Submission #62

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Adrian Lee & Partners

Question 1. What costs will the proposed collateral requirements create for small or medium-sized entities, particular types of counterparties and particular jurisdictions? Is it possible to quantify these costs? How could the costs be reduced without compromising the objective of sound risk management and keeping the proposal aligned with international standards?

The proposed collateral requirements would lead to a significant increase in the costs of trading and would impose significant operational demands on end users such as pension funds and other long-term institutional investors. The requirements are inconsistent with BCBS-IOSCO guidance and are in direct contrast to the requirements of the Dodd-Frank Act. Please see the attached document for further detail.

Question 2. Are there particular aspects, for instance of an operational nature, that are not addressed in an appropriate manner? If yes, please provide the rationale for the concerns and potential solutions.

As per the above, requiring pension funds and other long-term institutional investors to post and collect margin on foreign exchange forward contracts and foreign exchange swaps imposes significant operational as well as cost demands, as well as being inconsistent with BCBS-IOSCO guidance and the Dodd-Frank Act. A potential solution would be to limit the requirements to post and collect margin to contracts between banks and counterparties that are financial institutions and systemically important non-financial entities, defined so as to exclude pension funds and other long-term institutional investors. Please see the attached document for further detail.

Question 3. Does the proposal adequately address the risks and concerns of counterparties to derivatives in cover pools or should the requirements be further tightened? Are the requirements, such as the use of the CRR instead of a UCITS definition of covered bonds, necessary ones to address the risks adequately? Is the market-based solution as outlined in the cost-benefit analysis section, e.g. where a third party would post the collateral on behalf of the covered bond issuer/cover pool, an adequate and feasible alternative for covered bonds which do not meet the conditions mentioned in the proposed technical standards? N/A

Question 4. In respect of the use of a counterparty IRB model, are the counterparties confident that they will be able to access sufficient information to ensure appropriate transparency and to allow them to demonstrate an adequate understanding to their supervisory authority? N/A

Question 5. How would the introduction of concentration limits impact the management of collateral (please provide if possible quantitative information)? Are there arguments for exempting specific securities from concentration limits and how could negative effects be mitigated? What are the pros and cons of exempting securities issued by the governments or central banks of the same jurisdiction? Should proportionality requirements be introduced, if yes, how should these be calibrated to prevent liquidation issues under stressed market conditions? N/A

Question 6. How will market participants be able to ensure the fulfilment of all the conditions for the reuse of initial margins as required in the BCBS-IOSCO framework? Can the respondents identify which companies in the EU would require reuse or re-hypothecation of collateral as an essential component of their business models? N/A

Upload files ALP-Comments on ESA Consultation-14.7.14.pdf

Name of organisation Adrian Lee & Partners