Central clearing of standardised OTC derivatives products is already a reality in the US and EU markets. The Financial Markets Act has made provision for it in the South African market, and it will be implemented in phase 3 of the phasing-in process (potentially by Q3 of 2019). This is not far away, when one considers the large number of new legal documents that need to be put in place to support central clearing.
The ISDA Master Agreement can form the basis of your clearing documentation, however a new ISDA/FIA Cleared Derivatives Execution Agreement may be required. Although not a mandatory agreement, it is useful to sign as it sets out standard rights and obligations of each counterparty to a trade that is intended to be cleared. It describes the process for submitting a trade to a Central Counterparty (‘CCP’) and includes fallback provisions if a transaction isn't accepted for clearing. The timeframe for registering transactions for clearing is an important point for the parties to agree upon in this agreement.
The CCP rules will become an important document to review and sign. This document sets out the obligations of the Clearing Member (‘CM’) when transacting with a CCP. Each CCP has its own set of rules, and thus signing up to multiple CCPs will require a review and consideration of multiple sets of rules.
Not all participants in the OTC derivatives market will be eligible to be a CM. As a result, some participants will have to appoint a CM to act on their behalf to clear transactions. This will result in client clearing agreements being signed. The ISDA/FIA Client Cleared OTC Derivatives Addendum (‘Client Cleared Addendum’) is a template to document the relationship between a clearing member and its client, for the purposes of clearing over-the-counter derivatives transactions across CCPs that use the principal-to-principal client-clearing model. The Addendum Annex includes the elective and variable provisions that apply between CM and client in a client-cleared relationship.
A form of Paragraph 11 to the ISDA English Law Credit Support Annex is available for use with the Client Cleared Addendum. The CSA for clearing will have to include provisions around which model of segregation is being implemented (will collateral be held in a segregated/omnibus account by the CM?).
ISDA is in the process of obtaining clearing opinions for the various different jurisdictions that transact in derivatives. There will be multiple different opinions available depending on whether you are a client or a CM. These will need to be reviewed and your documents may require amendment to reflect the various jurisdictional impacts.
If you are not yet familiar with these documents, or how to negotiate them, DeriviDoc can help! We offer training courses on central clearing, including a dedicated course on the legal agreements required for clearing. Join us at our next course as follows:
An introduction to Central Clearing
Cape Town - 13 June 2018
Johannesburg - 05 July 2018
The Legal Agreements Required for Clearing
Cape Town - 14 June 2018
Johannesburg - 06 July 2018