Buy-side seminar: Markets break-out group Questions and answers on EMIR Hannah Meakin, Floortje Nagelkerke and Catherine Blake Norton Rose Fulbright LLP 30 July 2013

Timetable Since 16 August 2012Procedures for exchange of collateral Since 15 March 2013Daily marking to market By 1 September 2013NFC notifications to ESMA and competent authority ESMA’s equivalence advice on US and Japan From 15 September 2013Portfolio reconciliation, compression and dispute resolution By 1 October 2013ESMA’s equivalence advice on Australia, Canada, Hong Kong and Switzerland 1January 2014Reporting for all asset classes ?Exchange of collateral for uncleared OTC derivatives By 15 September 2014ESMA to recommend first sets of derivatives for clearing Mid-2014 to mid-2015Clearing obligation to apply for first sets of derivatives 2

Funds and FC/NFC classification EMIR obligations apply to the counterparty (principal) to the derivative – ie the fund, not the manager EU AIFNON-EU AIF EU AIFM Before authorisation or registration as AIFM NFCTCE would be NFC After authorisation or registration as AIFM (July 2013-July 2014) FC Non-EU AIFM Before authorisation or registration as AIFM NFCTCE would be NFC After authorisation or registration as AIFM (when Commission adopts delegated act – could be as late as after 2015) FC 3

How do classifications translate into obligations? FCNFC+NFC-TCE that would be NFC Clearing  Unless trading with NFC or TCE that would be NFC  X  If trading with FC or NFC+ or with another TCE and effect on EU or avoidance Confirmation  X Reconciliations  X Compression  X Dispute resolution  X Marking to market/model  XX Exchange of collateral  X  If trading with another TCE and effect in EU or avoidance Capital  XXX Reporting  X 4

How are you going to help your client to comply? Risk mitigation – Non-cleared OTC derivatives Confirmations –Confirm conclusion of transactions –Have procedure to report to competent authority Reconciliations –Agree arrangements in writing –Perform reconciliations (could use a third party) Compression –Have procedures to analyse –Perform compression (could use a third party) –If not, be able to provide explanation Disputes –Agree procedure for identification, recovery, monitoring and resolution –Try to resolve disputes –Report high value outstanding disputes Marking to market –Mark to market daily –Have policy for marking to model and model that satisfies criteria 5

How will this impact on agreements with clients and third parties? Fund is responsible but who will do these? –If not manager, will manager or fund delegate to others – eg other managers, prime brokers? What level of liability will manager accept, especially where obligation relies on those other delegates or on counterparties? Does manager have what it needs to do these or to delegate to a third party? –Authority –Certainty on client’s classification –Information about number of outstanding derivatives –Clarity on competent authority –Right to disclose confidential information Above items may also need to be reflected in contracts with third parties and counterparties –Most risk mitigation requirements require counterparty’s cooperation –ISDA protocols on reconciliation, disputes and disclosure for reporting 6

Reporting considerations Will manager report on client’s behalf or delegate to a third party? If delegating to a third party: –Does service cover common and counterparty data? –Be careful of scope – counterparties may only be willing to report derivatives to which they are counterparty –Will they report all modifications and termination as well as conclusion? –What information will you need to provide and how often? eg. valuations? –Will you have a chance to check report before it is submitted? –Do you need access to the trade repository in order to check reports once made? –What will the service provider do if you identify an error? –Does it matter how long ago? –To what extent will they be liable to rectify, cover any fine or pay damages? –Will they back report as well? What information goes in which field? –Details must be reported as if counterparty was itself reporting it –Ambiguity around certain fields 7

Which account will you choose? 8 OmnibusIndividual Assets and positions recorded in separate accounts Distinguish positions and assets of Clients from those of Clearing Member Distinguish positions and assets of one Client from those of any other Client and from Clearing Member No netting of positions recorded on different accounts Means positions of one Client in an account can be netted with positions of other Clients in same account Positions of Client in that account can be netted Assets covering positions in one account are not exposed to losses related to positions in another account Means assets of one Client in an account can cover positions connected to losses on positions of other Clients in same account so fellow Client risk exists Assets of Client can only be used to cover that Client’s positions in that account so no fellow Client risk Excess collateralMargin in excess of Client’s requirement can be held at Clearing Member level Margin in excess of Client’s requirement must be transferred to CCP and not held by Clearing Member PortingLikely to be more difficultShould be more likely

Choice of accounts: Questions to ask 9  Clearing Member must offer both  May offer variations – e.g. if omnibus, may be choice of net or gross margining  Client money currently incompatible with porting but will change  N/A if Clearing Member is a bank  N/A if margin is provided for on title transfer (and not retail)  Cash or securities?  Clearing Member may need to transfer to CCP so will need right of use if security interest  Sub-pools are subject of FCA Consultation  Objective is to facilitate porting in net margined omnibus accounts  Omnibus or individual account at CCP level?  Client money protection or not at Clearing Member level  Title transfer or security interest  Possible choice of sub-pool if omnibus client account with client money protection

Consequences of Clearing Member default 10 2.Return balance to Client Not part of notional pool Notional client money pool ‘For account of clients’? Defaulting CM: Defaulting CM: Individual client account Omnibus client account (net) CCP: Full sum minus costsSum rateable to client money entitlement Client: Client money Not Client money All accounts Omnibus Client account (gross) 1.Port positions and margin 3.Return balance to defaulting Clearing Member

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