Congratulations you're in scope for UMR phase 5!

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So what have you won?

1st Prize - You can keep trading derivatives. Which is pretty cool if you're in the business of trading derivatives.

But here's the kicker. In order to post or receive collateral, it is highly likely that you will have to on board with everyone's favourite ICSD... Clearstream. By September 2020.

This should however be a small price to pay considering the prize at stake here, so read on...

To start with, there are three components to the Clearstream doc package that must be considered.

  1. KYC and due diligence - In order to post or collect margin at Clearstream an entity must firstly become a customer of Clearstream. In the majority of cases the entity that is admitted as a customer is the entity that is named in the bilateral trading docs, the fund vs. the asset manager for example.
  2. Secondly both parties to the exposure must sign Clearsream’s Triparty service agreement, the Collateral Management Service Agreement (CMSA), either as pledgee, pledgor or both. This document would be the equivalent in most senses to an account control agreement and defines the relationship between the parties and the services provided by Clearstream. The CMSA is multi-laterally applicable, need only be signed once and can then be reused ad infinitum, to pair and exchange margin with any other Triparty customer of Clearstream Banking. Importantly the CMSA also covers any other Triparty activity with Clearstream, so once signed customers can further leverage additional services such as Triparty repo and securities lending, pledges to central banks and CCPs etc.

The CMSA itself has a number of appendicies. Key amongst these are;

  • The Appendix A (counterparty acceptance sheet and collateral eligibility criteria),
  • The Appendix D (customer operational profile),
  • The Appendix E (provisions linked to bilateral documents such as joint ISDA / CBL documentation,

3. Finally the bilateral relationship must be documented. In September 2016, ISDA and Clearstream jointly produced a common set of bilateral documents that allow UMR counterparties to add the respective provisions to their ISDA master documentation to ensure regulatory compliance with the uncleared rules as well as seamlessly link to the standardizedtriparty collateral management framework offered by Clearstream (CMSA). These documents support segregated accounts to be opened either in the name of the pledgor (posting party) or the pledgee (collecting party).

The documents are;

The Collateral Transfer Agreement (CTA) - creates the obligation to post collateral & defines mechanics for calculating the amount of collateral to be transferred and timing of the transfers. Templates are available under English and New York law as well as on a multi-regime basis. The CTA creates the link to ISDA Master framework.

The Clearstream Security Agreement - is a standardised master pledge agreement, establishing security interest over collateral assets held in Clearstream.

There are two versions of the Security Agreement, one designed for use where the Clearstream collateral account is held in the name of the Security-provider (pledgor/ posting party) and the other designed for use where the Clearstream collateral account is in the name of the Security-taker (pledgee/ collecting party).

The latter version should be used where parties wish to incorporate the Recommended Amendment Provisionsfor the ISDA 2017 Clearstream Security Agreement with respect to Japanese Collateral (“Shichiken”), which are provided as standalone documents and also included as an election, as they are intended for continued use with the 2019 versions of the Clearstream documents

The 2019 versions of these documents have been updated to reflect the changes made in the ISDA 2018 Credit Support Annex For Initial Margin (IM) (Security Interest –New York Law) and the 2018 Credit Support Deed For Initial Margin (IM) (Security Interest –English Law) published in September 2018.

The governing law of the Collateral Transfer Agreement is the governing law of the underlying ISDA Master Agreement. Parties using a French law governed ISDA Master Agreement should incorporate the ‘Recommended Amendment Provisions for ISDA Clearstream CTA for use with French law ISDA Master Agreement’, which is provided as a standalone document.

Previous versions of the CTA and SA remain valid however Clearstream recommend that newly in scope counterparts (NISCs) use the 2019 versions.

A sensible question would be why have Clearstream made changes to the existing doc package at all? why are there multiple versions? Answer - Jointly with ISDA Clearstream have enhanced and issued an updated set of legal documentation to;

  • Address the requirements of Phase 4 and Phase 5 market participants
  • Align with the underlying Credit Support Annex structure of ISDA
  • Allow further inclusion of elective clauses and governing law requirements in light of changing market environment

Obviously on boarding with Clearstream is only one piece of the puzzle and initial margin segregation will be a substantial puzzle for many phase 5 firms. However we would strongly recommend that newly in scope parties do not neglect the potential timescales involved in signing up with multiple custodians.

Act now or forever hold your peace.

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