-out netting and the single agreement concept.
Furthermore, the EU Collateral Directive has been implemented in the
meantime as well.
•
Czech Republic:
Part XI, Article XIV of Act No 257/2004 Coll and Sec 197 of the Act on
Conducting Business in the Capital Markets (No 256/2004 Coll, as
amended) defines close-out netting in accordance with the terms of any
local or foreign law governed contract. Declares that bankruptcy does not
have an effect on close-out netting as performed under a netting
agreement. Local implementation of the EU Collateral Directive currently
being improved.
•
Poland:
Articles 83-85, 127-128 of the Law on Bankruptcy and Restructuring,
2003 define a “framework agreement” as well as “term financial
transactions” and disapply the ability of the receiver to rescind the
agreement. The wording of the local implementation of the EU Collateral
Directive is unclear in regards of the applicability of interbank netting to
financial collateral arrangements
ISDA
®
ISDA’s current agenda for financial law reform
• ISDA netting legislation initiatives
• 2006 Model Netting Act and Memorandum on
Implementation of Netting Legislation
• ISDA proposal for a European instrument on close-out
netting
• European Collateral Directive – review of implementation
• Hague Securities Convention
• UNIDROIT Project on Intermediated Securities
• UNCITRAL projects
• Other financial law reform initiatives
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ISDA
®
Model Netting Act
• A model netting statute, prepared and published by ISDA - available
from the ISDA website at http://www.isda.org
• Originally published in 1996, a revised version was published in 2002
• 2006 Model Netting Act published in March 2006
• Includes provisions relating to collateral and multibranch netting
• Has influenced netting legislation in a number of countries, not
necessarily adopted verbatim, but providing a set of basic principles and
useful definitions to be incorporated into appropriate statutory form
under local law
• ISDA has also recently published a Memorandum on Netting
Legislation (March 2006), with guidance for legislators on
implementation of netting legislation, with particular attention to civil
code jurisdictions
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ISDA
®
ISDA Proposal for a European Instrument
on Close-out Netting
• Purpose:
– to provide guidance to new EU member states that have not yet adopted netting
legislation
– to promote convergence of existing EU regimes for netting on a common set of
core principles
• Neither the 1994 Contractual Netting Directive nor Article 7 of the Financial
Collateral Arrangements Directive establish a common set of core principles
for close-out netting
• EU Commission Securities Experts Group Report of May 2004 on the
Financial Services Action Plan referred to need for minimum standards in this
area
• ISDA comment letter of 1 August 2005 on the EU Commission Green Paper
on Financial Services Policy
• ISDA comment letters of 3 April and 15 September 2006 to the EU
Commission on implementation of the European Collateral Directive
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ISDA
®
European Directive on
Financial Collateral Arrangements
• Now implemented in all 25 Member States
• ISDA review of Collateral Directive implementation,
including the implementation monitor on website
• ISDA collateral opinions
• Article 10: requirement for report by the Commission
on implementation, due by 27 December 2006
• ISDA response of 3 April 2006 to the Commission’s
questionnaire addressed to the private sector, and
ISDA’s supplemental comments of 15 September 2006
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ISDA
®
Implementation of the European Collateral
Directive – key industry concerns
• Scope, particularly in relation to the opt-out to exclude
corporates
• Clarification of what it means to “provide” financial collateral,
particularly in relation to “control” of intangible claims
• Differential implementation across the EU
• Apparent lack of full implementation in one or more Member
States
• Article 7 and close-out netting
• Article 9 and its relationship to the Hague Securities Convention
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ISDA
®
Multiple Agreement Disorder (“MAD”)
•
Multiple Masters:
1.
2.
3.
4.
5.
6.
Waste time
Cost Money
Invite documentation backlog
Increase documentation risk (“Battle of the Forms”)
Divert management attention
Potentially increase credit risk (and capital costs)
Solutions: Single Agreement concept (since 1987):
ISDA Master Agreement is the basis for 90+% of all
global OTC derivatives transactions valued at USD220
trillion (2005)
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ISDA
®
Overview of ISDA Documentation
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ISDA Master Agreement
Schedule
Trade Confirmations
Credit Support Documentation
• User’s Guides
• Legal Opinions from 50 jurisdictions
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ISDA
®
Basic ISDA Agreement Structure
ISDA Master Agreement
plus Schedule
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Governs legal and credit relationship of parties
Includes representations, events of default and covenants
Incorporates Confirmations
Schedule makes elections and changes to standard provisions
Credit Support
Documents

Offering protection
against credit risk
Short Form Confirmations



Incorporate Definitions
Specify economic terms of each
Transaction
Include Transaction-specific
modifications
Long Form Confirmations
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Specify economic terms of each
Transaction
Include Transaction-specific
modifications
Definitions
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Contain standard terms and definitions
for documenting particular types of
Transactions
ISDA
®
ISDA Agreement Structure (2007)
Annexes
Credit Support Documents:
to reduce credit risk
 2001 Margin Supplement
(incorporating 2001 Margin
Provisions)


1995 Credit Support Annex
(Transfer-English law)

North American Power Annex
Bridges

North American Gas Annex
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
GTMA Annex (UK Power)
2002 Energy Agreement
Bridge

European Gas Annex

2001 Cross-Agreement Bridge

EU/US Emissions Allowance
Annexes

1996 FRABBA Bridge

1996 BBAIRS Bridge

Global Physical Coal Annex
1994 Credit Support Annex
(New York law)
2002 Master
Agreement
1995 Credit Support Deed
(Security Interest-English law)
1995 Credit Support Annex
(Japanese law)
2002 Master Agreement
Protocol
Confirmations
 Long form
confirmations
Confirmations
 Short form confirmations

ISDA ®
Master confirmation
agreements
Definitions: for use in
documenting Transactions
 2006 Inflation Derivatives
Definitions

2005 Commodity Definitions

2003 Credit Derivatives
Definitions

2002 Equity Derivatives
Definitions

2006 Definitions

1998 Euro Definitions

1998 FX and Currency Option
Definitions

1997 Government Bond
Option Definitions
Section 1 - Interpretation
• Definitions
• Inconsistency
• Single Agreement
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ISDA
®
Section 2 - Payment and
Delivery Obligations
• Conditions Precedent
• Change of Account
• Payment Netting
• Tax Withholding/Gross-Up
• Compensation
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ISDA
®
Section 3 - Representations
•
•
•
•
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Basic Representations
Absence of Certain Events
Absence of Litigation
Accuracy of Specified Information
Tax Representations
Additional Non-Standard Representations
ISDA
®
Section 4 - Agreements
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Purpose/Remedies
Furnish Specified Information
Maintain Authorisations
Comply with Laws
Tax Agreement
Payment of Stamp Tax
ISDA
®
Section 5 - Events of Default and
Termination Events
Events of Default
• Failure to Pay or Deliver (Section 5(a)(i))
• Breach of Agreement (Section 5(a)(ii))
– applies to both parties
– 30 day grace period (following the giving of notice)
• Credit Support Default (Section 5(a)(iii))
– applies to both parties and any Credit Support Provider(s)
• Misrepresentation (Section 5(a)(iv))
– applies to both parties and any Credit Support Provider(s)
• Default under Specified Transaction (Section 5(a)(v))
• Cross Default (Section 5(a)(vi))
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ISDA
®