July 10, 2015
Comments on Second Consultation Paper: Draft Regulatory Technical Standards on
risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP under Article
11(15) of Regulation (EU) No 648/2012 issued by the European Supervisory Authorities
Japanese Bankers Association
1. Introduction(1) We acknowledge that considerable improvements have been made to the first
consultation paper (the “1st CP”), addressing our comments on those requirements thatare difficult to implement or entail some issues (for example, the treatment of additional
haircut of 8% or limitation on collateral concentration). We therefore respectfully express
our gratitude to all relevant staff at authorities for their due considerations on these issues.
(2) It is expected that a number of financial institutions, primarily those in Europe, will
provide comments on this second consultation paper (the “2nd CP”). We would like tomake our comments in broader standpoints encompassing the Asia region and regions
where the collateral agreement (the Credit Support Annex) is less commonly used, notonly from a viewpoint of Japan. It is understood that the EMIR does not only set forth
requirements that are applied to cross-border transactions executed by Japanese or Asianfinancial institutions or corporates with European financial institutions or corporates, butalso serve as guidance for which other authorities would develop their own regulation. It
is therefore respectfully requested to fully reflect views of other regions including Asia,
in addition to those of European financial institutions.
2. General Comments(1) Setting a practical settlement period•

If the time difference is large, such as between Sydney and London, the settlement in
T+1 or T+2 may be physically impossible or very difficult.

•

On the other hand, if both counterparties are domiciled in the EU, collateral can be
settled within a relatively short period of time. However, many regional financial
institutions in Europe are executing a considerable amount of cross-bordertransactions.
Given the above and taking into account the combination of negotiated transactions, more
physically feasible settlement period should be considered as follows:(i) If a transaction is executed between counterparties within the same jurisdiction orwithin a predetermined region, both variation margin (VM) and initial margin (IM)shall be settled on a T+2 basis, at a maximum.

(ii) In cases other than the above (e.g., one counterparty is in the EU and the other is inAsia), on a T+3 basis, at a maximum.
(iii) If the settlement is executed within the above maximum period, the adjustment tomargin period of risk (MPOR) is not necessary.
(2) Exemption for jurisdictions where the regulation is not implemented and those where thelegal enforceability is not assessed•

In practice, it is substantially impracticable to enter into a CSA agreement and initiate
the exchange of collateral by no later than the date of application of respective
regulation in Europe, U.S. and Japan, with those counterparties domiciled in thejurisdictions where the regulation is not implemented, for the following reasons: (i)financial institutions have no binding power even if they request those counterparties
domiciled in such jurisdictions to enter into a CSA; (ii) considerable time is required
to establish an operational framework; and (iii) the revision of the insolvency law
regime requires a longer period of time to ensure the legal enforceability of netting.

•

Financial institutions subject to the regulation may be forced to concurrently cease
entering into a new transaction with those counterparties with which the CSA
agreement is not entered into, in order to avoid the violation of the regulation. Suchsituation is expected to result in a major disruption in the market of the relevant
regions; for example, a cover transaction could not be executed in the derivatives
market.
Given the above, it is requested to consider the following alternatives:(i) The application of EMIR should be extended until relevant authorities implement themargin requirements, or a certain transition period (about one to two years) should be
set after the date of application as lead time for entering into the CSA agreement.
(ii) The BCBS and IOSCO will issue a written recommendation to encourage entering
into the CSA agreement to the jurisdictions where the regulation is not implemented.
(iii) Transactions with the counterparties domiciled in the jurisdictions where the legal
enforceability of close-out netting is not assessed should be exempted from theregulation.
(3) Easing the conditions for applying the additional haircut of 8%•

To avoid the 8% haircut that results in an increase in collateral cost, the transfer
currency needs to be the same as the currency in which VM is denominated, or thetermination currency needs to be the same as the currency in which IM isdenominated.

•

However, since counterparties’ interests would completely conflict in cross-bordertransactions for the former case, it is difficult to enter into a contract by thedesignated deadline. For the latter case, if counterparties set a single currency
without considering their intent in executing a cross border transaction, this might
give rise to confusion at the time of bankruptcy.
2•Given that the most of financial institutions are required to exchange IM in addition
to VM, the need for setting the additional haircut of 8% is considered to be low in thefirst place.

•

It is considered necessary to ensure consistency with the treatment of not applying
haircut for cash collateral in VM.
Given the above, it is requested to consider the following alternative:
While a single termination currency or transfer currency should be set for a contract
within the same jurisdiction, it should be permitted to set multiple currencies in across-border contract (that is, each counterparty may set a different single currency).
3. Our responses to the questions(Responses in (1) to (8) below are for the questions provided in the 2nd CP)(1) Scope of regulation(i) [Question 1 (P.27)] Under the 1st CP, there was a concern that transactions with a
non-financial counterparty (NFC) domiciled outside the EU would uniformly besubject to the regulation. However, the 2nd CP clarified that NFCs outside the EU aretreated in the same manner as NFCs in the EU (that is, NFCs outside the EU (i.e.,
non-EU NFCs) is exempted from the regulation as is the case with NFCs in the EU(i.e., EU NFCs-)). We would like to appreciate this reasonable change.
(ii) On the other hand, as noted in [Article 3 GEN in P.27, (8) in P.18～19, the fifth andsixth paragraphs in Background and rationale in P.8], the 2nd CP may be interpreted as
requiring counterparties domiciled in the jurisdictions where the regulation has notbeen implemented (i.e., the jurisdictions which will not implement the regulation) or
those where the legal enforceability is not assessed (i.e., the jurisdictions where there
is a doubt about the legal enforceability of close-out netting and the feasibility of
constructing an asset segregation scheme that meets the regulatory requirements) tocollect and post IM and VM. This would imply that the transactions withcounterparties domiciled in non-EU jurisdictions which are either jurisdictions where
the regulation is not implemented or jurisdictions where the legal enforceability is notassessed are executed without an appropriate exchange of collaterals. Suchtransactions may immediately be deemed as violating the regulation. If such rulewould be determined, it is difficult to eliminate the possibility of inviting unintended
consequences.
Given the above and our concerns below, we would like to propose the following
alternatives in connection with the scope of the regulation:

Our concerns requested to be taken into account in rule making
 In practice, private financial institutions have no binding power to require
counterparties domiciled in the jurisdictions where the regulation is not
implemented to enter into the CSA agreement.
3 Conclusion of the CSA agreement is not often established as practice in suchjurisdictions. Therefore, there are a number of cases where the operationalframework is not established. It is therefore unrealistic to conclude the CSA
agreement and initiate the posting and collecting collateral by no later than
the application date of the regulation in Europe, U.S. and Japan.
 The negotiation process for entering into the CSA agreement cannot start
immediately after the regulation is finalised. In practice, it is difficult toengage in a detailed negotiation with counterparties until equivalence
assessment across authorities is completed.
 Financial institutions subject to the EMIR might be forced to concurrently
cease entering into a new transaction with those counterparties with which
the CSA agreement is not entered into, in order to avoid the violation of theregulation. Such situation is expected to result in a major disruption in themarket of the relevant regions; for example a cover transaction could not be
executed in the derivatives market.
 Some local laws and regulations restrict the facilitation of smoothconclusion of the CSA agreement. For example, in India, the local foreignexchange act does not permit entering into the Global Standard CSA
agreement (which is an agreement that permits posting and collection ofcollateral on a cross-border basis). To comply with the margin requirements,a new operational flow for posting and collecting collateral needs to beestablished in India, and the legal system that impedes the facilitation of acentralized and efficient process for entering into a CSA agreement at thehead office, etc. needs to be reviewed. (See Attachment 1“IMPROVEMENT OF CSA AGREEMENT” which is an excerpt from therequest submitted by the Embassy of Japan in India to the Indian Chamberof Commerce.)
 As stated in [the sixth paragraph in P.8, and (8) of (Recitals) in P.18-19],
with regard to IM being posted to counterparties in a disputable jurisdiction,
European financial institutions are required to segregate IM outside the EU,
by using third-party banks (custodians). However, in the above-mentioned
case of India, as collateral posting and collection is not permitted on across-border basis in the first place, it is impossible to physically segregate
IM being posted. Given that the cross-border scheme would not function,
there may be cases where the requirements in the 2nd CP would not besatisfied.
 If the exchange of VM is required with a counterparty in a jurisdiction
where the legal enforceability of close-out netting is not assessed, this maylead to an increase in risks, as well as to cause difficulty in reaching an
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agreement in the amount of VM to be exchanged. (*)(*)For the counterparty domiciled in such a jurisdiction, since the entity (Japanese financial
institution) is a counterparty for which the close-out netting is assessed as legally enforceable,
exposures based on which VM is calculated will be calculated assuming the close-out netting.
Whereas, for the entity, since the legal enforceability of the close-out netting is not assessed in
the counterparty’s jurisdiction, exposures will be calculated on a gross basis. (That is,
exposures will be calculated by aggregating only positive exposures, treating negative
exposures as nil.) Inevitably, there is a difference in the exposure calculation of the bothcounterparties, and the amount of VM to be exchanged could not be determined. To ensure
consistency of the calculation between the counterparties, if the entity calculates its exposures
assuming that the counterparty’s close-out netting is legally enforceable (that is, negative
exposures from losing positions are deducted for calculation purposes), resultant exposures
will be smaller than actual exposures held. Therefore, even if the entity has a positive
exposure, there may be cases where the entity has to post collateral. In such a case, risks ofthe entity would rather increase, which would be against the primary policy objective of risk
mitigation.

 Proposed alternatives:
On the assumption that private financial institutions will facilitate the process ofentering into the CSA agreement with counterparties in the jurisdictions where
the regulation is not implemented, we propose the following alternatives:(i) The application of EMIR should be postponed until relevant authorities in
the jurisdictions where the regulation is not implemented implement themargin regulation, or a certain transition period (about one to two years)
should be set after the application date as lead time for entering into the
CSA agreement.
(ii) Coordination across relevant authorities should be promoted in order toestablish a framework for discussing measures. For example, the BCBS andIOSCO may issue a letter to relevant authorities in the jurisdictions where
the regulation is not implemented to encourage financial institutions under
supervision to enter into the CSA agreement (namely, promote efforts to
reduce barriers that impede the facilitation of the CSA agreement).
(iii) Transactions with counterparties domiciled in the jurisdictions where thelegal enforceability of close-out netting is not assessed should be exemptedfrom the margin requirements.
(2) Settlement period for collateralFirstly, since the “calculation date” specified in [the third paragraph of Article 1 VM in
P.31-32, etc.] is not defined, it is requested to clarify the definition. The comment below isprovided assuming that the “calculation date” is equivalent to the “deal date”.
5The physically shortest period for VM and IM should be considered, by taking into accountthe combination of negotiated transactions, instead of setting the settlement period fromangles of VM (with IM posting and collection) or VM (with no IM posting and collection),etc.: Specific proposal (See Attachment 2 for details)
Location of the head officei)Maximum days fromthe calculation dateWithin the same jurisdiction, or in a T+2 business days for both VM andpredetermined region (for example, IM
between counterparties in the EU)(In case of cash, T+1 business day)ii) Other than the above (for example,
one counterparty is in the EU andthe other in the Asian region)T+3 business days for both VM andIM

The maximum days refer to the shortest period and no amendments to margin periodof risk (MPOR) is necessary.
Note: ii) is the case where operations will occur on a cross-border basis.
The following discusses our specific concerns and rationale of our proposed alternatives.
Understandably, a shorter settlement period is better from a risk mitigation perspective.
Nonetheless, various risks, costs and inconvenience arising from requiring a short settlement
period should not be disregarded.
(i)VM
a. Where IM is collected and posted
・ The first diagram in Attachment 2 of this comment letter shows the settlement
timeline when VM is paid/received between the counterparties in Asia andEurope. Since the shortest settlement period is determined for the
cross-border transactions on the assumption that “the counterparties should ina first stage collect at least the undisputed amount” as set out in the 2nd CP,
the shortest settlement period would still be T+3, even eliminating the“agreement” and “reconciliation” processes from respective VM and IM
processes.(*) However, under this “T+3” settlement period, the dispute
between the counterparties would not be resolve, and hence counterparties
would have no choice but to accept the amount that is smaller than theamount calculated based on its own calculation. This may result inunder-collateralization in terms of credit protection. In order to execute thecurrent level of operational procedures, additional time is required for thesettlement period.
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(*) However, the period can be shorten by one day if collateral is limited to
cash that does not require confirmation of the security.

b.

・ We understand that the MPOR should take into account the typical settlement
cycle applied to exchange of the margins in order to create an incentive forsettlement risk mitigation. This however is considered to be a sort of penalty,
and it is not reasonable to set such penalty for transactions where thesettlement is executed at the shortest period practicable for counterparties.
Such penalty should only be imposed on the portion exceeding the shortest
number of days practicable for counterparties, as this may disincentivise
entities from engaging in cross border transactions.
Where no IM is required
・ The 2nd CP requires that the collection shall not exceed one business dayfrom the calculation date. As discussed above, however, the period of T+3
needs to be ensured for cross-border transactions.
・ For non-cross-border transactions, if both the CSA operation function are
domiciled in the EU, some transactions may be settled in T+1. If the CSA
operation function of either counterparty is domiciled in other jurisdiction,
the same period as cross-border transactions is required since it may taketime for notification to the head office, reaching an agreement, settlement
and other processes.
・ If the settlement cycle of T+1 became mandatory, similarly to Asian financial
institutions, European financial institutions engaging in cross-bordertransactions need to (a) establish locations globally for negotiating a CSA
agreement with respective counterparties; and (b) establish risk and liquidity
management frameworks that enable to immediately post and collect
collateral at the discretion of each location. However, European financial
institutions capable of establishing such locations and frameworks are very
limited, and hence cross-border transactions may be extremely difficult toengage in. (*)(*) Specific examples are as illustrated below:(a) Where an European financial institution which has reached the IM threshold
transacts with an Asian regional financial institution which has not reached the IM
threshold(b) Where an European financial institution which has not reached the IM threshold
transacts with an Asian leading financial institution which has reached the IM threshold

(ii)

IM
・ The second diagram in Attachment 2 of this comment letter shows thesettlement timeline when IM is paid/received between the counterparties in7

Asia and Europe. The settlement cycle is dependent on whether there is an
auto allocation function for the custodian service, but if there is no auto
allocation function, the settlement cycle would be T+3 in the shortest period.
・ If the auto allocation function is used, the required settlement cycle would
shorten by about one day. However, custodians, including trust banks in Japan,that provide such function are limited.
・ If the head office or operation department of both counterparties is located in
the same jurisdiction, and the auto allocation function is used, margins may
be settled in T+1. However, establishing regulatory requirements assuming
the use of services provided only by certain vendors would substantially leadto driving out custodians with no auto-allocation function from the market.
・ These would likely to give rise to the following issues and risks:(i) Increased oligopoly in the custodian business and hence more concentrationof various risks to certain vendors(ii) Decline in the quality of service and an increase in fee due to oligopoly(iii) Adverse impact on the business continuity(iv) Difficulty to secure an alternative service vendor
Given the above, the rules, that could not be complied without using service offered bycertain vendors, should not be established. The rules, if implemented, should not be a
mandatory, but be a recommendation. In other words, the rule that requires IM to be
calculated and collected within one business day (T+1) should be revised.
(3) IM model・ Derivative transactions generally have risk factors related to multiple asset classes.
Therefore, if individual derivative transactions within a netting set are all allocated toa single asset class, and the amount of IM by asset class is calculated and aggregated,
the resultant aggregated IM may be over-calculated.
・ Taking into account that the original objective of this regulation is to clearly define
the asset classes, and recognise risk hedging and diversification effects within thesame asset class, while not allowing recognition of such effects across different asset
classes, the approach to assign the same risk factor (e.g. interest rate risk factor) tomultiple different asset classes, and simply aggregate these may produce an outcomethat may deviate from the intention of this regulation.
・ To enter into a derivative contract which is in the asset class different from the classwhich the derivative contract to be hedged is categorised into with the same
counterparty for the purpose of hedging some of risk factors inherent in the derivative
contract being hedged (for example, to enter into an interest rate derivativetransaction with the same counterparty for hedging interest rate risk inherent in an
equity derivative transaction) would originally mitigate counterparty risk between the8counterparties, eventually reducing systemic risk. Hence, such type of transaction
should be greatly encouraged. Nonetheless, the amount of IM would increase if suchtransaction is entered into, which might have a negative consequence of
disincentivising counterparties.
・ To avoid such unintended consequence and construct a framework that aligns with theintention of this regulation, an approach to first disaggregate all derivative contracts
by sensitivities and allocate these into each asset class would be recommended.
(4) Concentration Limits
We support the proposed approach to apply concentration limits to limited entities. Thisrequirement however still has the following issues:
The introduction of the concentration limits would (i) in the case of posting the collateral,
increase the type of collateral to be posted, and therefore the collateral sourcing cost is
expected to be increased; and (ii) in the case of receiving the collateral, increase thecollateral management cost for the same reasons. Either (i) or (ii) would lead to anincrease in the operational burden for collateral management purposes.
Accordingly, securities with a certain level of high liquidity even under the period ofstress should be exempted from the concentration limit. This is because, since positionsof securities with high liquidity could be liquidated in a short time, the negative impact ofcollateral concentration to certain securities on converting collateral assets to cash would
be reduced.
If such concentration limits would be introduced, counterparties subject to this regulationin the EU would impose concentration limits also to non-EU counterparties that are notsubject to the concentration limits, thereby increasing the operational workloads ofnon-EU counterparties. Further, there is a risk that non-EU counterparties that are
unwilling to be subjected to the concentration limits might cease transactions with EU
counterparties.
Given the above discussions, the following unclear points are requested to be clarified:(i) Whether “each of the counterparties belong to one of the categories listed in paragraph
3” stated in [the second paragraph of Article 7 LEC in P. 43] intends to require theconcentration limits applied only to counterparties both in the EU.
(ii) Whether “the collateral” in [the second paragraph of Article 7 LEC in P.43] refers only
to IM, or both IM and VM.
(iii) Whether (a), (b) and (c) in [the third paragraph of Article 7 LEC in P.43] include
financial institutions whose head office is domiciled outside the EU. Additionally,
whether (a) is applied to all group entities.
(iv) Whether the concentration limits are applied only to the portion exceeding EUR
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1billion (for example, if a EUR 1.2billion of collateral is exchanged, the concentration
limits are applied only to the EUR 0.2 billion), or to the entire amount of collateral,with regard to “the collateral collected in excess of EUR 1 billion” in the second
paragraph of Article 7 LEC in P.43],(v) We understand that the concentration limits are applied to the aggregate of IM and VM
when both IM and VM are collected and received by means of securities. We would
like to ask whether this understanding is correct.
(vi) Additionally, to clarify our understanding, we would like to confirm whether entities
should assess the concentration limits based on the aggregated amount of collateral
received from all counterparties if the same securities are posted as collateral frommultiple counterparties; or to assess the concentration limits based on the amount on acounterparty-by-counterparty basis. (In practice, if the concentration limits are set on
the multiple-counterparties basis, it is difficult to manage the limits on a real time basis
or comply with the regulation. Therefore, management based on an
individual-counterparty basis is considered to be a realistic approach.)(5) Requirements on establishing various documentation and policies and procedures
We support the revision made to 1st CP, which addresses undue requirements to have evena written agreement that would not exchange the margins with NFC counterparties.
(6) Perform an independent legal review at least on an annual basis in order to verify whether
the requirements are met for each jurisdiction
The independent legal review requirement set out in [the second paragraph 2 of Article
OPD in P.48] to be performed at least on an annual basis in order to verify the legal
enforceability of the bilateral netting arrangements is a stricter requirement than that under
the current capital regulation, and therefore such legal review is considered to lackreasonableness. The independent legal review requirement to be performed at least
annually to verify that the segregation arrangements meet the requirements has a similar
concern.
Additionally, it is requested to clarify that the independent review, if implemented, should
only be required for EU financial institutions.
(7) De-facto banning of treating cash as eligible collateral for IM
・ As set out in the paragraph 1 of Article 1 SEG in P.48, a framework is required to bein place to protect IM from the default or insolvency of the custodian. In practice,
however, it is difficult to segregate cash, and therefore such requirement may result in
de-facto banning of using cash as collateral for IM.
・ If the volume of other high-quality collateral assets to be used for IM is insufficient in
the markets, counterparties could not fulfill its obligation to post IM due to this10

requirement.
・ Given that counterparties are required to post collateral in a very tight timeline (i.e.
T+1) for IM (which could be regarded as unrealistic taking into account practicalconditions such as time required for the IM calculation and reconciliation), there arecases that counterparties would need to post cash as collateral to shorten time requiredfor collateral posting.
・ In view of this, the condition that may make counterparties impossible to use cash as
collateral for IM should not be added. Even if cash is not eligible for IM as IM cannot
be in principle re-invested, some cash will need to be used for IM. Therefore, wewould like to suggest that the final rule to include a threshold amount, such as EUR
500K, under which the posting party’s exposure to custodian risk for return of cash isdeemed to be acceptable, as well as the grace period of 3 days, when the IM cash
exceeds such threshold.
・ The definitions related to the use of collateral assets (prohibited re-hypothecation,
re-pledge and re-use; and re-investment which is allowed as long as the agreement isreached) could be determined at the discretion of respective jurisdictions. (It is
understood that, basically, the definitions shall be in line with the agreement underrelevant governing law of ISDA -CSA.) We would like to confirm if the “re-invested
collateral” [in P.49] in the rule includes “collateralized short-term loan contract(so-called “Yutan call”)” which is currently considered as an option of IM cash
reinvestment in Japan.
・ Additionally, in the context of Basel III leverage and other requirements, the impact
of various Basel requirements could not be disregarded since cash may be piled up at
hand of each entity. Thus, custodians and trust banks that offer a segregation function
may become more careful in accepting cash. Given such consequence, the competentauthorities are requested to continue considering relaxing this requirement, by fully
taking into account the relevance between the margin requirements and the Basel III
including the leverage requirements so as to facilitate the provision of function bycustodian banks/trust banks that contribute to mitigating systematic risk through thesegregation of IM.
(8) Treatment of additional 8% haircut
 Request for clarification and confirmation of the objective(i) Definition of termination and transfer currencies
Please provide more specific definition for termination and transfer currencies. Underthe 2nd CP, if the currency is different from the termination and transfer currencies
defined under the agreement, the haircut of 8% needs to be applied. In this regard, wewould like to confirm whether such termination and transfer currencies should be
defined using the same definition for both counterparties, or these currencies are11

separately defined by respective counterparties, taking into account that, underdocumentation practice of ISDA Master and CSA Agreements, termination and transfer
currencies are often separately defined by respective parties to the agreement.
(ii) Please clarify whether a haircut shall be applied to assets purchased throughre-investment as defined in [the second paragraph of Article 1 REU in P.49], using
examples. (For example, in the case where the termination currency is USD, and JPY
cash is posted for IM, and US Treasury Securities are purchased throughre-investment.)(iii)Whether a haircut is applied to cash posted for IM(iv) Details of [seventh paragraph of Annex II in P.58]. In particular, it is requested to clarify
the intention of requiring the application of an 8% haircut only to the “unsettled
variation margin”.
(For example, in the case where the transfer currency is USD and JPY cash is posted,
the haircut of 8% is applied only to unsettled collateral until the settlement is completed,and after the settlement, the haircut of 8% will not be applied. In other words, whether
this requirement intends that VM equivalent to 8% additionally posted portion will be
returned. To avoid unnecessary confusion, it is requested to apply the same calculation
method as IM.)(v) If, under the agreement, the termination currency is specified as USD for IM, or thetransfer currency is defined as USD for VM, and the exchange of collateral is executedin USD (e.g., $1,000,000), we would like to confirm whether the haircut of 8% needs
not be applied.
Assuming the same agreement as above, the haircut of 8% needs to be applied if thecollateral is exchanged in JPY, and the collateral amount is calculated as $1,000,000 x
JPY120 (the conversion rate for $/¥) / (1-0.08) = JPY130,434,783. We would like to
ask whether this is correct.
(vi) If the termination and transfer currencies are not agreed with the counterparty, it may beinterpreted that the haircut is applied to collateral assets for both VM and IM. It istherefore requested to clarify this. If the haircut is applied to both VM and IM, there is aconcern that the haircut will be applied in a duplicated manner to VM and IM for thesame Trade Population.
 Easing the conditions for applying the haircut of 8%
・ The termination currency under the ISDA Master Agreement is set forth as atermination currency used for close-out netting. In the case of contracts between
counterparties in the same jurisdiction, a specific single currency is generally set,
whereas for cross-border transactions, a specific single currency is often not defined,
for example by setting forth as “either USD, JPY or EUR”, or “non-defaulting party
or non-affected party shall determine”. This is due to the fact that:
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a)

b)

“Termination currency for close-out netting” shall be a currency used for
liquidation which does not cause difficulty in the close-out netting
proceedings by a non-default party. (Under current default practice, thecurrency used at a jurisdiction where the head office of a defaulting party is
domiciled is mostly used to determine the amount of receivables.)Under the cross-border contract, the termination currency may differ,depending on jurisdictions where both counterparties domicile.

・ In light of the above practice, a same single currency should not be applied to bothcounterparties. Instead, multiple termination currencies should be permitted to be set
in line with the practice.
・ Practically, there may be a financial institution that sets a single termination currency,with a view to avoiding additional haircut. In such a case, it is necessary to take into
account difficulty that may be caused when executing close-out netting. In the firstplace, it is not considered necessary to attach importance to the relevance between
the termination currency under the ISDA Master Agreement and collateral currency
under the CSA Agreement.
・ It is apparent that it would be favourable for an entity if the termination and transfer
currencies are set as denominated in home currency, whereas if those currencies aredenominated in the counterparty’s currency, it would be unfavourable for the entity.
As such, in the practice for negotiating a cross-border agreement, both parties would
not compromise and insist to use their home currency. Consequently, not only thenegotiation process for entering into an agreement would be prolonged, but in theend, financial institutions with a weaker power would be forced to compromise. As aresult, there would be many transactions where large Euro-American financial
institutions set the termination and transfer currencies in its home currency, whereas
relatively small financial institutions in Asia and/or Africa need to accept thosecurrencies to be denominated in the non-home currency, and are required to apply theadditional haircut. Such situation may impede smooth transactions in markets.
・ We recognise that the objective of the margin requirements is to prevent and reducethe impact of counterparty bankruptcy risk. In the context of VM, however, there is aconcern that the introduction of the haircut would result in an increase in credit risk
since the collateral poster would assume credit risk equivalent to the haircut portionof collateral against the collateral taker. Such situation would be contrary to theobjective of this regulation.
Consequently, further review of the requirement on the additional haircut is strongly
proposed for the following reasons: (i) since, in addition to VM, the exchange of IM will
become mandatory for most of financial institutions in the future, it is not necessary in
the first place to set the additional haircut of 8%; (ii) it is necessary to ensure consistency13

of the treatment for VM cash to which the haircut is not applied; and (iii) it is necessary
to smoothly implement the requirement in a short lead time, without having an adverse
impact on financial practice.
Given the considerations above, we propose the following:
Termination and transfer currencies of a contract entered into between the counterparties
in the same jurisdiction shall be a single currency, whereas for the cross-border contract,setting multiple currencies (for example, both counterparties designate their own single
currency separately) should be permitted.
4. Comments other than those related to questions(1) Scope(i) Obligation for collecting and posting initial and variation margins
As set out in the above 3(1), it is proposed not to impose the obligation to post
collateral. It is requested to revisit this issue as it is important that the same concern
may arise in cases where the same rules are introduced at respective jurisdictions, andthe harmonization with the regulations of other jurisdictions should be ensured. In thiscomment letter, the issue associated with this rule is discussed from the following four
patterns of transactions:
a.

b.

c.

Transactions between entities in the EU
In transactions between entities in the EU, generally, if one counterparty requests
the other counterparty to post collateral, the other counterparty is expected toaccept this request, and therefore it would not be an issue for those entities in the
EU to be imposed the collateral obligation. Nonetheless, if the rule would be
finalised as “the collateral taker must collect the amount it calculated” or “thecollateral poster can only post the amount it calculated”, both parties could notreach an agreement. In order to avoid such situation, it is requested to clarify thedefinition of “undisputed amount” in [sixth paragraph of Article 1 VM in P.32 andfifth paragraph of Article 1EIM in P.33].
Transactions between entities in the EU and outside the EU
Except for transactions discussed in c. and d. below, similarly to the transactions
in a., basically there is no issue in this transaction, provided however that thecondition that the both counterparties may agree to exchange collateral at the“undisputed amount” is also permitted for entities outside the EU. For smooth
introduction of the regulation, it is requested to achieve harmonization as much as
possible.
Transactions between entities in the EU and non-EU entities in the jurisdictions
where the regulation is not implemented14

d.

The issue is as stated in 3(1) above.
Transactions between entities in the EU and non-EU entities in the jurisdiction
where the legal enforceability of the netting is not assessed
The issue is as discussed in 3(1) above.

(2) IM model(i) Not taking into account any correlations between the unsecured exposure and thecollateral [the second paragraph of Article 5 MRM in P.36]
The final policy framework established by the BCBS and IOSCO provides the optionof model-based haircuts. Because, in general, interest rate, FX and other risks arecommonly inherent in the derivative portfolio and collateral assets, risks that arecovered by applying haircuts include the correlation risk between the derivatives
portfolio and collateral assets, in addition to price fluctuation risk (volatility) unique toindividual collateral assets.
In light of the objective of the regulation to reduce systemic risk, it is difficult tounderstand the rationale behind the prohibition of taking into account such correlation.
Rather, it is considered to unduly restrict the latitude of entities in modeling (thisrelates also with Question 3).
(ii) Posting of the additional margin in response to changing market conditions [eighth
paragraph of Article 3 MRM in P.34]
Firstly, we would like to confirm which phrase does the “over a period that ranges
between one and thirty business days” relates to; “to post the additional initial margin”
or “the recalibration of the model”.
If the “over a period that ranges between one and thirty business days” relates to theformer (i.e., where this period refers to the deadline for posting additional margin
arising from recalibration of the model”), it is expected that, in particular, the amountof required collateral would increase across the financial industry in a time of financial
crisis. Consequently, depending on the liquidity of High Quality Liquid Assets, setting
the 30-business day deadline uniformly for all transactions might result in increasingsystemic risk. It is therefore requested to clarify a rationale for setting the 30
business-day criterion, and to defer a decision on applying the same deadline, if
possible, to avoid any unintended adverse consequence on market liquidity.
(iii) The 1st CP required notifying the relevant competent authorities if they are intending touse an internal model for IM calculation and be prepared to supply relevant
documentation. This requirement is eliminated from the 2nd CP. We would like toconfirm whether this implies that the use of internal model will not require any
procedures including the notification to relevant competent authorities.
(3) Intragroup transactions
15

The 2nd paper requires exchanging margins for intragroup transactions unless the relevant
competent authorities grant the exemption. The objective of this requirement is to prevent
systemic risk that arises from a failure of one financial group to have a chain reaction onother financial groups. However, the exchange of margins between the entities would not
be an effective measure for preventing the chain of failure across the group, and would
not contribute to the prevention of systemic risk. Nonetheless, if this is mandated, aconsiderable number of collateral securities would be piled up within the group without
being disposed of, because, apart from VM, collateral assets could not be repledged in thecase of IM, and major sovereign bonds are expected to account for the majority ofcollateral assets in order to avoid an adverse impact on the leverage ratio of custodians
accepting IM. If the volume of major sovereign bonds traded in the market would be
reduced, there is a concern that the volatility of interest rate would further increase in the
future to normalize the monetary policy (lifting of quantitative easing andzero-interest-rate policy), thereby leading to market turmoil. Additionally, it is requested
to clarify from which relevant competent authorities approval should be obtained for the
exemption for the intra-group transactions. For example, the clarification is requested forthe following cases: If more than 2 entities exist in the EU in the group company, whether
it is necessary to obtain approval from all relevant competent authorities in which thosegroup entities are domiciled or from either one of the competent authorities. Or, if the
exemption for the intragroup transaction is set forth in the jurisdiction where a non-EUgroup entity is domiciled similarly to the cases in the EU, whether the requirement toobtain approval should be satisfied for such non-EU jurisdiction.
(4) Equivalence assessment
The completion of equivalence assessment after the finalisation of respective regulations
is indispensable for entering into a CSA agreement on a cross-border basis. Therefore, tocomplete the conclusion of a huge number of CSA agreements across jurisdictions by nolater than the application date of the regulation, it is requested to complete theequivalence assessment by early 2016 (January 2016). If equivalence assessment could
only be completed after this timing, it is impracticable for private financial institutions toaccelerate their CSA agreement process through its own efforts. Therefore, with regard tojurisdictions for which the equivalence assessment is not completed at early next year,
including those jurisdictions where the regulation is not implemented, it is requested toallow more flexibility in the timing of implementation; for example, setting a certain lead
time.

16

（Attachment 1）

Suggestion ｘｘ-ｘｘ
IMPROVEMENT OF CSA AGREEMENT
■ New
1.



2.





3.





4.



□ Ongoing

SUGGESTION
In order to facilitate the introduction of Global Standard Credit Support Annex (“Global CSA”) against
Indian banks, regulations on transfer of securities for collateral posting outside in India must be eased.
Or, if such deregulation is not possible in the near future, then settlement and clearing of Indian
Securities has to evolve for Indian National Debt to be used as eligible collateral for Local Credit
Support Annex (“Local CSA”).
ISSUE / PROBLEM
Aftermath of the Great Financial Crisis, executing collateralized OTC derivatives has become a soundglobal practice as agreed at G20 in 2009. Foreign banks in India are finding it difficult to expand
derivative transactions with Indian banks and Financial Institutions because of severe restrictions on
collateral posting, both locally as well as globally.
Consequently, this limits the overall growth of derivative markets in India.
Practice in India doesn’t conform to the standards of “The 2009 G20 agreement to reform the global
OTC derivatives market” which stipulates the introduction of collateralization of derivativetransactions worldwide.
BENEFIT / MERIT FOR INDIA
With the enabling of transfer of security outside India under Foreign Exchange Management (FEMA)
Act, derivative transactions between the Indian banks and foreign banks under global CSA will be
activated and this will lead to development of local derivatives markets as well as debt capital markets.
An active derivatives market is a key proponent to attract more foreign investment which is in line withthe long-term vision of the Indian Government to develop local Infrastructure.
Introducing global CSA will mitigate credit risk between Indian and Foreign banks, and contribute toactivation of financial markets in India. It will also contribute to development of overseas business of
the Indian banks.
Acceptability of India national debt by foreign banks will increase if it is accepted as an eligible
security (in case of Local CSA). It will also help for the expansion of Indian Bond markets and demandfor Indian bonds.
(IF ANY)INTERNATIONAL STANDARD / BEST PRACTICE
Each country is advancing standardization and introducing legislation on derivative transactions forconforming to the international agreement of G20 in September, 2009 (example: Malaysia).
The Global CSA has been introduced among major Asian countries except for Indonesia, Vietnam,
and India. Especially, The Global CSA is commonly used in the market of Thailand as compared toother ASEAN countries.

5. (IF ANY) RESPONSE OF FEDAI AND/OR OUR COMMENTS THEREON 24th September2012 FEDAI Circular / SPL-62/ISDA-CSA/2012“On the issue, it is observed that providing collaterals / margins for onshore transactions at an off-shore
centre is not permissible under FEMA”

(Attachment 2)

Shortest Settlement Period for Margins in Cross-border Transactions□Assumption: " T " is "deal date"(≠"Valuation date").

VM
T
East Asia

6:00

12:00

T+1
18:00

24:00

6:00

12:00

T+2
18:00

24:00

6:00

12:00

T+3
18:00

24:00

6:00

18:00

24:00

JPY settlement

Margin Call
Deal done ( = date " T " )

12:00

Reply
(Margin Call)
EUR or USD settlement

Europe

6:00

12:00

18:00

24:00

6:00

T

12:00

18:00

24:00

6:00

T+1

12:00

18:00

24:00

6:00

T+2

12:00

18:00

24:00

T+3

Confirmation ofbond collateral details

IM
T
East Asia

6:00

12:00

T+1
18:00

24:00

6:00

12:00

T+2
18:00

24:00

6:00

12:00

T+3
18:00

24:00

6:00

12:00

18:00

24:00

Undisputed AMT

Margin Call
Deal done ( = date " T " )Reply(Margin Call)

Global Custodywith auto

Global Custody and TR BK without Auto
allocation

undisputed AMT

Europe

6:00

12:00

T

18:00

24:00

6:00

12:00

T+1

18:00

24:00

6:00

12:00

18:00

24:00

6:00

T+2

12:00

18:00

24:00

T+3

○ If collateral is limited to cash which does not require confirmation of bond collateral details, the settlement period can be shorten by one day
This assumes that the "counterparties shall collect at least the undisputed amount" under the proposed EU Regulation○ If the dealing hours are late in the East Asia time zone, deals executed in this time zone may be treated as deals done in the following day, depending on the system oeach firm.
In such a case, the following date of the actual deal date is recognised as "T".