Derivatives Documentation – Questions Answered

During our recent webinar, “Managing OTC Derivatives Documentation in a Central Clearing Environment,” we had several questions from the audience that we couldn’t cover in the time allotted. Paul Nelmes of Exari offers the following response to one of the questions posed from the audience during the Web-event.

Q. If not already on the agenda, would appreciate an overview of the client clearing documentation that will be in the US, given that client clearing would be a principal-agency model (futures/FCM model). What is the status of such documentation?

A. My understanding of the documentation required under the ‘Principal’ and ‘Agency’ models is:

Documentation ‘Principal model’

  1. Existing ISDA for uncleared transactions remains
  2. New ISDA and CSA between CM and client for client clearing transactions
  3. New set of documentation for each CCP
  4. Security Deed/Agreement whereby the CM grants to its client a security interest in respect of client account at the CCP
  5. New security arrangement for each CCP
  6. Give-Up agreement – agreement between the Clearing Member and Broker whereby the CM agrees to accept give-up transactions in relation to underlying clients
  7. Compensation Agreement (if a transaction is not cleared) – a fall back to the previous Give-Up, which covers compensation arrangements between the Executing Broker and the client in the event that a transaction is not accepted by the CM for clearing

6 & 7 above are between the three parties until the transaction clears and/or in the event that it doesn’t

  • There are potentially further agreements required detailing the fees charged to the client for clearing – prepared by the CM

Documentation ‘Agency’ Model

  1. Futures Agreement – with addendum for Clearing transactions
  2. Give-Up Agreement between FCM, Client and Executing Broker
  3. End-User License Agreement for use of electronic systems
  • There are potentially further agreements required detailing the fees charged to the client for clearing – prepared by the CM

To see some more of the post-event Q&A, read the DerivSource Blog (registration required).

For information on streamlining your derivatives documentation visit Exari.

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