ubs ag - europa

Response from UBS of 43

UBS AG P.O. Box 8098 Zürich Public Policy EMEA Group Governmental Affairs Dr. Gabriele C. Holstein Bahnhofstrasse 45 P.O. Box 8098 Zürich Tel. +41-44-234 44 86 Fax +41-44-234 32 45 [email protected] www.ubs.com

European Securities and Markets Authority 103 Rue de Grenelle 75007 Paris France

3 August 2012 Re: ESMA Consultation Paper on Draft Technical Standards for the Regulation on OTCDerivatives, CCPs and Trade Repositories

Dear Sir/Madam,

UBS would like to thank ESMA for the opportunity to comment on the Consultation Paper on Draft Technical Standards for the Regulation on OTC Derivatives, CCPs and Trade Repositories. Please find attached our response to the Paper. We would be happy to discuss with you, in further detail, any comments you may have. Please do not hesitate to contact Gabriele Holstein on +41 44 234 4486.

Yours sincerely, UBS AG

Dr. Thomas Bischof Dr. Gabriele C. Holstein Head of Legislative & Regulatory Initiatives

Head of Public Policy EMEA Group Governmental Affairs


UBS Response to the ESMA Consultation Paper on Draft Regulatory

Technical Standards for the Regulation on OTC derivatives, CCPs and

Trade Repositories

INTRODUCTION

UBS would like to thank ESMA for the opportunity to comment on the consultation

paper on Draft Regulatory Technical Standards for the Regulation on OTC derivatives,

CCPs and Trade Repositories. Please find below our response to the overall content, as

well as specific explanatory sections and standards set out in the Paper.

With regard to the indirect clearing requirements, we consider the CP to be unclear as

to whether the provision of indirect clearing by a clearing member is a mandatory

requirement or whether the clearing member can choose to offer indirect clearing

arrangements should it wish but would not be mandated to do so. We strongly believe

the provision of indirect clearing should be at the discretion of the clearing member and

not a mandatory requirement.

We would like to emphasize our view that we do not believe the approach outlined in

the CP for indirect clearing is workable from a legal, operational or a risk management

perspective for a number of reasons. These include the lack of a single EU bankruptcy

framework, difficulties in undertaking adequate due diligence on indirect clients, an

overly aggressive proposed timetable for setting up legal documentation for indirect

clients and clearing members’ counterparty risk to indirect clients which will be difficult

to manage given likely information constraints. We set out our specific concerns in more

detail in the paper and propose an alternative interim approach, under which, indirect

clearing would be available through a client omnibus account with the direct client, held

separately from the direct client's house positions (the annex to this response sets out

our proposed amendments to the relevant articles). We believe this will meet many of

ESMA’s stated objectives for indirect clearing but will be more workable for market

participants in practice. A longer term solution will require greater harmonisation of EU

bankruptcy regimes.

EMIR Article 5 states that one of the methods via which OTC derivatives become subject

to the clearing obligation is where, within six months of receiving notification, ESMA

develops draft regulatory technical standards (RTS) which it will submit to the


Commission specifying i) the class of OTC derivatives that should be subject to the

clearing obligation and ii) the date or dates from which the clearing obligation takes

effect including any phase-in and the categories of counterparties to which the

obligation applies. Once ESMA has submitted its draft RTS to the Commission, that class

of OTC derivatives is likely to become subject to the clearing obligation within three

months.

We believe it is necessary to clarify the exact circumstances in which the competent

authority notification to ESMA is required. Our understanding is that the notification is

only triggered in the case where a competent authority has completed the authorisation

process under EMIR and we believe this needs to be made explicit in the technical

standards

We do not consider that the notification requirement is triggered in the circumstances

where a competent authority has received an application for authorisation under EMIR,

or where a CCP is already authorized under existing national law. If an application

triggered the notification, there would be significant uncertainty as to when the clearing

obligation applied. This is because there is no requirement under EMIR for competent

authorities to notify ESMA when they receive an application for authorisation under

EMIR. There is then a risk that the CCP authorisation process and the process for

determining whether an OTC derivative contract should be subject to the mandatory

clearing obligation would be run in parallel. The consequence would then be that the

relevant class of OTC derivative contract may become subject to the mandatory clearing

obligation at the same time that the CCP becomes authorized. This would give firms no

time to prepare to meet the clearing obligation and would be extremely difficult to

comply with.

We disagree with the blanket application of a 99.5% confidence interval for OTC

derivatives and consider that a 99.5% level will result in a disproportionate margin

requirement for many asset classes, particularly for liquid products with low volatility.

Whether an instrument is OTC or not does not in itself determine the risk of the

instrument and a more risk sensitive approach is necessary. We therefore propose that a

99% confidence interval is applied to all instruments within the scope of EMIR, with

CCPs having the flexibility to set higher confidence intervals for different classes of

financial products based on their specific risk characteristics.

We consider that the amount of a CCP’s ‘skin in the game’ should be calibrated to

ensure adequate margins are maintained that reflect the close-out risk and so that the

CCP proactively monitors the creditworthiness of its clearing members and adjusts the


required margin for weaker or lower rated clearing members. However, from a financial

stability perspective, we believe the need for significant CCP capital should be balanced

with the concern that the amount of capital dedicated to skin-in-the game should not

be large enough to threaten the viability of the CCP should a large clearing member

default.

Consistent with this, our concerns with the proposed skin the game calculation are

twofold: i) it is difficult to assess the magnitude of the proposed 50% requirement given

that the CCP capital requirements being developed by the EBA are not yet finalised but

we note that the requirement may be significant (particularly if based on less risk

sensitive standardised methodologies used by the CCP) to the extent such calibration

could threaten a CCP’s viability and ii) the proposed approach is effectively based on

the sum of the CCPs expenses in a winding-down scenario, its operational risks and its

risks arising from investment activity, meaning it is not risk sensitive in the sense of not

reflecting the likelihood and impact of a clearing member default. We propose that the

calibration of the skin in the game should be amended so that it is based on a CCP’s risk

from clearing activity and is structured so that CCPs have capital at risk both before and

after the non-defaulting clearing members in order optimise the CCP’s risk management

incentives.

We regard to data reporting to trade repositories, we would stress the importance of

consistency across jurisdictions and particularly with regards to requirements in the US.

A requirement to source different data fields for the same client for trades falling within

different jurisdictions would be highly onerous, would reduce the global comparability

of data and would not deliver any benefits. We believe it is necessary to have alignment

of granular data reporting requirements in order to allow for the development of

systems and processes that are suitable for reporting across different jurisdictions. An

approach based on consistent principles only is unlikely to be sufficient to enable this.

We believe that, as far as possible, reporting standards under ESMA should be based on

existing international data standards in order to maximise the extent of global

consistency and comparability of data. We therefore support the proposal to use LEI and

ISO standards. In order to minimise the potential detrimental impacts of data

fragmentation, we advocate that regulations are designed to encourage the use of a

single global trade repository.


III. OTC DERIVATIVES

III.I CLEARING OBLIGATION

Types of indirect clearing arrangements (Art 4 EMIR, Annex II Chapter II ICA)

In order to comply with the clearing obligation, EMIR requires that a counterparty must

become a clearing member (“CM”), a client or establish indirect clearing arrangements.

Assets and positions of a counterparty entering into such an arrangement should

benefit from protections with equivalent effect to those allowing segregation and

portability for direct clients. Indirect clearing arrangements are considered client-to-client

arrangements i.e. a direct client is considered a client that has an account with a CM, an

indirect client a client of a client. In ESMA’s view, an “equivalent” level of protection

means that the indirect client should be protected from the default of the direct client

providing clearing services and from any losses resulting from the default of other direct

clients of the same CM. To ensure positions of indirect clients are protected in an

equivalent manner, indirect client should have the possibility of requesting an individual

client account with the CM, but not necessarily with the CCP. It is also considered that:

a. The direct client providing clearing services should at least maintain an

individual client account at the CCP level for the exclusive purpose of holding

assets and positions of indirect clients: For its proprietary positions the direct client

will retain the right to choose between omnibus or individual segregated accounts, but

for the indirect clients it will need to maintain at least one specific segregated account at

CCP level to ensure that the indirect clients are not exposed to losses derived from (i)

the proprietary positions of the direct client and (ii) from other clients of the CM.

b. If the direct client defaults, the CM member must have procedures that

ensure the transfer of the indirect client positions to another client or commit to

directly manage these positions: To ensure portability, the CM needs to know the

identity of the indirect clients. As this is commercially sensitive information for the direct

client, appropriate Chinese Walls should be established by the CM to ensure that

information provided by the direct client to the CM member is not used for commercial

purposes. All information held by a client in respect of its indirect clients will be made

available to the CM following the default of the direct client. According to ESMA there

should also be full transparency over the different types of account segregation available

to indirect clients and the level of protection provided by each option.


UBS view on types of indirect clearing arrangement

We would like to raise several issues which can be categorised as the clarification of

clearing member obligations and the operation of indirect clearing arrangements.

Clarification of clearing member obligations with regard to indirect clearing:

Article 4 ICA, 1. states that “A clearing member shall be required to facilitate indirect

clearing arrangements on reasonable commercial terms. These terms shall be publicly

disclosed by the clearing member”.

We consider this requirement to be ambiguous as it could be read as either i) a

mandatory requirement for a clearing member to offer indirect clearing arrangements to

its clients or any clients of its clients or ii) a requirement that, should a clearing member

choose at its own volition to offer indirect clearing, it would be required to do so on

reasonable commercial terms.

We strongly believe that the appropriate interpretation should be ii) as firms should have

the option, but not the obligation, to offer indirect clearing as this is a commercial

decision and clearing members may have legitimate reasons why they do not wish to

provide indirect clearing services. In addition, we consider that a mandatory requirement

for clearing members to offer indirect clearing would go beyond the EMIR Level 1 text.

We therefore propose the following amendment to Article 4 ICA, 1. “In

circumstances in which a clearing member chooses to offer indirect clearing

arrangements, the clearing member shall be required to facilitate indirect clearing

arrangements on reasonable commercial terms. These terms shall be publicly disclosed

by the clearing member”.

It is also important to recognise that an indirect client would have a choice in how to

clear their trades - i.e. to use an indirect clearing arrangement, or to have a direct

clearing arrangement through a clearing member. An indirect clearing arrangement

would be likely to be much more cost-effective for a small client, who might otherwise

have to pay high minimum fees (in relation to their trading activity) if they wanted to

have a direct clearing arrangement. The client should be free to make the choice

between a more cost-effective clearing arrangement which incurs some additional risks

(which should be explained clearly to the client, and which are similar to the risks


currently faced by almost all clients of ETD clearing arrangements), and a more

expensive clearing arrangement with more protections in place.

Operation of indirect clearing arrangements: We would like to emphasize our view

that we do not believe the approach outlined in the consultation paper is workable from

a legal, operational or a risk management perspective for a number of reasons outlined

below.

1) Lack of single EU bankruptcy framework: We do not have a single bankruptcy

framework within the EU that covers all jurisdictions that clients, CCPs and clearing

brokers will reside in. As such, we are unable to see that indirect customer assets will be

appropriately protected in the event of a default, under the model proposed. The crucial

issue at present seems to be that it is virtually impossible to offer exactly the same

options and protections (in terms of segregation options, portability, and return of

assets in the event of a direct client default) as would be available to a direct client. This

is due in large part to the many different bankruptcy regimes under which the clearing

members, direct clients and indirect clients could be operating.

2) Requirement for clearing members to extend individual accounts to indirect

clients results in complexity and leads to prohibitively high costs: It is impractical

for the indirect client to be known to the clearing member and CCP, although we do

appreciate this would be required to facilitate the porting of assets and positions in the

event of direct client or CB default. Clearing members would have to perform 'Know

Your Client' (KYC) due diligence on each indirect client entity as well as risk manage

each end customer both on an on-going basis and in the event of a default. This is

effectively a direct relationship, except, the clearing member would not have been in a

position to assess the end client to our internal standards and criteria. As a result, each

clearing member could have to perform and maintain accounts for thousands of end

clients which would make the costs prohibitively high.

We consider that under the proposed requirements of Article 4 ICA, default

management of a direct client will be very difficult as clearing members will also have to

manage their indirect clients' portfolios individually and there is likely to be considerable

uncertainty as to the process to be followed at the point the direct client defaults. For

example, some indirect clients may want to transfer to a different client/clearer, some

may just wait, and some may not know what to do.


In the case of a direct client default, we would also appreciate clarification of the

following points:

Communication with indirect clients: Would the clearing member have to contact

each and every one of the likely thousands of indirect clients to confirm what their

intentions are?

Approach to margin collection: How long would the clearing member have to wait,

and what is the legal position, with regard to collecting margins from indirect clients

once the direct client (broker) has defaulted?

We would also raise ESMA’s attention to the fact that it is highly improbably that in the

event of a default, these customer assets could be ported, given that the clearing

houses have specific timeframes for porting (e.g. LCH gives client 48 hours to

port,before portfolios are liquidated).

Today Eurex has approximately 50 members and probably less than 1,000 house and

client accounts in total. With the model suggested, where indirect clients are given

equivalent protections as direct clients, Eurex and clearing members could find

themselves opening thousands more accounts for indirect customers.

Should ESMA mandate that information held by the direct client on its indirect clients

must be made available to the clearing member despite our concerns raised, it should

be limited to information relevant for the clearing service. For example, fee

arrangements and other details of the relationship between the direct and indirect

client, should not be released.

3) Requirement for clearing members to extend individual accounts to indirect

clients not achievable in envisioned timeline: From a clearing broker’s perspective,

we are currently negotiating and onboarding direct clients for OTC IRS Clearing at LCH

SwapClear. The client negotiations for legal documentation are taking approximately

three months to complete, as it is necessary to educate clients on the key differences

between Bilateral ISDA documentation and clearing. At UBS, we are currently targeting

approximately 200 clients for OTC Clearing and we believe there are more than 5,000

clients that trade OTC Derivatives in the market today. If clearing brokers are to perform

KYC due diligence with indirect customers, negotiate legal agreements and set up the

accounts internally, this believe this could take the market 2 years. This is assuming a 3


month timeframe for onboarding and 12 clearing brokers in the market who all

onboard 50 client per year, with each client uses a single account structure. Given this

timeframe, meeting mandatory clearing for either direct or indirect clients is unlikely to

be achievable in the timeframes required by EMIR.

4) Requirement to manage indirect client’s portfolio individually increases

counterparty risk to indirect clients: Article 4 ICA, 6. states that “In circumstances

where the positions and assets of indirect clients cannot be successfully transferred, the

clearing member shall offer to hold directly the positions and assets in an equivalent

account with the CCP for a period of at least 30 days and on reasonable commercial

terms. These terms shall be specified in advance as part of the contractual relationship

between the clearing member and the client”.

A clearing member will backstop its customers. If one defaults, the onus is on the

clearing member to make good any losses incurred. If we are clearing on an indirect

basis for a client that defaults, we would be expected to make good any losses to the

clearing house and potentially port the end indirect clients assets to another broker or

hold them for 30 days until they can port.

We may not have the appropriate documentation in place to directly clear for that

client, yet we are still liable for any counterparty risk they pose to the CCP. From a

clearing member perspective, we have the operational burden of maintaining and

segregating the end customer assets, and the responsibility to make good any losses

incurred without being given the opportunity to complete our due diligence and decide

whether we would accept the client or not based on our internal standards and criteria.

This clause creates additional counterparty exposure to indirect clients which we cannot

reasonably manage from the very beginning due to Chinese Walls.

So whilst Article 4, 3. of EMIR states that indirect clearing arrangements must not

‘increase counterparty risk’, in our view, the 30 day holding period would in fact

increase counterparty risk which cannot be adequately managed due to Chinese Walls.

Proposed Solution

In light of these issues, we propose the following:

i) as an interim measure, ESMA put in place an indirect clearing provision as outlined

below, which meets some, but not all, of the desirable clearing standards; and,


ii) as a longer-term measure, ESMA works with the European Commission and national

governments to harmonise bankruptcy legislation to enable greater protections to be

put in place effectively.

Interim approach

Here we aim to describe an interim clearing arrangement which we believe would be

workable in the short term, and we highlight areas where this arrangement would fall

short of the segregation/portability standards which would be preferable:

Indirect clearing would be available through a client omnibus account with the direct

client, held separately from the direct client's house positions

Direct clients should only be allowed to offer indirect clearing capabilities if they meet

certain requirements (e.g. appropriate regulatory supervision; appropriate risk

management framework and procedures for managing risk to their clients; appropriate

KYC and anti-money laundering standards and a requirement to fully inform clients of

the risks involved in an indirect clearing arrangement). The direct client acts as

guarantor to the clearing member for the activity going through their client account.

The clearing member will set risk limits in line with their risk appetite to direct client.

In the event of a clearing member default, the indirect client omnibus could be ported

across to another clearing member just like any other account under direct clearing

arrangements. If the positions could not be ported as a whole, the omnibus account

would be liquidated and any collateral returned by the CCP to the direct client to be

passed back through to the indirect client.

In the event of a direct client default, the clearing member would have procedures in

place (similar to a CCP in a direct clearing arrangement) to port the client omnibus to an

alternative direct client who supported indirect clearing. The clearing member would

need to have contact information available for the indirect clients in order to seek their

permission for this porting. The client agreement with the direct client would need to

include provisions to allow porting of these positions and the associated collateral. If

porting was not possible, the positions in the indirect client omnibus would be closed

out immediately and any collateral returned to the estate of the defaulted direct client.

We recognise that this proposal may not be deemed suitable by all potential indirect

clients on the basis that it does not provide full protection to indirect clients in the case


of a direct client default. But we do consider that a material number of indirect clients

would be able to get comfortable with the level of protections provided and would be

willing to participate in indirect clearing arrangements under this approach. Given the

identified limitations however, we stress the importance of achieving a single

bankruptcy framework across the EU to facilitate indirect clearing, a point we discuss in

more detail below.

We have provided detailed proposed amendments to the indirect clearing articles in the

Annex to this response.

Longer term approach

We recognise that it will be very difficult for ESMA to devise an indirect clearing model

that protects the indirect client to an equivalent level that the direct customer assets are

protected and gives clearing brokers comfort around the risk management process for

the indirect clients both on an ongoing basis and in the event of a default. Whilst we

note that indirect clearing is common for ETD, in such cases the indirect client does not

benefit from the same protections as the direct client.

We feel that a necessary condition for effective indirect clearing arrangements is a single

bankruptcy framework that legally works in all jurisdictions that EMIR covers. A single

segregation and bankruptcy framework would facilitate indirect clearing.

We would like to draw ESMA’s attention to the fact that today none of the European

insolvency laws foresee special treatment of client collateral in relation to central

clearing in the case of a clearing broker default.

Where client collateral, both cash as well as non-cash, is passed through to the clearing

house, it is exposed to the regular insolvency process and bankruptcy estate vis-à-vis the

clearing broker. The one exception where client collateral enjoys special treatment on

clearing broker level are the FSA Client Money and Client Asset Segregation Rules in the

UK, which allow omnibus level segregation of designated client collateral. However,

these rules are not appropriate for strong collateral segregation for OTC clearing by

clients. The recent broker insolvencies, in particular Lehman Brothers, have highlighted

the weakness of such collateral segregation rules. By contrast, in the US, clients enjoy a

much more robust segregation rule in the cleared futures business. The US have, in light

of the mandatory requirement for OTC clearing, further improved their rules and


recently introduced LSOC (Legally Segregated Operationally Commingled) rules that give

effective protection of client collateral on the clearing broker level.

The challenge is hence to establish an EU framework that allows OTC clearing with

effective and efficient collateral segregation rules on the level of the clearing broker.

Consistent with this, we support Annex II, Recital (4) as a means of trying to address this

issue by stating that the requirements set out in the Regulation on the segregation and

portability of positions and assets of indirect clients should prevail over any conflicting

laws, regulation and administrative provisions of the Member State that prevents the

parties from fulfilling them. We believe the legal force of the statement would be

improved were it included in an article rather than a recital and we therefore propose

that it is included within an article in Chapter II. We also believe the text should be

amended to be more explicit that it is applicable to all parties involved in indirect

clearing arrangements (i.e. CCPs, clearing members, direct clients and indirect clients).

However, we still do not consider the text to provide adequate legal certainty that the

Regulation requirements on the segregation and portability of positions and assets of

indirect clients would override any conflicting laws, regulations and administrative

provisions of member states. We propose that ESMA work with other relevant parties to

facilitate the development of a suitable legal framework that ensures effective legal

segregation.

Specifically in regards to indirect clearing, collateral treatment rules need to be adjusted

to the effective nature of the role of the clearing broker and indirectly participating

bank, which is the role of an agent (the clearing broker clears at the CCP, and the

indirectly participating bank at the clearing broker, in its own name, but at the risk of

the client). Related collateral should be treated as such in case of a default of any of

these intermediaries. An additional challenge specific to indirect clearing is that the

clearing member and the indirectly participating bank may operate under different

insolvency laws. As such the feasibility of collateral protection solutions would need to

be verified across two regulations. Also collateral protection rules for indirect clearing

would need to take into consideration not only a clearing broker default, but potentially

also a default of the indirectly participating bank/broker.


III.II CLEARING OBLIGATION PROCEDURE

Criteria to be assessed by ESMA under the clearing obligation procedure (Art

5.5 EMIR and Annex II, Chapter IV, CRI)

ESMA takes into consideration (i) the degree of standardisation of the contractual terms

and operational processes for the relevant class of OTC derivatives, (ii) volume and

liquidity of relevant contracts within the relevant class of OTC derivatives; (iii) availability

of fair, reliable and generally accepted pricing information.

Degree of standardisation: For assessing contractual terms, ESMA considers the use

of common legal documentation, including master netting agreements, definitions and

confirmations which set forth contract specifications commonly used by counterparties

and. For assessing operational processes standardisation, ESMA considers the extent to

which post trade processing is automated and lifecycle events are managed in a

common manner with a widely agreed timetable.

Liquidity: For assessing liquidity ESMA considers whether margins would be

proportionate to the risk that the clearing obligation intends to mitigate, the historical

stability of the liquidity through time and the likelihood that liquidity would remain

sufficient in case of a CM default.

Availability of fair, reliable and generally accepted pricing information: ESMA

would assess whether relevant information to correctly price the contracts is easily

accessible to counterparties on a reasonable commercial basis. The Availability of Pricing

models are not considered an absolute requirement.

Notification to ESMA (Art 5.1 EMIR and Annex II, Chapter III, DET)

According to EMIR, a competent authority shall notify ESMA when it authorises a CCP

to clear a class of OTC derivatives. The clearing obligation will affect contracts entered

into as of the date of the notification. According to ESMA it is likely that only a part of

the classes of OTC derivatives notified will meet the relevant criteria. Regulatory

standards specifying classes of derivatives subject to the clearing obligation will specify

dates as of which the obligation will take effect to give market participants necessary

time for implementation. Where, following a negative assessment of the clearing

eligibility of a given class of OTC derivative contracts, the competent authority is

informed that market conditions or any of the information provided change, it should


have the ability to submit another notification with updated information to ESMA.

According to ESMA a reasonable and balanced approach is required to avoid an

unnecessary heavy workload while assessing appropriateness of the clearing obligation

when required.

UBS views on the application of the clearing obligation

Phasing-in arrangements: We would welcome more clarity in regards to the phasing-

in of the clearing obligation. Article 1 DET, 2. sets out details of the information to be

included in the notification from the competent authority to ESMA in respect of

assessing the date or dates from which the clearing obligation takes effect, including

any phasing-in and the categories of counterparties to which the clearing obligation

applies. Article 5, 2. of the EMIR Level 1 text also refers to phase-in. But, in our view, it

is not clear what types of phasing-in is contemplated by ESMA. We consider that

phasing-in arrangements should be introduced both by i) type of asset class and ii) type

of counterparty and that the technical standards should clearly set out the approach.

We would welcome alignment with the U.S. with regard to phasing-in of different types

of counterparties.

Trigger for the clearing obligation to apply: Article 5 EMIR states that one of the

methods via which OTC derivatives become subject to the clearing obligation is where,

within six months of receiving notification, ESMA develops draft regulatory technical

standards (RTS) which it will submit to the Commission specifying i) the class of OTC

derivatives that should be subject to the clearing obligation and ii) the date or dates

from which the clearing obligation takes effect including any phase-in and the

categories of counterparties to which the obligation applies. Once ESMA has submitted

its draft RTS to the Commission, that class of OTC derivatives is likely to become subject

to the clearing obligation within three months.

We understand that ESMA may only submit draft RTS to the Commission where it has

received notification that a competent authority has authorised a CCP under EMIR, or

where ESMA has recognised a third country CCP under EMIR. Article 5, 1. of the EMIR

Level 1 text states that "where a competent authority authorises a CCP to clear a class

of OTC derivatives under Article 14 or 15, it shall immediately notify ESMA of that

authorization".

We would appreciate clarification of the exact circumstances in which the competent

authority notification to ESMA is required. Our understanding is that the notification is

only triggered in the case where a competent authority has completed the authorisation


process under EMIR and we believe this needs to be made explicit in the technical

standards

We do not consider that the notification requirement is triggered in the circumstances

where a competent authority has received an application for authorisation under EMIR,

or where a CCP is already authorized under existing national law. If an application

triggered the notification, there would be significant uncertainty as to when the clearing

obligation applied. This is because there is no requirement under EMIR for competent

authorities to notify ESMA when they receive an application for authorisation under

EMIR. There is then a risk that the CCP authorisation process and the process for

determining whether an OTC derivative contract should be subject to the mandatory

clearing obligation would be run in parallel. The consequence would then be that the

relevant class of OTC derivative contract may become subject to the mandatory clearing

obligation at the same time that the CCP becomes authorized. This would give firms no

time to prepare to meet the clearing obligation and would be extremely difficult to

comply with.

UBS views on notification following a negative assessment of clearing eligibility

We support the review process following a negative assessment and the opportunity to

provide an updated notification. We would reiterate our comments made in our

response to the ESMA discussion paper that ESMA should seek consistency with US

rules when establishing any process and timeline and should push for alignment across

all G20 jurisdictions and beyond.

We would furthermore welcome clarity in the reverse situation where an eligible

contract would no longer meet the eligibility criteria due to a reduction in liquidity or

volume. Given how the liquidity of an instrument can change over time, it is possible

that contracts deemed eligible for CCP clearing may subsequently become ineligible

and, equally, contracts initially deemed ineligible for CCP clearing may become

sufficiently liquid and standardised to the point where they may become eligible for CCP

clearing. For these reasons, it is important that CCPs, competent authorities and ESMA

adopt a dynamic approach to monitoring eligibility for CCP clearing.

In general, it is essential that market participants are informed at an early stage of

potential changes to existing clearing arrangements for particular contracts, bearing in

mind the economic and other consequences of transitioning from bilateral clearing to

central clearing. We would hence query if in such a situation there would be a status

change in that the contract would no longer be considered eligible and be “delisted”


and if so, immediately upon publication of the negative assessment or with a time lag.

We would stress the importance to have a clearly defined time period to allow the

updating of systems. We believe it would be appropriate to provide for transitional

periods to give firms adequate opportunity to, for example, re-negotiate contracts.

III.IV ACCESS TO A TRADING VENUE (ART 8 EMIR and ANNEX II, CHAPTER VI, LF)

According to Art 8 EMIR, access to a trading venue by a CCP can only be granted if such

access would not require interoperability or threaten the smooth and orderly

functioning of markets in particular due to liquidity fragmentation. In this context,

ESMA is required to specify through draft RTS the notion of liquidity fragmentation.

ESMA decided not to specify a level of liquidity fragmentation which would be sufficient

to threaten the smooth and orderly functioning of markets on the basis that it would

not be possible to specify a single threshold appropriate for all markets. Access of a new

CCP to a venue is considered to cause liquidity fragmentation if, after the CCP had

gained access, there would be no single CCP to which all market participants had

access. In a market with a clearing obligation in place, this would imply that transactions

between some pairs of market participants would be impossible, therefore fragmenting

liquidity in two or more buckets. The draft RTS sets out measures which would need to

be in place to prevent such a situation from occurring. It is specified that in order to

prevent liquidity fragmentation, all participants in a trading venue have access to either:

i) at least one common CCP; or ii) clearing arrangements established by the CCPs.

According to ESMA interoperability arrangements might entail additional risks and given

that under EMIR these arrangements are limited to cash instruments, EMIR specifies that

access to a trading venue can be denied if it requires interoperability. However, this

condition does not exclude that interoperability arrangements can be established among

CCPs if the relevant risks arising from them are duly managed. If the relevant CCPs and

their competent authorities agree with an interoperable arrangement for the purpose of

accessing a trading venue, this possibility should not be excluded.

UBS view on CCP access to trading venues

UBS strongly supports non-discriminatory access to CCPs by trading venues and to

trading venues by CCPs to ensure competition in derivatives trading and clearing

services. Currently the vast majority of trading in ETDs occurs on a few venues, namely

Liffe and Eurex and attempts by new entrants like Turquoise Derivatives have not been


very successful as they either are unable to gain licenses for index products or are not

able to compete in post trade as positions traded on one venue cannot be cross-

margined or netted in the same CCP.

If competition between trading venues is to be fostered, it is critical that CCPs be

required to allow non-discriminatory access to their facilities and services. Access of

CCPs to trade venues should, however, be user demand driven. Where this is not the

case, CCPs should bear the costs (e.g. capital expenditure to develop connectivity). We

do not believe that non-discriminatory access relates to a requirement of

interoperability.

We are aware of a number of market initiatives which are looking at cross margining

(for example, Futures against IRS). In addition, in the futures space there have been

discussions of interoperability between clearing houses, similar to what we see in the

cash world today.

Due to the fact that the OTC cleared derivatives markets is still immature, we do not

support a requirement for CCP interoperability in the short to medium term.

Interoperability beyond cash securities is a laudable goal in the mid-term but we would

caution against practical challenges that need to be better understood as otherwise

interoperability arrangements could lead to a build-up of systemic risk. The timing must

be consistent with the level of CCP readiness to support the process in a scalable

manner. We would stress the importance, however, that the regulatory standards do

not preclude any interoperability offering in the long term.

III.V NON-FINANCIAL COUNTERPARTIES (ART10 EMIR and ANNEX II, CHAPTER

VII, NFC)

OTC derivative contracts that protect non-financials against risks directly related to their

commercial activities and treasury financing activities, as well as those that do not

protect against such risk but do not exceed the clearing thresholds, are not subject to

the EMIR clearing obligation. Once a threshold is exceeded, the clearing obligation

would apply to all future OTC derivatives concluded by the non-financial counterparty

after it has exceeded the clearing thresholds. To calculate whether it exceeds the

clearing thresholds, a non-financial counterparty does not include in its calculation the

OTC derivative contracts which are objectively measurable as reducing risks directly

related to its commercial activity or treasury financing activity or that of its group.


UBS view on clearing thresholds of non-financial counterparties

We believe it is important to clarify which party has the responsibility for ensuring

compliance with the defined clearing thresholds and which party has the liability should

the clearing threshold be incorrectly assessed and the consequent obligations breached.

Both points are currently unclear.

We believe it should be the responsibility of the non-financial counterparty to ensure

compliance with the clearing threshold. Financial counterparties typically do not have

sufficient information with regard to the non-financial counterparty’s activities to

determine whether the threshold has been breached. Requiring having such information

would be a highly burdensome and potentially non-achievable. Furthermore where a

non-financial counterparty has breached a clearing threshold and has not met its

clearing obligation for a period of time, transactions undertaken during this period

should not be back-loaded.

Criteria for establishing which derivative contracts are objectively measurable

as reducing risk directly related to the commercial activity or treasury financing

An OTC derivative contract entered into by a non-financial counterparty is deemed to be

“objectively measurable” as reducing risks if it is:

i) directly related to the commercial activity or treasury financing activity of that non-

financial counterparty or of that group, when its objective is to reduce the potential

change in the value of assets, services, inputs, products, commodities, liabilities that it

owns, produces, manufactures, processes, provides, purchases, merchandises, leases,

sells or incurs in the ordinary course of its business, or the potential change in the value

of assets, services, inputs, products, commodities or liabilities referred to above,

resulting from fluctuation of interest rates, inflation or foreign exchange rates.

An OTC derivative contract used for a purpose in the nature of speculation, investing, or

trading is not considered objectively measurable as reducing risk.

(ii) the accounting treatment of the derivative contract is that of a hedging contract

pursuant to International Financial Reporting Standards (IFRS) principles.


UBS view on objectively measurable criteria

Definition of hedging

Chapter III.V Article 1 NFC sets out conditions that must be met for an OTC derivative

contract to be considered to be objectively reducing risks. Article 1 NFC 1., a. refers to

“…the risks arising from the potential change of the value of….” and Article 1 NFC 1.,

b. refers to “…the risks arising from the potential indirect impact on the value of…”.

We are concerned that use of the word ‘value’ is overly restrictive as OTC derivatives are

frequently used by non-financial counterparties to reduce the risk of variability in future

cash flows rather than the risk of changes in value (e.g. hedging of foreign exchange

risks). We therefore propose that Article 1 NFC is amended to include OTC derivatives

used for the purpose of hedging the variability in expected future cash flows as well as

potential changes in value.

Use of local GAAP

We consider that the proposed technical standards are insufficiently clear with regard to

the ability to rely on local GAAP to determine whether an OTC derivative contract

objectively reduces risks. Article 1 NFC 1., c. states that OTC derivative contracts that

qualify as hedging contracts pursuant to International Financial Reporting Standards

(IFRS) will be deemed to be objectively reducing risks. Annex II Recital 14 recognises that

some non-financial counterparties may report under local GAAP and goes on to say that

“it is expected that most of the contracts that are classified as hedging under local

GAAP would fall within the general definition of contracts reducing risks directly related

to commercial activity or treasury financing activity provided for in this Regulation”.

However, paragraph 61 on page 15 of the CP calls into question whether satisfying

hedge accounting criteria under local GAAP meets the Article 1 NFC 1., c. requirements.

We consider that non-financial counterparties who satisfy hedge accounting criteria

under local GAAP should be considered to meet the Article 1 NFC 1., c. requirements

and that the article should be amended to explicitly reflect this.

Clearing Thresholds

For the purpose of the clearing thresholds, 5 asset classes are considered i.e. credit

derivatives, equity derivatives, interest rate, foreign exchange and, finally, commodity

and others. When one of the clearing thresholds for an asset class is reached, the

counterparty is considered as exceeding the clearing thresholds and therefore is subject

to the relevant requirement for all classes of OTC derivative contracts. The clearing


obligation would apply to all OTC derivatives contracts concluded after the clearing

threshold was exceeded, irrespective of the asset class to which these OTC derivative

contracts belong to. ESMA proposes a phase-in approach where it will start by setting

the clearing thresholds at a level that can be further tailor-made when more data is

available. The clearing thresholds will be reviewed on a regular basis.

ESMA has chosen to determine the value of the clearing thresholds by reference to the

notional amount of the OTC derivative contracts. Contrary to a net exposure approach,

the approach based on the notional amount adds up the nominal value of all

outstanding OTC derivative contracts, irrespective of whether they are in or out of the

money.

UBS View on clearing thresholds

We understand that ESMA has chosen to use notional values to determine clearing

thresholds as it is an approach that will be simple for non-financial counterparties to

implement. Whilst we recognize the need for an approach that can be easily

implemented by non-financial counterparties, we note that notional values frequently

will not reflect actual exposure due to different tenors and payoff formulas.

Consequently, we consider that the notional thresholds per asset class should be better

aligned to the economic characteristics of the underlying. For example, whilst the

clearing thresholds for interest rate derivatives and foreign exchange derivatives are

proposed to be set at the same level, interest rate derivatives usually have a significantly

lower present value sensitivity than foreign exchange derivatives of the same tenor. We

believe the clearing thresholds should be amended to take this into account.

We are concerned that under the ESMA proposal, all classes of derivatives will fall within

the clearing requirement even if only one asset class clearing threshold is breached. We

consider this approach to be significantly more onerous than that of the equivalent US

rules as the CTFC proposals a breach of the threshold for one of the two individual

categories (“rate” swaps and others) would result in only that class of instrument

becoming subject to collateralization requirements. We propose that ESMA aligns its

approach with that of the US to ensure a more harmonized global approach and so as

not to disadvantage EU firms. Thus we propose that the technical standards are

amended so that a breach of the clearing threshold for one asset class results in the

clearing obligation being triggered for that asset class only and not other asset classes.


If this proposal is accepted by ESMA, we consider it also necessary for ESMA to clarify

the approach to be used where a derivative does not easily fit within only one of the

clearing threshold classes. For example, cross-currency interest rate swaps could

arguably be classified as either interest rate derivative contracts or foreign exchange

derivative contracts. So if passing through the clearing threshold triggered the clearing

obligation for that class only, it would be important to know which class to assign the

contract to.

III.VI RISK MITIGATION FOR OTC DERIVATIVE CONTRACTS NOT CLEARED BY A

CCP (ART 11 EMIR AND ANNEX II, CHAPTER VIII, RM)

Timely confirmation

ESMA proposes the following timeline for the confirmation of OTC derivative contracts:

(i) financial counterparties and non-financial exceeding the clearing threshold as soon as

possible, at latest by the end of the day when entered into the contract.

(ii) non-financial counterparties as soon as possible and at the latest, by the second

business day following the trade day.

Where the counterparty would be in a different time zone or when the trade would be

agreed upon late in the day, the contract would have to be confirmed as soon as

possible and at the latest, by the end of the following business day for the relevant

counterparty.

Financial counterparties should report on a monthly basis their OTC derivative contracts

that remain unconfirmed for more than 5 business days.

UBS views on timely confirmation

As an overall comment, we would voice our concern that the timelines envisaged are, in

our view, too aggressive and not achievable by the industry. It is likely to force

participants to focus on speed rather than accuracy. We would suggest a phased in

approach by asset class1. Furthermore that the timelines take into consideration whether

trades are confirmed electronically. Specifically it is our view that trades with brokers /

dealers that are confirmed electronically, confirmation by end of day could be achieved

1 We support a phased in approach as suggested by ISDA in its response to the CFTC notice on proposed rulemaking – confirmation, portfolio reconciliation and portfolio compression requirements for swap dealers and major swap participants, dated 28 February 2011.


for rates, credit and equities. For trades with investment managers who confirm

electronically, T+2 could be achieved. We would bring to ESMA’s attention that a

number of investment managers do not confirm via Marketwire or DTCC (especially in

equities).

For structured contracts, a T or T+2 turnaround is not achievable, regardless of whom

the counterparty is. This will be an industry wide issue.

The industry for many years has been working towards the goal to move trade

confirmations onto electronic platforms but today there are a number of investors who

still confirm via paper. Should ESMA choose to maintain the confirmation time frames

despite our concerns raised, it should consider mandating electronic confirmation for

financial and non-counterparties. We would also stress the importance to have a

consistent approach globally and as propose that the EMIR timeframes are aligned with

the US.

Lastly we would seek clarity as to the consequences of a trade not being confirmed

within the deadline. Our understanding is that the consequence of non-confirmation

within the deadline is the need to include the trade in the monthly report to the

competent authority of trades outstanding for more than five business days. But we

would like clarification of whether the validity of the trade would be affected

We would also appreciate clarification on five aspects outlined below.

Meaning of confirmation: We would appreciate clarification of what confirmation

actually means. Specifically, does confirmation mean i) a fully executed, matched

confirmation or ii) the dispatch of the confirmation to the counterparty. We would

support the latter interpretation.

Scope of confirmation: We would appreciate clarification of whether intra-group and

inter-entity transactions are within scope of the timely confirmation requirements set

out Article 1 RM. We would propose that these transactions are not included in the

confirmation requirements.

Treatment of trades which have a negative confirmation in place: We would

appreciate clarification of how trades which have a negative confirmation in place,


details of which are held within the Master Agreement, would be treated for the

purposes of timely confirmation.

Confirmation of trades in situations where one counterparty would be in a

different time zone: In Article 1 RM, 2., we would appreciate clarification of the

precise definition of “by the end of the same business day” and in Article 1 RM, 3. of

“by the end of the next business day”. We consider that the cut-off time of the business

day should be up until midnight of the following day. Where the two counterparties to

a transaction are in different time zones, we would appreciate clarification as to which

time-zone should be used. For example, in the case where a trade is executed after 4pm

by a financial counterparty in Germany, but with a financial counterparty in London for

whom the local time is 3pm, we consider that Article 1 RM, 3. would apply and the

trade confirmation would need to be sent by the end of the next business day where

the end of the next business day was defined as before midnight German time on the

following business day.

We also note a drafting error in Article 1 RM as two separate paragraphs are numbered

‘3,’.

Reporting of unconfirmed trades: We would welcome clarity as to whether the

reporting requirement only covers the number of unconfirmed trades, or if additional

information, such as counterparty details and type of trades will be required.

Also, we would appreciate clarification of the nature of the monthly report. Our

understanding is that it should be a month-end snapshot of outstanding trades and we

believe this should be made explicit.

Reconciliation of non-cleared OTC derivative contracts

Concerning the frequency of the reconciliation in view of the size of the portfolio that

counterparties have with each other, ESMA proposes that portfolio reconciliation be

performed:

(i) at least each business day when the counterparties have 500 or more derivative

contracts with each other,

(ii) at least once per week for a portfolio between 300 and 500 derivative contracts

(iii) once per month for a portfolio of less than 300 derivative contracts


being understood that the timing should be appropriate based on the size and volatility

of the OTC derivative portfolio between the counterparties.

UBS views on reconciliation of non-cleared OTC derivative contracts

Overall, we consider the proposed frequency and timing of the Portfolio Reconciliation

requirement to be appropriate.

We believe a plausible interpretation of Article 1 RM is that financial and non-financial

counterparties must have bilateral policies and procedures in place which details how

portfolio reconciliations are carried out. We disagree with this requirement and believe

that it is appropriate at a firm wide level to have policies and procedures in place that

details how we undertake portfolio reconciliation, but that such a requirement should

not exist at an individual counterparty level.

Portfolio compression

ESMA proposes that counterparties, financial entities or non-financial entities, having a

portfolio of at least 500 or more non- centrally cleared derivative transactions, should

have procedures to regularly, and at least twice a year, analyse the possibility to conduct

a portfolio compression exercise. The aim of the exercise is for counterparties to reduce

their counterparty credit risk. The procedures should also provide for engaging in such

portfolio compression exercise when it is considered appropriate. Counterparties should

provide a reasonable and valid explanation to the relevant competent authority when

concluding that such a portfolio compression exercise is not appropriate.

As a result of the portfolio compression exercise, the offset OTC derivative contracts

should be terminated no later than the day following the execution of the fully

offsetting derivative contract.

UBS views on portfolio compression

We are generally not supportive of mandating portfolio compression. This is because in

nettable jurisdictions, the compression will not reduce credit, funding or capital usage. It

will reduce the amount of tickets, but not materially, and such trades work on straight

through processing, so are not manually intensive from an operational perspective.

Therefore, we do not consider the costs of portfolio compression in terms of resources

involved, negative impact on cashflow and increased operational risk to be justified by

the benefits which are minimal in our view.


We therefore support the ESMA proposal to limit the portfolio compression requirement

to transactions for which compression would be feasible and appropriate as a risk

mitigation tool. We emphasize our view that portfolio compression is not appropriate

for foreign exchange swaps, equity derivatives and commodities for the reasons outlined

below.

Foreign Exchange Swaps should be excluded due to the short tenor of these trades,

their non-standardized, bilateral nature and the considerable preparation time

associated with the compression process, due to which there is minimal benefit to be

gained from compression. Equity derivatives should be excluded as this market is

broadly positional in nature, lacks product standardization and hence provides little

opportunity for compression and netting. Finally the exclusion should apply to

commodities as well as notional amounts are comparatively low.

We would furthermore query how portfolio compression will work where a client (e.g. a

sovereign wealth fund) appoints several different asset managers to manage different

portions of its overall portfolio. Each asset manager may enter into trades with the same

counterparties, but will not be aware of the trades placed by the other asset managers.

Portfolio compression would be carried out by the asset managers rather than the

sovereign wealth fund, as such it should only operate at the level of the discrete

portfolio managed by that asset manager, i.e. not at the level of the fund across all its

asset managers.

Dispute resolution

ESMA acknowledges that some disputes may require more time than others in order to

be resolved as they may be more complex. In order to avoid that disputes add up and

result in increased risks, ESMA considers that for disputes outstanding for more than 5

business days, procedures and processes shall be agreed upon between counterparties

and provide for some resolution mechanism.

UBS views on dispute resolution

We support the use of the industry standards being developed in relation to dispute

resolution and dispute resolution reporting.

Similar to our comments on portfolio reconciliation, we do not consider it appropriate to

require dispute resolution policies and procedures at an individual counterparty level.

Rather, we consider firm level policies to be sufficient.


We are content with the requirement to report disputes to the competent authorities.

We believe dispute reporting should follow ISDA’s ODSG process which requires the

reporting of disputes of $15 million or greater and outstanding for at least 15 days.

Intra-group exemptions

ESMA proposes that the intra-group exemption information to be disclosed publicly

should contain a mix of qualitative and quantitative information. The quantitative

information would be limited and relate to aggregated data. It would not contain

commercially sensitive information. Disclosure could be made through the annual

accounts or the website of the counterparty on a yearly basis.

UBS views on intragroup transactions

As we are operating against a dynamic background where new classes of derivatives

can be declared eligible for clearing by ESMA on a continuous basis, it is preferable, in

our view, to make one application for a specified list of entities engaging in intragroup

derivative transactions as well as a high level description of the classes of OTC

derivatives they currently or intend to enter into. This would be less cumbersome than

applying for an exemption whenever a new class of derivatives is declared eligible for

clearing by ESMA.

Consistent with the above approach, we would suggest that the entities which have

intragroup relationships and which have been approved for exemption should be made

public.

We do not support the public disclosure of further information such as the anticipated

size, volume and frequency of OTC derivative contracts per annum. This is because the

most common purpose of intragroup transactions is to allow for netting at a parent

level where true net exposures are calculated and elements of OTC derivatives and their

underlying hedges can be brought together. Splitting out elements of the relationships

will only give partial, potentially one-sided elements of the exposure which could be

misleading and is not the way such transactions are managed within banking groups.


IV. CCP REQUIREMENTS

IV.VI MARGINS (Art 41 of EMIR and Annex III, Chapter VII, MAR)

ESMA is required to define: a) the appropriate percentage above the minimum 99

percent confidence interval that margins are required to cover; b) the time horizon for

the liquidation period; and c) the time horizon for the lookback period, i.e. the period

over which the appropriate percentage should be covered, which is necessary to

properly calibrate the model. These three elements are to be considered for the different

classes of financial instruments cleared by the CCP and take into account the objective

to limit procyclicality. Finally ESMA is required to define the conditions under which

portfolio margining practices can be implemented.

Confidence interval for OTC derivatives: ESMA proposes that it should be at least

99.5% and at least 99% for other classes of financial products. For both classes of

financial instruments the criteria based approach should always apply. The percentages

should be increased by each CCP if needed, based on a criteria based approach.

The lookback period is to be calculated by equally weighting: (i) The latest 6

months and (ii) the 6 months reflecting the most stressed historical market conditions

during the last 30 years or as long as reliable price data have been available. A different

calculation would only be allowed if it results in more conservative margin requirements.

A mixed approach is proposed for the liquidation period: For less liquid products,

such as OTC derivatives, the period for the management of the exposures of a CCP

should be, at a minimum, equal to 5 business days, for other financial instruments, at a

minimum, 2 business days. For the determination of the adequate liquidation period,

the CCP shall be responsible for defining the period for which the CCP is exposed after

a default taking into consideration the characteristics of the financial instrument cleared,

the market where it is traded, and the period for the calculation and collection of

margins.

UBS views on margins

Our comments on the scope of the provisions, confidence intervals and portfolio

margining follow below.


Scope of the provisions

Article 1, 1. of EMIR states that “This Regulation lays down clearing and bilateral risk

management requirements for OTC derivative contracts, reporting requirements for

derivative contracts and uniform requirements for the performance of activities of

central counterparties and trade repositories."

In our view, this definition makes a clear distinction between the scope of the clearing

and bilateral risk management requirements which are applicable to OTC derivatives

only, and the reporting requirements which apply to derivatives more generally (i.e. to

both OTC derivatives and exchange traded derivatives). In our view, based on this

distinction, the appropriate interpretation of the scope of the EMIR risk mitigation

requirements for both cleared and bilateral trades is that they apply to OTC derivatives

only, and not to non-OTC derivatives.

However, in Article 1 MAR, ESMA specifies minimum margin requirements for "financial

instruments other than OTC derivatives", namely:

- Confidence interval of at least 99%,

- Liquidation period of at least 2 days,

- Look back period equally weighted between past 6 months and the 6 months

period of highest stress in the past 30 years.

We recognise that the EMIR Article 41 requirements on margins lie within the Title IV

‘Requirements for CCPs’ section of EMIR and that this section covers the uniform

requirements for the performance of activities of central counterparties and trade

repositories as set out in Article 1, 1. We therefore assume that ESMA has relied on this

to justify its wide approach to setting margin requirements for both OTC and non-OTC

derivatives. However, given that margins are used as a risk mitigation technique, we

believe ESMA should only specify margin requirements for OTC derivatives.

We believe the proposed margin requirements for ‘financial instruments other than OTC

derivatives’ could have a highly material impact on listed options and futures.

Consequently, and notwithstanding our view that ESMA should not prescribe margin

requirements for such instruments, we request that ESMA carries out a detailed cost

benefit analysis to justify its approach should it maintain the current scope of the margin

articles in the final draft technical standards.


Calibration of confidence interval for OTC derivatives

We disagree with the blanket application of a 99.5% confidence interval for OTC

derivatives and consider that a 99.5% level will result in a disproportionate margin

requirement for many asset classes, particularly for liquid products with low volatility. .

Whether an instrument is OTC or not does not in itself determine the risk of the

instrument and a more risk sensitive approach is necessary to reflect characteristics such

as liquidity and volatility of different types of instrument. We therefore propose that a

99% confidence interval is applied to all instruments within the scope of EMIR, with

CCPs having the flexibility to set higher confidence intervals for different classes of

financial products based on the criteria set out in Article 1 MAR, 2. This will better align

capital with risk.

Further, we note that in paragraph 167, d. on page 32 of the CP, ESMA has stated that

the chosen confidence interval “does not impact on end clients since they are already

required to post higher margins to direct clearing members". We do not agree with this

point and would appreciate clarification as to why ESMA believes this to be the case.

Portfolio margining

Cross-margining between OTC and non-OTC instruments

We understand that EMIR permits cross-margining between listed derivatives and

cleared OTC derivatives. We are strongly of the view that cross margining between asset

classes should be permitted under EMIR and believe it would be helpful to make this

more explicit within the technical standards. We also note that such cross-margining is

permissible under Dodd Frank.

Should ESMA retain the requirement for different confidence intervals and liquidation

periods for OTC-derivatives and non-OTC derivatives, we would appreciate clarification

of how the different confidence intervals for OTC and non-OTC derivatives in Article 1

MAR should be applied when cross-margining related products (e.g. Interest Rate Swaps

(OTC) and Interest Rate Futures (non-OTC)). The same issue arises for the application of

the different liquidation periods for OTC derivatives and financial instruments other than

OTC derivatives set out in Article 3 MAR and clarification is required as to which

liquidation period should be applied when cross margining related products. We

consider that it is necessary to have consistent minimum requirements for listed and

cleared OTC derivatives.


Correlation requirement

We have concerns with Article 4 MAR as we do not consider the correlation

requirements of this article are consistent with historical VaR margining which does not

use explicit correlations. This is highly problematic as historical VaR is a very commonly

used margining approach for CCPs. We propose that the requirements are amended so

that explicit correlation parameters are not prescribed but rather that a principles based

approach is introduced under which the CCP must be able to demonstrate to its

competent authority on request that it applies a robust approach to portfolio margining.

Time horizon for the calculation of historical volatility

We consider that the proposed requirements in Article 2 MAR, 1. are overly prescriptive

and we believe a principles based approach would be more appropriate. In particular,

we consider that the Article 2 MAR, 1. b. requirement to use the 6 month period

reflecting the most stressed market conditions over the last 30 years or as long as

reliable price data is available to be inappropriate. This is because, for certain asset

classes, the market will may have evolved materially since the beginning of the 30 year

period meaning any calculation based on that period may not appropriately reflect the

volatility of the asset class. We therefore propose an approach in which the

determination of the most appropriate 6 month period of stressed market conditions

would be the result of a bilateral discussion between the CCP and its competent

authority.

IV.IX DEFAULT WATERFALL (ART 45 EMIR AND ANNEX III, CHAPTER X, DW)

Under the draft RTS on the default waterfall, ESMA is required to specify the

methodology for calculation and maintenance of a CCPs’ own resources to be used in a

default situation before the resources of the non-defaulting clearing members can be

mutualised, i.e. so called “skin in the game”.

ESMA has concluded that the most appropriate way for calculating the “skin in the

game” is to base such calculation on the capital of the CCP but notes that:

a. The minimum capital requirements need to be specified in the draft technical

standards to be drafted by EBA, on which ESMA will need to be consulted;

b. For the incentive to be effective, the percentage of capital dedicated to the skin in the

game should be substantial. For this reason ESMA is considering 50 percent of the


minimum capital requirements to be the appropriate percentage for the “skin in the

game”.

UBS views on the default waterfall

As a CCP is a profit-making entity, it should also have considerable resources as a back-

stop to manage defaults of clearing members. A substantial portion of these resources

should be from its own capital. We consider that the amount of the CCP’s skin in the

game should be calibrated to ensure i) adequate margins are maintained that reflect the

close-out risk and ii) the CCP proactively monitors the creditworthiness of its clearing

members and adjusts the required margin for weaker or lower rated clearing members.

However, from a financial stability perspective, we believe the need for significant CCP

capital should be balanced with the concern that the percentage of capital dedicated to

"skin-in-the game" should not be large enough to threaten the viability of the CCP or

result in a breach of its minimum capital requirements should a large clearing member

default.

Consistent with this, our concerns with the proposed skin the game calculation are

twofold:

i) it is difficult to assess the magnitude of the proposed 50% requirement given that the

CCP capital requirements being developed by the EBA are not yet finalised. But we are

concerned that a skin in the game requirement of 50% of the CCP’s minimum capital

requirements, as proposed in paragraph 196, b. of the CP, creates a potential liability to

a single default event that could have this result, particularly if based on less risk

sensitive standardised methodologies used by the CCP (although we note that Article 2

DW may mitigate against this to some extent, this is contingent on the CCP being able

to re-capitalise itself quickly, which may not be possible under potentially stressed

funding conditions); and,

ii) the proposed approach is effectively based on the sum of the CCP’s expenses in a

winding-down scenario, its operational risks and its risks arising from investment

activity, meaning it is not risk sensitive in the sense of not reflecting the likelihood and

impact of a clearing member default.

In achieving a more appropriate balance between the need for the CCP to have

sufficient “at risk” capital to incentivise strong risk management, and the need for its


viability as a going concern to not be immediately threatened by the default of a

significant clearing member, we are supportive of an approach whereby the CCP has

capital at risk based on the risks from its clearing activity. This could for example be

achieved by calibrating skin in the game relative to the default fund contribution of a

large clearing member. We believe ESMA and EBA should jointly undertake quantitative

analysis to determine an appropriate calibration of the skin in the game amount.

We also believe the CCP should have capital at risk in the default waterfall both before

and after the default fund contribution of the non-defaulting clearing members in order

to create better risk management incentives for the CCP. For example, a significant

portion of the total skin the game could be placed ahead of the non-defaulting

members’ default fund contributions as this incentivises the CCP to calibrate margins

and clearing members’ default fund contributions appropriately to reduce the risk of the

skin in the game being required to absorb losses. The remaining amount of the total

skin in the game would then be utilised once all of the default fund contributions of the

non-defaulting clearing members had been exhausted in order to incentivise the CCP to

ensure that the aggregate default fund is appropriately calibrated.

We also support a non-risk based floor for a CCP’s skin in the game which would

provide a minimum level of confidence for market participants, irrespective of the size

and volume of the clearing activity of the CCP.

Notwithstanding our view that the skin in the game should not just be an arbitrary

percentage of a CCP’s capital requirements, we request that ESMA works in conjunction

with the EBA to determine the skin in the game requirement.

IV.X COLLATERAL REQUIREMENTS (ART 46 EMIR AND ANNEX III, CHAPTER XI,

COL)

ESMA is required to define the type of collateral that can be considered highly liquid

and define under which conditions commercial bank guarantees may be accepted.

According to ESMA accepting as collateral assets other than (local currency) cash should

be at the discretion of the CCP, providing space for a more conservative approach than

required by the standard where appropriate. Own name covered bonds will be

permitted as collateral subject to certain conditions that will be aligned with the CPSS-

IOSCO Principles. In particular, the collateral underlying a covered bond should be


eligible in its own right and fully segregated from the default of the issuer. All other

securities issued by the clearing member seeking to provide the collateral will not be

accepted.

ESMA proposes that a CCP should ensure its approach to setting haircuts minimises

procyclicality as far as possible without undermining the robustness of the CCP. The

intention is to employ a criteria-based approach within which CCPs have discretion to

define appropriately conservative haircuts.

UBS views on collateral requirements

Cash investments such as term deposit and reverse-repos (i.e. investments which are not

trade-able and cannot be liquidated daily) should not have a tenor longer than the

expected liquidation period used in determining margins.

We do not agree with the proposal to allow the use of covered bonds as permitted

collateral. This is because the legal framework pertaining to segregation of collateral

from the issuer's default has not been rigorously tested.

IV.XI INVESTMENT POLICY (ART 47 EMIR AND ANNEX III, CHAPTER XII, INV)

In respect of duration, in order to give CCPs sufficient flexibility to appropriately diversify

their investments across financial instruments with a range of maturities, and to avoid

any risk of causing a shortage of short-dated debt instruments, ESMA decided to

increase the average of the time-to-maturity of the portfolio from 12 months to 24

months. This will also align with the CFTC rules.

With reference to concentration risk, ESMA notes that the requirement that CCPs

consider credit risk exposures to individual obligors when making investment decisions is

set out in EMIR and therefore is not a requirement which can be departed from in the

draft RTS . The importance of concentration limits is also included in the CPSS-IOSCO

Principles for FMIs, where it is set out that a CCP should carefully consider not only its

credit risk exposures with an obligor but also the CCPs other relationships with that

obligor which might create additional exposures, such as where the obligor is also a

participant or an affiliate of a participant in the CCP.

With regard to the proposal for a limit on the amount of cash placed on an unsecured

basis, ESMA has specified that where cash is deposited other than with a central bank


then a certain proportion of the CCP’s cash deposits should be secured in a particular

way, namely through collateralisation. In setting this proportion ESMA has taken into

account the need for CCPs to be able to manage securities settlements and margin

inflows, which cannot be fully controlled at all times.

With regard to the use of derivatives by CCPs for hedging purposes, ESMA considers

that: 1) CCPs, being netted by definition, should not have any open position on FX or

interest rate that might give rise to risks to be hedged; 2) under the investment policy

the CCP is not supposed to take any FX or interest risk that requires hedging; 3) the

need to hedging risks could, therefore, only arise from the collateral, but the risk arising

from collateral should be covered by the CCP with adequate haircuts; 4) it could be

quite difficult to determine which derivatives are entered into for hedging or speculative

purposes; 5) CCPs with a banking licence could be eventually required to clear their

derivatives with another CCP. ESMA has therefore concluded that the use of derivatives

may only be used in the exercise of the CCP’s default management procedures.

UBS views on investment policy

We consider that the circumstances in which CCPs can use derivatives should be very

tightly defined.


Trade Repositories

V.I Reporting obligation (Art 9 EMIR, Annex V, RTS on minimum details of

information to be reported; Annex VI, ITS on format and frequency of trade

reports)

Table 1 (“Counterparty Data”) and 2 (“Common Data”) of Annex V contains the

information to be reported by counterparties to TRs.

Where one report is made on behalf of both counterparties, it needs to contain

information of Table 1 in relation to each counterparty. Information of table 2 only is

required once. Where one counterparty reports a trade on behalf of the other

counterparty or a third party entity reports on behalf of both counterparties, the report

must include all details as if reported by each counterparty separately.

ESMA outlines that TR mechanisms are already in place under MiFID. The draft MiFID

proposal notes that TRs may seek authorisation as an Approved Reporting Mechanisms

(“ARM”) and if authorisation is granted, the reporting of a trade to the TR/ARM ensures

compliance with both EMIR and MiFID reporting requirements. The dataset between

what is reported under the MiFID transaction reporting requirements and under EMIR

will need to be compatible, to the extent that this is possible.

Contents of reporting

Minimum set of information to be required: parties to the contract, beneficiary of

the rights and obligations arising from it, main characteristics of the contract (including

type, underlying, maturity, notional value, price and settlement date).

Legal Entity Identifier (LEI): ESMA supports the development of the LEI and any fields

captured by this should not be reported twice. If a global entity identifier is in place, it

should be used. An interim solution in line with the specifications agreed by the FSB

might need to be developed in case of delay in establishing a global solution.

Beneficiaries: Where the economic beneficiary of a derivatives trade is different to the

counterparty, the beneficiary of the rights and obligations arising from the transaction

should be identified. While back-to-back trades would be reported separately,

transparency of other trading techniques must be ensured, including the use of

structures where there may be ‘morphing’ of beneficiaries. Regarding the definition of a


beneficiary, ESMA clarifies that where the transaction is executed by a structure (e.g.

fund, trust which represents a number of beneficiaries), the beneficiary field should

identify this structure.

Format of reporting

Codes

ESMA considers the widest use of codes as possible. The general approach taken is that

the LEI should be used if it follows the principles outlined in the CPSS-IOSCO report. If

an LEI is not available, an interim entity identifier solution will be used. The approach

taken with regards to identifying products follows the same line that has been taken for

the LEI; The UPI should be used if it is globally available and complies with principles

consistent with the one listed in the CPSS-IOSCO report on data aggregation. If the UPI

is not available, the taxonomy as outlined in the draft ITS should be used.

UBS View on the content and format of reporting:

We would like to comment on a number of different aspects:

Determination of who reports: We note that different to Dodd-Frank there is no

concept of a “reporting party”, i.e. a hierarchy that determines who has the

responsibility to report the trade details to the swap data repository. In addition to the

reporting hierarchy, the industry have formally agreed on standards to determine who

the reporting party is when two financial entities are transacting with each other. Our

concern with having no concept of reporting party within the technical standards is the

lack of consistency and uncertainty this creates across the market. For example, UBS

could choose to be the reporting party to one transaction, but not the next.

Participating in many bilateral conversations to determine who the reporting party

should be could have the unintended consequence of creating uncertainly and time

delays across the market. We would be supportive of clear standards and obligations to

make the process more certain and efficient.

Our understanding is that any third entity can report on behalf of the counterparty,

provided the requirements in Annex V, Article 4 are satisfied, and that there are not

restrictions on the nature of third entity provided the criteria are met. Whilst we agree

with this approach and do not propose that an exhaustive list of potential third entities

is produced, it would provide additional certainty if it was clarified that the CCP can

report to the TR on behalf of the counterparties, including the clearing member.


Global standards: We would support the use of global standards i.e. LEI and UPI and

the ISDA taxonomy.

Data fields: We would stress the importance of consistency across jurisdictions. A

requirement to source different data fields for the same client but with trades falling

within different jurisdictions would be onerous.

Global Trade Repository: we would question the effectiveness of having multiple TR

across many jurisdictions and would advocate that regulations are designed to

encourage the use of a global TR.

Distinction between OTC and ETD: We consider that the technical standards fail to

adequately reflect the different characteristics of OTC derivatives and Exchange Traded

Derivatives (ETD). Specifically, there are a large number of reporting fields in Table 1

Counterparty Data that are not relevant to ETD. We support the views in the Futures &

Options Association (FOA) response to this CP with regard to this issue.

We also consider that, with respect to ETD reporting, ESMA should consider sourcing

data from exchanges as this will reduce duplication of reporting and should mitigate the

burden of reporting many fields for ETD and is likely to improve data quality.

We would furthermore welcome clarification on the following points:

Annex V, Article 3 details to be reported: We are unclear as to the interaction of

paragraphs 3. and 6. of this Article. Paragraph 3 indicates that where one report is

made on behalf of both counterparties, the information in Table 1 of the Annex must

be provided in relation to each of the counterparties but the information in Table 2 of

the Annex should be submitted only once. However, paragraph 6. indicates that where

one counterparty reports on behalf of the other counterparty, or a third party entity

reports on behalf of both counterparties, the report must contain the full set of details

that would have been reported had each counterparty reported separately. This need to

report for each counterparty separately seems to conflict with the paragraph 3.

requirement that the information in Table 2 of the Annex should be submitted only

once. We consider the paragraph 3. requirement to be appropriate as this will avoid

duplication of reporting and we propose that the Article is amended accordingly.


Timing of reporting: We would appreciate clarification of what T+1 means in terms of

actual business hours. Does ESMA consider the concept of business day? We would

advocate for a definition of business day based on local trading hours to be included in

the technical standards. For example we would anticipate that if a trade was traded in

London at 4.30pm, UBS would have until 5pm the following day to report the

transaction to the TR.

“Following the conclusion of the contract”: We are unclear what exactly is meant by

this term. For example, if it refers to the point at which the trade has been i) executed,

ii) confirmed or iii) matched. We are of the view that the most appropriate definition is

once final agreement between the two counterparties has been reached and believe the

technical standards should be amended to clarify this.

Reporting of ISINs: Annex VI, Recital 3 notes that OTC Derivatives are typically not

uniquely identifiable by single International Securities Identification Numbers (ISINs).

However, Annex VI, Recital 4, which relates to baskets, states that “The underlying itself

should be identified using a single identifier, however there is currently no market wide

standardised code to identify the underlying within a basket. Counterparties should

therefore be required to indicate at least that the underlying is a basket and use ISINs

for standardised indicies where possible”. We consider this requirement unclear and

would appreciate clarification of exactly what ISIN is expected to be reported – we

assume it is the ISIN of the index (where such an ISIN exists) and not of the underlying

components.

Additional Points

Trade Identification: To effectively match counterparties to a trade, where those

trades are reported separately by each counterparty (potentially to two different trade

repositories), a Unique Trade Identifier (“UTI”) or other trade ID, for example the Unique

Swap Identifier (‘USI’) should be reported with each counterparty. We would advocate

the use of the USI as the agreed technical standard.

Pricing and fees: Three essential elements considered useful to authorities: a.

price/rate/spread; b. price multiplier; and c. up-front payment.

Risk mitigation and clearing: Number of fields to be reported to facilitate the

monitoring of market participants compliance with EMIR obligations.


Specific asset classes: Whilst counterparties are expected to report all applicable

information in relation to the parties to the contract, the contract type, details of the

transaction, risk mitigation, clearing and the exposure of a contract, additional fields are

needed to correctly identify the relevant asset class. These additional fields will only

apply to the specific asset class and are proposed for a. interest rate derivatives and b.

currency derivatives.

Non-deliverable forwards would be captured by a UPI or by the taxonomy outlined in

the ITS. A derivative on a derivative would be captured by the fields already listed under

“contract type”. The “underlying” field would capture the information for CDS.

Regarding option types and swaptions, ‘put or call’ options were considered sufficient.

The UPI should capture the information under forex however additional fields have been

included in the event that a UPI is not available.

No additional fields are proposed for the reporting of credit and equity derivatives.

Data on exposures: While ESMA is aware of the challenges involved in reporting, it

takes the view that collateral needs to be reported, in order to properly monitor

concentration of exposures and systemic risk.

Information on type, amount and currency of collateral is to be provided. Where

counterparties exchange collateral on a portfolio basis and it is not possible to report

collateral exchanged for an individual contract, counterparties may report to a TR

collateral exchanged on a portfolio basis.

Daily updated information about the mark-to-market valuation of the outstanding

contract is considered necessary to quantify the counterparty’s exposure more

accurately.

UBS View on Collateral / Reporting of Exposure Data:

We strongly believe that exposure/collateral reporting should be at a portfolio level, not

at a transaction level.

However, trade repositories to date are structured to receive data not on a portfolio

basis but at a trade level. Adapting to report portfolio level data such as collateral held

on a trade level would be difficult. We therefore propose that the portfolio reporting of


collateral should be in a separate report from the transaction report. We propose that a

portfolio collateral report could be submitted on a daily basis. We also support the ISDA

proposal, set out in its March 2012 comment paper, for a ‘Counterparty Exposure

Repository’ to store the net mark-to-market exposure and collateral for counterparty

portfolios.

V.II Application for registration

V.III Transparency and data availability (Art 81) (Annex V)

ESMA sets out the elements to be reported in the application for registration of TRs and

the scope of the data to which authorities and public will have access.

UBS view on Transparency and data availability

We support public reporting on a weekly basis and see no issue with this and agree with

the importance of providing information on an aggregated level only.


Annex I – Proposed drafting changes to Chapter II, Indirect Clearing Arrangements Please note that our proposed amendments to the articles are shown in blue. The text we propose to delete is struck-through and proposed new text is underlined. CHAPTER II INDIRECT CLEARING ARRANGEMENTS Article 1 ICA Indirect clearing arrangements An indirect clearing arrangement meets the conditions referred to in the second subparagraph of paragraph 3 of Article 4 of Regulation 2012/XXX [EMIR] if it complies with the requirements of this Chapter. Article 2 ICA Structure of indirect clearing arrangements 1. Any client of a clearing member of a CCP shall be permitted to provide clearing services to one or more of its own clients, provided that the client of the clearing member is subject to appropriate regulatory requirements, including authorisation. 2. The contractual terms of an indirect clearing arrangement shall be defined by the client providing the service. They shall include an obligation on the clearing member to honour any obligations between the client and its indirect clients following the default of the client. Justification for amendment: We do not believe that the CCP should have to honour the clearing member's obligations. Rather, they should just have to go through a process as agreed in their CCP rules for porting / closing it out. Article 3 ICA Obligations of authorised CCPs 1. Indirect clearing arrangements shall not be subject to business practices by the CCP which act as a barrier to their establishment on reasonable commercial terms. The indirect clearing arrangements shall ensure that, at the request of a clearing member, the CCP maintains separate records and accounts enabling each client to distinguish in accounts held with the CCP the assets and positions of the client from those held for the accounts of the indirect clients of the client. 2. A CCP shall not be required to enter into direct contractual relationships with indirect clients. It shall identify, monitor and manage any remaining material risks arising from indirect clearing arrangements that could affect the resilience of the CCP. Justification for amendment: We believe the objective here should be to ensure that there are no additional risks arising - i.e. the clearing member is the risk guarantor to the CCP on behalf of their client base and the direct client is the risk guarantor to the clearing member of behalf of their client base.


Article 4 ICA Obligations of clearing members and clients 1. A clearing member shall be required to facilitate indirect clearing arrangements on reasonable commercial terms. These terms shall be publicly disclosed by the clearing member. Justification for amendment: We do not believe that the provision of indirect clearing should be mandatory. The rules need to ensure that it is workable option for clearing members, and then it will be potentially be an attractive business in its own right (as it is currently given that the direct client consolidates lots of activity in a way that is a lower operational / KYC burden than if the clearing member had to face each smaller client directly). 2. When facilitating indirect clearing arrangements, a clearing member shall implement the following segregation arrangements as indicated by the client: a. keep separate records and accounts enabling each client to distinguish in accounts with the clearing member the assets and positions of the client from those held for the accounts of its indirect clients; b. keep separate records and accounts enabling each client to distinguish in accounts with the clearing member the assets and positions held for the account of an indirect client from those held for the account of other indirect clients. Justification for amendment: We strongly believe a gross client omnibus should be the minimum standard for indirect clearing. We do not consider that there should be a mandatory obligation to have individual accounts (the indirect clients can choose direct clearing instead to achieve this if they wish). 3. The requirement to enable each client to distinguish in accounts with the clearing member between assets held for different persons is met if the arrangements provide for the conditions specified in Article 39(9) of Regulation 2012/XXX [EMIR] to be met. The clearing member shall cooperate with each client that provides indirect clearing services Any direct client offering indirect clearing services shall to ensure that indirect clients are informed of the risks associated with the alternative segregation options described in paragraph 2. Such information shall include a description of the main legal implications of the respective levels of segregation offered including information on the insolvency law applicable in the relevant jurisdictions. 4. A clearing member shall establish robust procedures to manage the default of a client that provides indirect clearing services. These procedures shall be supported by the CCP and shall allow the transfer of such assets and positions to an alternative client or clearing member, or support the prompt liquidation of assets and positions of indirect clients. An alternative client or clearing member shall not be obliged to accept these assets and positions unless it has entered into a prior contractual agreement to do so. 5. Where the clearing member maintains records and accounts in accordance with paragraph 2(a), the procedures described in paragraph 4 shall include arrangements for obtaining the agreement of all of the indirect clients affected by the transfer. Where the clearing member maintains records and accounts in accordance with paragraph 2(b), the procedures described in paragraph 4 shall allow each indirect client to identify the client or clearing member to which its positions and assets will be transferred.


6. In circumstances where the positions and assets of indirect clients cannot be successfully transferred, the clearing member shall offer to hold directly the positions and assets in an equivalent account with the CCP for a period of at least 30 days and on reasonable commercial terms. These terms shall be specified in advance as part of the contractual relationship between the clearing member and the client. Justification for amendment: This is not in line with the protections offered for direct clients. Again, our view is that the offering for indirect clients should not attempt to provide better protection than that offered for direct clients. 7. The client shall provide sufficient information for the clearing member to evaluate and manage the counterparty risk that it could reasonably expect to incur in view of meet the requirement for contacting indirect clients and gaining authorisation for a transfer of positions in the event of a direct client default in indirect clearing arrangements. The clearing member shall establish robust internal procedures to ensure this information cannot be used for commercial purposes. Details of these procedures shall be disclosed to clients and indirect clients on request. Justification for amendment: There should not be any additional counterparty risk because the direct client guarantees the positions. However we would need information in some form on all the individual clients as we would need to reach out to them for authorisation to transfer accounts in the event of a direct client default. 8. A client that provides indirect clearing services shall keep separate records and accounts that enable it to distinguish between its own assets and positions and those held for the account of its indirect clients. It shall offer indirect clients a choice between the position and account segregation options described in paragraph 2 and cooperate with the clearing member and the CCP to ensure that indirect clients are fully informed of the risks associated with each option. 9. A client that provides indirect clearing services shall request the clearing member to open a segregated account at the CCP. The account shall be for the exclusive purpose of holding the assets and positions of its indirect clients. The client shall not be required to disclose information on individual indirect clients to the clearing member, except for the purposes specified in paragraph 7 or in the event of default. In the event of default, all information held by a client in respect of its indirect clients shall be made immediately available to the clearing member.

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