the new swiss financial market infrastructure act and ordinances

The new Swiss Financial Market Infrastructure Act and Ordinances

Dr. Martin Liebi

Dr.iur., LL.M., Attorney-at-law

Head Capital Markets

PwC, Legal FS Regulatory and

Compliance Services

28 January 2016

2

The views expressed in the following material are the

author’s and do not necessarily represent the views of

the Global Association of Risk Professionals (GARP),

its Membership or its Management.

PwC | January 2014

Agenda

2

PwC | January 2014

General Topics

3January 2012

PwC | January 2014

Overview scope of application of the FMIA

4

2Partially new1. Stock exchanges2. Multilateral Trading Facilities3. Central Counterparties4. Central Securities Depository5. Trade Repository6. Payment Systems

4Other market behavioural rulesCorresponds in general to the current regulations under the SESTA re disclosure, public takeover, and insider dealing/market manipulation.

Financial Market Infrastructure Act

NewGeneral Sections applicable to all FMI

Unclear to what extent applicable to other sections

3New

Implementation of the principles decided on by the G-20 conference in Pittsburgh.

1

PwC | January 2014

Who falls within the scope of application of the FMIA?

5

• Stock Exchanges

• Multilateral Trading Facilities

• Swiss Participants

• Foreign Participants

• Foreign Trading Venues

• Organized Trading Facilities

• Power Exchanges

• Central Counterparties

• Foreign Central Counterparties

• Central Counterparties

• Swiss Trade Repository

• Foreign Trade Repository

• Payment Systems

• Banks

• Securities dealers

• Insurance and reinsurance companies

• Parent companies of a financial group and conglomerate

• Fund management companies and asset managers of collective investment schemes

• Funds

• Pension funds and foundations (48 BVG)

• Non-financial counterparties (Enterprises not being financial counterparties)

• Each market participant exploiting insider information or a recommendation based on insider information.

• Each person substantially influencing the price of securities with the intention of gaining pecuniary damage if false/misleading information is being disseminated against better knowledge or acquisitions and sales of such securities are directly or indirectly effected for the benefit of the same person connected for this purpose.

• Direct or indirect holder

• Individually or jointly

• Shares, call-options or put-options

• of a listed company domiciled in Switzerland

• of a company domiciled abroad with a main listing in Switzerland (Hauptkotierung)

• Each person making a public takeover offer for shares of a company having

• its seat or listing in Switzerland or

• abroad, if its shares are at least partially mainly listed (hauptkotiert) in Switzerland.

PwC | January 2014

Penal provisions

6

Breach of professional secrecy

A custodial sentence of up to 3 years/monetary penalty shall be imposed to anyone, who willfully

• discloses a secret entrusted to them in their capacity as director/officer/employee/agent/liquidator,

• induces to such a breach of the professional secrecy,

• discloses to other persons a secret disclosed to them in violation of letter a or exploit such a secret for their own benefit or for the benefit of others.

Duties in derivatives trading

A fine not exceeding CHF 500’000 shall be imposed on any person who wilfully

• violates the clearing duty,

• violates the reporting duty,

• violates the risk mitigation duty,

• violates the venue trading duty.

Insider information

A custodial sentence not exceeding 3 years or a monetary penalty shall be imposed on any person who as a body/member of a body of an issuer/company controlling or controlled by them, or as a person who due to their holding or activity has legitimate access to insider information, if they gain a pecuniary advantage by:

• exploiting it to acquire or dispose securities admitted to trading/use of derivatives,

• disclosing it to another,

• exploiting it to recommend to another to acquire or dispose of securities/derivatives.

Price manipulation

A custodial sentence not exceeding 3 years or a monetary penalty shall be imposed on any person who substantially influences the price of securities admitted to trading in Switzerland with the intention of gaining a pecuniary advantage if they:

• disseminate false or misleading information against their better knowledge;

• effect acquisitions and sales of such securities directly or indirectly for the benefit of the same person or persons connected for this purpose.

PwC | January 2014

European Counterparts

7

FinfraG

01MIFID II 02

MiFIR

03CSDR

04EMIR

0506

07

08

REMIT

Takeover regulation

MAR

National law

PwC | January 2014

FinfraG Implementation Timeline

Entry into force of FinfraG, FinfraV, FinfraV-FINMA

01/01/2016

Application of the documentation obligation

Likely licensing date of SIX TR

Application of the enhanced resolution stay provision

Reporting obl. for FCs and CCPs *

Reporting obl. for FCs (-) & NFCs *

Timely conf., portfolio. recon, dispute resol., portfolio comp. for non-small CPs & transactions with an FC (-)

01/04/2016

01/10/2016

01/01/2017

01/01/2017

01/04/2017

01/07/2017

16/08/2017

Application of the auditing obligation through an auditor

Application of the enhanced reporting & recording obligation

Reporting obl. for at that time open derivatives transactions in all other cases *

Timely conf., portfolio recon., dispute resol., portfolio comp. in all other cases for at that time open derivatives transactions

Clearing obl. for certain Pension Plans and Investment Foundations for certain transactions in order to reduce risks

Valuation obl. for at that time open transactions

2016 2017 2018 2019 2020

*For the reporting of derivatives transactions that are traded via trading venues or the operator of an OTF, this deadlines are extended by 6 months in each case.

01/01/2020

Application of initial margin req. for month-end gross average positions for the months March, April & May of a year > 8 bill. CHF; The obligation applies at a time from 01 Sept. of the year in question until 31 Aug. of the following year

PwC | January 2014

Financial Market Infrastructures

9January 2012

Life cycle of an ETD-Trade

Trading Venue

Buyer B Seller S

Order Order

Tra

din

g

Central Counterparty

Buyer B Seller S

Securities Securities

Becomes seller of the buyer and buyer of the seller; guarantees fulfilment of the trade

Cle

ari

ng

Set

tlem

ent

Buyer B Seller S

Central Securities Depository

Payment System

Payment vs. Delivery

Delivers SecuritiesReceives Securities

Pays CHF Receives CHF

Trade Repository

Rep

ort

PwC | January 2014 11

Stock Exchanges and Organized Trading Fa-

cilities

Payment System Multilateral TradingFacilities

Central Counter-parties


Trade Repository

An entity that clears and settles payment obligations based on uniform rules and procedures.

Payment System

An entity which collects, manages and retains in a centralized manner the data on derivatives transactions reported to it in accordance with Art. 103 FMIA.

Trade Repository

The operator of a central custodian or a securities settlement system.



An institution for multilateral securities trading where securities are listed, whose purpose is the simultaneous exchange of bids

between several participants and the conclusion of contracts based on non-discretionary rules.

Stock Exchange

An institution for multilateral securities trading where securities are listed, whose purpose is the simultaneous exchange of

bids between several participants and the conclusion of contracts based on non-

discretionary rules.

MTF

An entity based on uniform rules and procedures that interposes itself between the counterparties to a

securities transaction or other contract involving financial instruments,

thereby becoming the buyer to every seller and the seller to every buyer .



An establishment for (a) multilateral trading in securities/other financial instruments whose purpose is

the exchange of bids and the conclusion of contractsbased on discretionary rules, (b) multilateral trading in

financial instruments other than securities whosepurpose is the exchange of bids and the conclusion of

contracts based on non-discretionary rules, and (c) bilateral trading in securities or other financial

instruments whose purpose is the exchange of bids.

Organized Trading Facility

PwC | January 2014

General section applicable to all financial market infrastructures

12

Licensing requirement

Organization, Business continuity, Prohibition of conflicts ofinterests and guarantee of irreproachable business conductfor management, board of directors, and shareholders

Ancillary services are subject to licensing and theoutsourcing of essential services requires the approval ofFINMA

Minimum capital and IT systems requirements

Fair and open access, disclosure or essential informationand recording obligation

Systemically important financial market infrastructuresand business processes



Stock Exchanges & MTF

Trade Repository

Payment Systems

PwC | January 2014

Spain

Foreign stock exchange/MTF

Switzerland

Swiss stock exchange/ MTF

Participant at a stock exchange/MTF

Frankfurt

Foreign Central Counterparty

Paris

Foreign participant at a stock exchange/MTF

London

Foreign Trade Repository

Recognition of foreign financial infrastructures and licensing of foreign participants on a Swiss trading venue

PwC | January 2014

Trading in derivatives

14January 2012

PwC | January 2014

FinfraG Implementation Timeline

Entry into force of FinfraG, FinfraV, FinfraV-FINMA

01/01/2016

Application of the documentation obligation

Likely licensing date of SIX TR

Application of the enhanced resolution stay provision

Reporting obl. for FCs and CCPs *

Reporting obl. for FCs (-) & NFCs *

Timely conf., portfolio. recon, dispute resol., portfolio comp. for non-small CPs & transactions with an FC (-)

01/04/2016

01/10/2016

01/01/2017

01/01/2017

01/04/2017

01/07/2017

16/08/2017

Application of the auditing obligation through an auditor

Application of the enhanced reporting & recording obligation

Reporting obl. for at that time open derivatives transactions in all other cases *

Timely conf., portfolio recon., dispute resol., portfolio comp. in all other cases for at that time open derivatives transactions

Clearing obl. for certain Pension Plans and Investment Foundations for certain transactions in order to reduce risks

Valuation obl. for at that time open transactions

2016 2017 2018 2019 2020

*For the reporting of derivatives transactions that are traded via trading venues or the operator of an OTF, this deadlines are extended by 6 months in each case.

01/01/2020

Application of initial margin req. for month-end gross average positions for the months March, April & May of a year > 8 bill. CHF; The obligation applies at a time from 01 Sept. of the year in question until 31 Aug. of the following year

Important questions

1 Are we talking about a derivative?

− Generally each financial contract whose value is being derived from one or multiple underlyings and is not a cash transaction is a derivative if no exceptions are applicable.

2 What is the legal nature of the counterparty?

− Is the counterparty a FC or an NFC?

− Is the counterparty small?

3 Which obligations are applicable?

4

− Is there a clearing or reporting obligation?

− Are there risk mitigation measures?

− Is there a trading obligation?

Who must fulfil the obligation?

− Who must report to the Trade Repository?

4

PwC | January 2014

Are we talking about a derivative?

• A derivative is generally any financial instrument whose value depends on one or several underlying assets and which are not cash transactions;

• No derivatives (and thus not subject to any of the obligations are):

• Cash transactions;

• Structured Products;

• Transferable securities;

• Derivatives in the form of structured deposits;

• Derivate transactions related to power and gas that (i) are traded on an organized trading system, (ii) must be physically settled, and (iii) cannot upon unilateral choice of a party be settled in cash;

• Commodities derivatives that (i) are physically delivered, (ii) cannot upon unilateral choice of a party be settled in cash, and (iii) are not traded on a trading venue or organized trading system.

• Derivative transactions related to climate variables, freight rates, inflation rates or other official economic statistics, that can only be settled in cash in case of default or another termination event;

• Securities borrowing and lending.

• Only subject to the reporting obligation, but not subject to the clearing, risk mitigation obligation, and trading obligation are foreign exchange swaps, options, and futures if they can be settled on a payment-vs-payment basis.

17

PwC

What is the legal nature of the counterparty?

Financial Counterparty (FC)• Swiss banks, securities dealers, insurance and reinsurance companies, parent companies of financial or insurance group or financial or

insurance conglomerate, fund management companies, asset managers of collective investment schemes, collective investment schemes, occupational pension schemes and investment foundations (Art. 48-53k BVG).

Non-financial Counterparty (NFC)

• Non-financial counterparties are companies that are not financial counterparties.

Small Financial Counterparty (FC-)

• A financial counterparty is deemed to be small if the rolling average for its gross position in all outstanding OTC transactions calculated over 30 working days of the entire financial group is below the threshold of CHF 8 bio.

Small Non-financial Counterparty (NFC-)

• A non-financial counterparty is deemed to be small if all of the rolling averages for its gross positions in relevant outstanding OTC derivatives transactions calculated over 30 working days are below the following thresholds: credit derivatives CHF 1.1 bio., equity derivatives CHF 1.1 bio., interest derivatives CHF 3.3 bio., forex derivatives CHF 3.3 bio., commodities derivatives and other derivatives CHF 3.3 bio.

Exempted counterparties andcounterparties only subject to

reporting

• The chapter on OTC-derivatives do not apply to the Confederation, Cantons, and Communities, the SNB, and the Bank for International Settlements.

• Multilateral development banks, certain public organizations (incl. social insurances) owned by the Confederation, Cantons, or Communities are subject to the reporting obligations according to Art. 104 FMIA.

PwC

Which obligations are applicable?

FC FC- NFC NFC-

Clearing obligation Yes No Yes No

Reporting obligation Yes Yes YesYes/No

(if between NFC-)

Risk mitigationmeasures

(confirmation,reconciliation,

dispute resolution)

Yes Yes YesYes/No

(no Portfolio Reconciliation if NFC-)

Risk mitigation measures (valuation)

Yes No Yes No

Risk mitigation measures (exchange

of securities)Yes Yes Yes No

Trading venue obligation

Yes No Yes No

PwC | January 2014

FC

FC has to report

NFC

NFC1

Selling NFC has to report

NFC2

FC

FC has to report

FC (-)

NFC1 (-)

No reporting obligation

NFC2 (-)

FC1

Selling FC has to report

FC2

Swiss CP

Swiss CCP has to report

Non-Swiss-

CP

FC1 (-)

Selling FC- has to report

FC2 (-)

CP1

CCP has to report. If a foreign CCP does not

report, the Swiss CP must report.

NFC

NFC has to report

NFC (-)

CP2CCP

NFC (-) = Small non-Financial Counterparty

CP = Counterparty

CCP = Central Counterparty

FC = Financial Counterparty

FC (-) = Small Financial Counterparty

NFC = Non-Financial Counterparty

Who has to fulfil the reporting obligation?

PwC | January 2014

Potential model for the integration of OTC-Derivates in the Clearing- andCollateral Process

2European Market Infrastructure Regulation (EMIR) • Leistungsumfang

PM Pre-Trade TradeExecute/

MatchMargin Call Collateral Mgmt. Settlement Reporting

Trade ‘Give up‘

Margin Requirements

Collateral

Margin

Settlement

Co

ll.

Inst

uct

ion

Co

lla

tera

lR

equ

estAllocation

Mandate

Order

Trade

Confirmation

Co

lla

tera

lD

eliv

ery

Trade Repository

Execution

SettlementTrade

Confirmation

Transaction Instruction

Collateral Management

1

23

4

5

6 7 8

9Check

9a 9b

10

12

13

Alternative Reporting

Alternative Reporting

Alternative

ReportingSettlement Confirmation

Confirmation

NEW

NEW

NEW

NEW

NEW

ExternClient

Investor

Portfoliomgmt.

Trading Desk

Execution-

Broker 1-n

Middle Office

Back Office

DCM

Custodian 1+2

Transaction management

11

Some remarks

Extraterri-toriality

Documentation obligation

Party self-declaration

The FMIA and its ordinances do only set forth a very limited extraterritorial effect. The FMIA does only stipulate a clearing obligation and an obligation to trade on a trading venue which will be further diluted in the FinfraV.

FC and NFC must establish in writing the procedures/processes implementing the clearing obligation, reporting obligation, risk mitigation measures, and trading venue obligation. Non-financial counterparties can decide in writing not to trade in derivatives.

A counterparty might in principle rely on the self-declaration of the counterparty about its nature. Such a self-declaration is applicable to all obligations under the chapter related to the OTC-derivatives. Parties must be informed about amendments on time.

The limited extraterritorial impact as well as the possibility to fulfill the obligations under the FMIA under foreign law are welcome.

These procedures/processes must already be established beginning as of January 1, 2016. There are in other words no transition periods set forth in the current draft of the FinfraV for these obligations.

The reliance on self-declarations issued by counterparties, especially also regarding the legal nature of foreign domiciled counterparties, are welcomed.

Topic Details Commentary

No Frontloading

The obligation to clear derivatives through licensed or recognized central counterparties starts 6 to 12 months after the point in time when FINMA determines the mandatory application of the clearing obligation related to specific derivative categories. Only derivatives transactions entered into after the start of the clearing obligation are subject to the clearing obligation.

The fact that no front loading is required is welcomed from a practical point of view.

PwC | January 2014

Disclosure obligations

23January 2012

PwC | January 2014

Essential amendments to disclosure obligationsReporting obligation of the beneficial owner and a third party with free discretion

24

Fourth party

Reporting obligation, who

factually controlsvotes

Reporting obligation of the Beneficial Owner

Beneficial Owner(Control of votes and

bearer of economic risk)

Third party usesvotes in its free

discretion (Beneficial owner does

not control votes)

Transfer of voting rights

Transfer of votes

Examples:

Asset management agreement

Securities Lending

Usufruct

Re-delegation in the area of collectiveinvestment schemes

Some important new provisions

Reporting obligation

Usufruct/ Securities

lending

Reporting obligation

Only the beneficial owner and the direct holder must be reported in situations of indirect holdings (indirect holders must not be reported anymore).

The reporting obligation related to usufruct and securities lending have been abolished and have been replaced by the general twin reporting obligation of both the beneficial owner and the third party having free discretion about transferred voting rights (Art. 120 FinfraG).

Legal persons do only have to mention the name and seat of a corporation, but not the address anymore. The contact person must not be reported anymore. The reports must on a mandatory basis be made on the official reporting form.

Topic Details

PwC | January 2014

Q&A

26January 2012

Your contact

Birchstrasse 1608050 Zurich-Oerlikon

Tel: +41 58 792 28 86Mobil: +41 76 341 65 43E-mail: [email protected]

Martin LiebiLegal FS Regulatory & Compliance Services Head Capital Markets

C r e a t i n g a c u l t u r e o f

r i s k a w a r e n e s s ®

Global Association of

Risk Professionals

111 Town Square Place

14th Floor

Jersey City, New Jersey 07310

U.S.A.

+ 1 201.719.7210

2nd Floor

Bengal Wing

9A Devonshire Square

London, EC2M 4YN

U.K.

+ 44 (0) 20 7397 9630

www.garp.org

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the new swiss financial market infrastructure act and ordinances

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