legal workshop: gmra adoption strategy, key business issues, case studies of other jurisdictions and...

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

22 November 2011

Indonesian GMRA Annex

Paul Landless and Emir Nurmansyah

Overview

PART I – OVERVIEW OF THE REPO MARKET Introduction on Repos International Master Agreements

PART II – PRACTICAL CONSIDERATIONS FOR THE INDONESIAN GMRA ANNEX

Risk Issues in Repo Markets Output of Initial Legal Survey

22 November 2011Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey 2

PART I: OVERVIEW OF THE REPO MARKET


Introduction on Repos


What is a repo?

“Repo” is short for sale and repurchase transaction

Under a "classic" repo, the owner of securities (the seller) will sell the securities or shares (the repoed securities)

to a bank or other financial provider (the buyer) for $X and

agree to buy the repoed securities back (or equivalent securities) at a specified future date for $Y


What is a repo?

Start of Transaction - Purchase Date

During life of Transaction – Margin Transfer

End of Transaction – Repurchase Date

22 November 2011

Seller Buyerrepurchase price

transfer of equivalent securities

Seller Buyerpurchase price

transfer of securities

Seller Buyermanufactured income on securities margin interest on cash margin

margin transfers

manufactured income on securities interest on cash margin

6Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

Why are repos used?

Seller: to raise cash on a short term basis from longer term assets

Buyer: to make money from the interest charge

To support other money-making transactionsTo fund "long" positions in securitiesTo take "short" positions in securitiesCentral banks: monetary policy instruments


Repo marketThe players and the securities

The Players

Dealers in securities Central banks Banks Insurance companies Pension funds Mutual funds

The Securities

Government Bonds Corporate Bonds Structured finance

bonds Equities


Types of Repo

Classic repoFixed term

– Overnight to one year“on demand” or “open” repo

Reverse repo Buy-sell back Tri-party repo “Special” or “GC” Synthetic repo

Total return swap Forward-start repo


Distinguishing repos from similar transactionsRepos are similar to

Secured loansBuy/sell-backsStock loans or securities lending transactions


Similarities and differencesRepos and secured loans

SimilaritiesSimilar economic terms

DifferencesSecured loans

– Outright title transfer– No security interest granted


Similarities and difference Repo and Secured Loans

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Loan

Seller Buyertransfer of securities

Purchase Priceoutright transfer – no security interest

Seller Buyersecurities collateral

Cash Loan

security interest

Repo

12Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

Development of the international repo markets Originated in the US

Introduced by the US Federal Reserve in 1918 Developed in Europe during 1980 and 1990s Increasingly global

Latin AmericaEastern EuropeSoutheast Asia

InnovationsElectronic trading

CCPRepoclear


Repo market trends

Rapid expansion in overall repo volumesEuropean Repo survey (September 2010): 25%

increase in the size of the European repo market since December 2009

higher than the previous highest figure in June 2007 (pre financial crisis)

Growing market concentrationBroader underlying shift towards CCPMarket share of electronic repo trading falling


International Master Agreements


Introduction to Master Agreements

What are Master Agreements?The standard contractual terms apply

Why are they used?Repo contracts in most jurisdictions can be created

without formality i.e. orallyMost transactions agreed orally over the telephoneThis can lead to uncertainty about what has been

agreed – a written contract removes this uncertaintyEntire agreement clauses

22 November 2011 16Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

Common Architecture

Documentation ArchitectureMaster Agreement produced by trade associationAnnexConfirmations for each tradeCustomised for particular markets or products by

annexes which form part of the master agreementForms a single agreement

No cherry pickingForms the basis for close-out netting


REPO MARKETS MASTER AGREEMENTS

INDUSTRY BODIES AND MARKET PARTICIPANTS

•ICMA/SIFMA•Trade Association representing participants active in the international capital markets•Approximately 350 members globally•Members include: investment banks, banks, exchanges, central banks, law firms, professional bodies

MARKET DOCUMENTATION

•GMRA 2011*•GMRA 2000*•PSA/ISMA Global Master Repurchase Agreement (1995)*•Various country/product annexes•TBMA Master Repurchase Agreement (US)•Local market agreements e.g. China, France, Germany•MRA (US)

•*Guidance Notes available


Market Guidance and Best Practice

ICMA (International Capital Market Association) statements of best practice for repos

Not a contractual commitment Guidelines or recommendations aimed at improving

efficiency or liquidity in the repo marketsRepo Trading Practice Guidelines of August 20, 2003Best Practice Guide to Repo Margining of September 15,

2005 Available from the ICMA website


PART II: PRACTICAL CONSIDERATIONS FOR THE INDONESIAN GMRA

ANNEX


Risks Issues in Repo Markets


Myriad of risks

Settlement Risk

Operational risk Credit Risk

Liquidity risk Market Risk Collateral

risk

Regulatory risk Legal risk


Settlement Risk

Repo transactions are structured as sales of securities

Inherent risk that the sale does not settle as agreed between the parties


Simple legal analysis of a sale of a security

Simple ScenarioAssume physical certificatesAssume simultaneous transfer of fundsSale is complete – title to the security passes

– upon physical delivery of the security to the buyer and money to the seller

22 November 2011Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

Seller BuyerTransfer of Securities

Transfer of Funds

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The Settlement Process – Settlement RiskRisk to buyer/seller inherent in settlement

system in process of transferring titleDelay in reconciling settlement system

register with definitive register of title for registered securities

Aim to minimise delay between payment and transfer of ownership

Delivery versus Payment (DvP) is the ideal


Documentation Risk

Are there any rules in a particular jurisdiction that require particular formalitiesRules requiring writing, signatures, notorisation or

other formalities?


Liquidity Risk

The risk that a firm will not be able to meet its obligations as they fall dueLehman Brothers collapse 2008Northern Rock collapse 2007

Liquidity risk has two aspectsFunding liquidityMarket liquidity


Market Risk

Market risk: the exposure to adverse movement in the prices of securities lent

Market risk mostly arises due to counterparty default, inappropriate margin or reinvestment of cash collateral

ISLA guidance on pricing securities for securities lending transactions


Credit Risk

Risk that a counterparty will fail to meet its obligations

Collateralisation is an effective way to reduce credit exposurereduces the exposure of the lender to borrower by

the amount of collateral heldImportant that the collateral management process

is robust– Operational risk


Output of Initial Legal Survey

(Conducted by Ali Budiardjo, Nugroho, Reksodiputro)


Key Legal Issues

Capacity and authority Tax Issues Recharacterisation

riskEnforceability of

set-off

Automatic Early Termination Language Issue Recognition of

English law

Enforcement of judgments and arbitral awards

Agency transactions

Formalities of transfer of Indonesian Securities

FX-related issuesTreatment of flawed asset

provision

22 November 2011Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other

Jurisdictions and Output of Initial Legal Survey 31

Capacity and Authority

Special considerations apply for Indonesian parties to the GMRA

Classification of local counterparties– Government authorities - Corporates / Companies– State-owned enterprises - Financial institutions– Banks - Insurance companies

Ultra vires issues Verification of capacity and authority

– Documents to be requested from counterparty

Sovereign immunity


Tax issues

Stamp dutyWitholding taxTreatment of the “repo rate”

Whether “profit” or for the purpose of capital gains tax

Filing of tax returns


Recharacterisation risk (1)

Recharacterisation risk

Consequence of recharacterisation – GMRA transaction deemed void and unenforceable

Circumstances under which a GMRA transaction may be recharacterisedRights as owner of underlying assets/securitiesTreatment of manufactured dividends/coupon

payments


Recharacterisation risk (2)

Recharacterisation risk in IndonesiaViews from the Indonesian repo marketAcademic views

Recharacterisation risk in other Western jurisdictions


Enforceability of set-off (1)

An Indonesian entity party to GMRA has rights of set-off and netting upon EOD or insolvency, subject to any preferential transactions

Preferential transactions (actio pauliana) – may be subject to cancellation by Indonesian court under the:Indonesian Bankruptcy LawIndonesian Civil Code


Enforceability of set-off (2)

Set-off and netting in IndonesiaMargin issues - criteria for mutuality in the

context of Equivalent Margin Securities?Requirement for creditor to act in good faith?Formalities required?


Automatic Early Termination

General position

Automatic Early Termination

It is necessary for Indonesian GMRAs to apply AET to preserve the other part’s right to set-off and net under the GMRA.

22 November 2011 38Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

Language

Documentation to be executed in Indonesian language if contracting party is an Indonesian individual/entity


Recognition of English law

Recognition of English law as governing law of the GMRAValid and binding subject to:

– public policy– any mandatory rules of laws of another jurisdiction– there being a connection between at least one of the parties or the

transaction and the chosen governing law

Effect of application of Indonesian law to the GMRA


Enforcement of judgements and arbitral awards

Enforcement of foreign judgmentsForeign judgments unenforceable – territorial

sovereigntyException - Foreign countries with convention with

IndonesiaEnforcement of arbitral awards

Arbitral awards enforceable – 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (i.e. New York Convention)


Agency transactions

Treatment for transactions entered into by party as Principal or as Agent in respect of a PrincipalTerms and extent of any agency disclosed?


Formalities for transfer of Indonesian Securities

General PositionTrue sale without any conditionsOwnership transferred after “juridische levering”

BondsSecuritiesOther registered receivables


FX-related issues

Foreign exchange restrictions in respect of Indonesian Rupiah?Generally no FX restrictions but subject to:

– Reporting obligations which apply to certain Indonesian entities (and failure to report renders such entities liable to relevant criminal or administrative sanctions)

– Restrictions on payment or remittance of sales proceeds in Rupiah apply to Indonesian banks

Foreign exchange events involving settlement of Indonesian Rupiah


Treatment of flawed asset provision

Anti-deprivation principleRule to invalidate a contract that has the effect of

transferring one’s property to another (and removing it from the estate) on insolvency, contrary to the pari passu principle of distribution

“Flawed asset” provision under Paragraph 6(j) of the GMRA in respect of an Indonesian entity which has become insolvent


Questions?


Your Contacts


Paget Dare BryanPartner28th FloorJardine HouseOne Connaught PlaceCentralHong Kong SAR

T +852 2826 2459F +852 2825 8800E [email protected]

Paul LandlessConsultantClifford ChanceOne George Street19th FloorSingapore 049145Singapore

T + 65 6661 2029F + 65 6410 2288E [email protected]

Terry YangSenior Associate28th FloorJardine HouseOne Connaught PlaceCentralHong Kong SAR

T +852 2825 8863F +852 2825 8800E [email protected]

http://knowwho.intranet.cliffordchance.com/profile.aspx?personID=17250


Philip Payne Foreign Of CounselGraha CIMB Niaga 24th FloorJl. Jend. Sudirman Kav. 58Jakarta 12190

T +62 21 2505125F +62 21 2505001, 5121, 5122,5392E [email protected]

Emir NurmansyahPartnerGraha CIMB Niaga 24th FloorJl. Jend. Sudirman Kav. 58Jakarta 12190

T +62 21 2505125F +62 21 2505001, 5121, 5122,5392E [email protected]

Your Contacts

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Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

legal workshop: gmra adoption strategy, key business issues, case studies of other jurisdictions and...

Documents

seller of securities

repoed securities

gmra adoption strategy

key business issues

securities margin

owner of securities

classic repo

case studies