Peculiarities of the OTC derivatives regulation model in the EU International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015 Peculiarities of the OTC derivatives regulation model in the EU Ing. Mgr. Martin Glajch LL.M. ING. MGR. MARTIN GLAJCH, LL.M.

Introduction European Market Infrastructure Regulation Counterparties International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015 Introduction European Market Infrastructure Regulation Counterparties Obligations Risk mitigation techniques Reporting Clearing Margining Local experience in CEE International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015 ING. MGR. MARTIN GLAJCH, LL.M.

European Market Infrastructure Regulation (EMIR) EU regulation No. 648/2012, as amended on OTC derivatives, central counterparties and trade repositories Effective as of 16 August 2012 Directly applicable in all EU member states Regulatory technical standards (RTS) developed by the European Securities & Markets Authority (ESMA) International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015

Counterparties Financial counterparties (FCs) financial institutions authorised or registered in accordance with EU directives Non-financial counterparties (NFCs) all undertakings established in the EU which are not FCs NFC+ exceed clearing thresholds NFC- do not exceed clearing thresholds Counterparties outside the EU = third country entities (TCEs) may be subject to clearing and risk mitigation obligations Exempt EU central banks, public bodies dealing with public debt and BIS International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015

Counterparties - TCEs Extra-territoriality Equivalence contracts with direct, substantial and foreseeable effect within EU at least one TCE benefits from guarantee from EU FC two TCEs enter into contract through their branches in EU contracts without clear business rationale or economic justification Equivalence TCEs established in equivalent jurisdiction can adhere to rules of that jurisdiction Australia, Hong Kong, Japan & Singapore TCEs established in non-equivalent jurisdictions must ensure EMIR compliance International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015

Risk mitigation techniques Timely confirmations FCs/NFC+ to confirm contract by T+1 & NFC- to confirm contract by T+2 FCs to report unconfirmed transactions monthly Daily valuation FCs and NFC+ to carry out daily mark-to-market or mark-to-model valuations Portfolio reconciliation FC/NFC+ daily, weekly or quarterly & NFC- quarterly or annually Portfolio compression all counterparties semi-annually International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015

Risk mitigation techniques in CEE Dispute resolution all counterparties to identify, record, monitor and resolve disputes FCs to report unresolved disputes to competent authority Applicable since 15 March 2013 or 15 September 2013 Czech Republic local master agreement amended to provide for risk mitigation obligations no local protocol similar to 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol published by ISDA International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015

Reporting obligation All counterparties International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015 Reporting obligation All counterparties delegation to third party is possible but responsibility retained All contracts: over-the-counter (OTC) & exchange-traded derivatives (ETD) common data & counterparty data as well as collateral & valuation data Applicable since 12 February 2014 and 11 August 2014 Frontloading International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015 ING. MGR. MARTIN GLAJCH, LL.M.

Reporting obligation in CEE Trade repositories (TR): registered in EU or recognised by EU obligation to report contracts to TR (or to ESMA) by T+1 Practicalities counterparties should obtain global legal entity identifier (LEI) register with Local Operating Unit (LOU) or pre-LOU CEE no local TR local pre-LOUs International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015

Clearing obligation Obligation to clear contract through central clearing counterparty (CCP) only clearing members (CM) & counterparties will become client of CM FCs/NFC+s & TCEs NFC required to notify if it exceeds clearing threshold => NFC+ OTC derivative contracts which are subject to clearing obligation OTC derivative contracts for hedging purposes are not in scope intra-group (including a TCE) OTC derivative contracts Margin, segregation & portability To apply from December 2015, but phase-in until June 2018 International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015

Clearing obligation in CEE should it apply to interest rate swaps (IRS) in local currencies? Poland: KDPW_CCP authorised to clear IRS in Polish Zloty Czech Republic: no local CCP authorised to clear IRS in Czech crowns if IRS in local currencies cleared, should business model change? Notification obligation Czech Republic & Hungary: intra-group exemption from NFCs’ notification should local NFC notify local competent authority? should local NFC become NFC+ on a group basis? International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015

Margining obligation All counterparties except for non-EU NFC-s and sovereigns Uncleared OTC derivative contracts Risk management procedures: initial margin (IM) and variation margin (VM) Margin methods: standardised method or initial margin models Eligibility criteria & treatment of collateral: concentration limits & haircuts Operational procedures: segregation of IM & no ability to re-use IM Procedures concerning intra-group OTC derivative contracts To apply from September 2016, but phase-in until September 2020 International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015

Margining obligation in CEE ISDA Working Group on Margining Requirements new ISDA templates for Credit Support Documents new Credit Support Annex for regulatory VM and non-regulatory IM new Credit Support Document for regulatory IM Custodial agreements (tri-party agreements) requirement for segregation of IM New or updated netting opinions may be necessary Slovakia ISDA has published no collateral opinion International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015

Summary Local implementation in EU Local experience in CEE EMIR is regulation directly applicable in all EU member states no local law required to be adopted to implement EMIR exception: local penalties for infringing EMIR Local experience in CEE direct consequences: legal & compliance issues indirect consequences: business model issues International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015

Questions & answers Československá obchodní banka, a. s. International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015 Questions & answers Československá obchodní banka, a. s. Ing. Mgr. Martin Glajch LL.M. Address: Radlická 333/150 150 57 Prague 5 Czech Republic Telephone: + 420 224 116 852 Email: mglajch@csob.cz Address: Vietnamská 8/1125 160 00 Prague 6 Czech Republic Telephone: + 420 731 471 442 Email: martin.glajch@gmail.com International scientific and research seminar: Current trends of legal regulation of the over-the-counter derivatives market 22 October 2015 ING. MGR. MARTIN GLAJCH, LL.M.