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Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial L

Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey . Paul Landless and Emir Nurmansyah. 22 November 2011. Indonesian GMRA Annex. Overview. PART I – OVERVIEW OF THE REPO MARKET Introduction on Repos

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Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial L

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  1. Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey Paul Landless and Emir Nurmansyah 22 November 2011 Indonesian GMRA Annex

  2. Overview PART I – OVERVIEW OF THE REPO MARKET • Introduction on Repos • International Master Agreements PART II – PRACTICAL CONSIDERATIONS FOR THE INDONESIAN GMRA ANNEX • Risk Issues in Repo Markets • Output of Initial Legal Survey Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  3. PART I: OVERVIEW OF THE REPO MARKET Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  4. Introduction on Repos Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  5. What is a repo? • “Repo” is short for sale and repurchase transaction • Under a "classic" repo, the owner of securities (the seller) will • sell the securities or shares (the repoed securities) to a bank or other financial provider (the buyer) for $X and • agree to buy the repoed securities back (or equivalent securities) at a specified future date for $Y Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  6. What is a repo? Start of Transaction - Purchase Date During life of Transaction – Margin Transfer End of Transaction – Repurchase Date transfer of securities Seller Buyer purchase price manufactured income on securities interest on cash margin Buyer Seller margin transfers manufactured income on securities margin interest on cash margin transfer of equivalent securities Seller Buyer repurchase price Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  7. Why are repos used? • Seller: to raise cash on a short term basis from longer term assets • Buyer: to make money from the interest charge • To support other money-making transactions • To fund "long" positions in securities • To take "short" positions in securities • Central banks: monetary policy instruments Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  8. Repo marketThe players and the securities The Players • Dealers in securities • Central banks • Banks • Insurance companies • Pension funds • Mutual funds The Securities • Government Bonds • Corporate Bonds • Structured finance bonds • Equities Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  9. Types of Repo • Classic repo • Fixed term • Overnight to one year • “on demand” or “open” repo • Reverse repo • Buy-sell back • Tri-party repo • “Special” or “GC” • Synthetic repo • Total return swap • Forward-start repo Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  10. Distinguishing repos from similar transactions • Repos are similar to • Secured loans • Buy/sell-backs • Stock loans or securities lending transactions Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  11. Similarities and differencesRepos and secured loans • Similarities • Similar economic terms • Differences • Secured loans • Outright title transfer • No security interest granted Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  12. Similarities and difference Repo and Secured Loans Repo transfer of securities Purchase Price Seller Buyer outright transfer – no security interest Loan securities collateral Cash Loan Seller Buyer security interest Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  13. Development of the international repo markets • Originated in the US • Introduced by the US Federal Reserve in 1918 • Developed in Europe during 1980 and 1990s • Increasingly global • Latin America • Eastern Europe • Southeast Asia • Innovations • Electronic trading • CCP • Repoclear Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  14. Repo market trends • Rapid expansion in overall repo volumes • European Repo survey (September 2010): 25% increase in the size of the European repo market since December 2009 • higher than the previous highest figure in June 2007 (pre financial crisis) • Growing market concentration • Broader underlying shift towards CCP • Market share of electronic repo trading falling Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  15. International Master Agreements Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  16. Introduction to Master Agreements • What are Master Agreements? • The standard contractual terms apply • Why are they used? • Repo contracts in most jurisdictions can be created without formality i.e. orally • Most transactions agreed orally over the telephone • This can lead to uncertainty about what has been agreed – a written contract removes this uncertainty • Entire agreement clauses Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  17. Common Architecture • Documentation Architecture • Master Agreement produced by trade association • Annex • Confirmations for each trade • Customised for particular markets or products by annexes which form part of the master agreement • Forms a single agreement • No cherry picking • Forms the basis for close-out netting Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  18. REPO MARKETS MASTER AGREEMENTS Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  19. Market Guidance and Best Practice • ICMA (International Capital Market Association) statements of best practice for repos • Not a contractual commitment • Guidelines or recommendations aimed at improving efficiency or liquidity in the repo markets • Repo Trading Practice Guidelines of August 20, 2003 • Best Practice Guide to Repo Margining of September 15, 2005 • Available from the ICMA website Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  20. PART II: PRACTICAL CONSIDERATIONS FOR THE INDONESIAN GMRA ANNEX Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  21. Risks Issues in Repo Markets Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  22. Myriad of risks Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  23. Settlement Risk • Repo transactions are structured as sales of securities • Inherent risk that the sale does not settle as agreed between the parties Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  24. Simple legal analysis of a sale of a security Seller Buyer Simple Scenario • Assume physical certificates • Assume simultaneous transfer of funds • Sale is complete – title to the security passes – upon physical delivery of the security to the buyer and money to the seller Transfer of Securities Transfer of Funds Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  25. The Settlement Process – Settlement Risk • Risk to buyer/seller inherent in settlement system in process of transferring title • Delay in reconciling settlement system register with definitive register of title for registered securities • Aim to minimise delay between payment and transfer of ownership • Delivery versus Payment (DvP) is the ideal Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  26. Documentation Risk • Are there any rules in a particular jurisdiction that require particular formalities • Rules requiring writing, signatures, notorisation or other formalities? Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  27. Liquidity Risk • The risk that a firm will not be able to meet its obligations as they fall due • Lehman Brothers collapse 2008 • Northern Rock collapse 2007 • Liquidity risk has two aspects • Funding liquidity • Market liquidity Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  28. Market Risk • Market risk: the exposure to adverse movement in the prices of securities lent • Market risk mostly arises due to counterparty default, inappropriate margin or reinvestment of cash collateral • ISLA guidance on pricing securities for securities lending transactions Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  29. Credit Risk • Risk that a counterparty will fail to meet its obligations • Collateralisation is an effective way to reduce credit exposure • reduces the exposure of the lender to borrower by the amount of collateral held • Important that the collateral management process is robust • Operational risk Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  30. Output of Initial Legal Survey (Conducted by Ali Budiardjo, Nugroho, Reksodiputro) Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  31. Key Legal Issues Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  32. Capacity and Authority • Special considerations apply for Indonesian parties to the GMRA • Classification of local counterparties • Government authorities - Corporates / Companies • State-owned enterprises - Financial institutions • Banks - Insurance companies • Ultra vires issues • Verification of capacity and authority • Documents to be requested from counterparty • Sovereign immunity Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  33. Tax issues • Stamp duty • Witholding tax • Treatment of the “repo rate” • Whether “profit” or for the purpose of capital gains tax • Filing of tax returns Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  34. Recharacterisation risk (1) • Recharacterisation risk • Consequence of recharacterisation – GMRA transaction deemed void and unenforceable • Circumstances under which a GMRA transaction may be recharacterised • Rights as owner of underlying assets/securities • Treatment of manufactured dividends/coupon payments Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  35. Recharacterisation risk (2) • Recharacterisation risk in Indonesia • Views from the Indonesian repo market • Academic views • Recharacterisation risk in other Western jurisdictions Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  36. Enforceability of set-off (1) • An Indonesian entity party to GMRA has rights of set-off and netting upon EOD or insolvency, subject to any preferential transactions • Preferential transactions (actio pauliana) – may be subject to cancellation by Indonesian court under the: • Indonesian Bankruptcy Law • Indonesian Civil Code Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  37. Enforceability of set-off (2) • Set-off and netting in Indonesia • Margin issues - criteria for mutuality in the context of Equivalent Margin Securities? • Requirement for creditor to act in good faith? • Formalities required? Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  38. Automatic Early Termination • General position • Automatic Early Termination • It is necessary for Indonesian GMRAs to apply AET to preserve the other part’s right to set-off and net under the GMRA. Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  39. Language • Documentation to be executed in Indonesian language if contracting party is an Indonesian individual/entity Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  40. Recognition of English law • Recognition of English law as governing law of the GMRA • Valid and binding subject to: • public policy • any mandatory rules of laws of another jurisdiction • there being a connection between at least one of the parties or the transaction and the chosen governing law • Effect of application of Indonesian law to the GMRA Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  41. Enforcement of judgements and arbitral awards • Enforcement of foreign judgments • Foreign judgments unenforceable – territorial sovereignty • Exception - Foreign countries with convention with Indonesia • Enforcement of arbitral awards • Arbitral awards enforceable – 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (i.e. New York Convention) Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  42. Agency transactions • Treatment for transactions entered into by party as Principal or as Agent in respect of a Principal • Terms and extent of any agency disclosed? Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  43. Formalities for transfer of Indonesian Securities • General Position • True sale without any conditions • Ownership transferred after “juridische levering” • Bonds • Securities • Other registered receivables Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  44. FX-related issues • Foreign exchange restrictions in respect of Indonesian Rupiah? • Generally no FX restrictions but subject to: • Reporting obligations which apply to certain Indonesian entities (and failure to report renders such entities liable to relevant criminal or administrative sanctions) • Restrictions on payment or remittance of sales proceeds in Rupiah apply to Indonesian banks • Foreign exchange events involving settlement of Indonesian Rupiah Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  45. Treatment of flawed asset provision • Anti-deprivation principle • Rule to invalidate a contract that has the effect of transferring one’s property to another (and removing it from the estate) on insolvency, contrary to the pari passu principle of distribution • “Flawed asset” provision under Paragraph 6(j) of the GMRA in respect of an Indonesian entity which has become insolvent Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  46. Questions? Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  47. Your Contacts Paul Landless ConsultantClifford ChanceOne George Street19th FloorSingapore 049145Singapore T + 65 6661 2029 F + 65 6410 2288 E paul.landless@cliffordchance.com Paget Dare Bryan Partner28th Floor Jardine House One Connaught Place Central Hong Kong SAR T +852 2826 2459 F +852 2825 8800 E paget.darebryan@cliffordchance.com Terry Yang Senior Associate28th Floor Jardine House One Connaught Place Central Hong Kong SAR T +852 2825 8863 F +852 2825 8800 E terry.yang@cliffordchance.com Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  48. Your Contacts Emir Nurmansyah Partner Graha CIMB Niaga 24th Floor Jl. Jend. Sudirman Kav. 58 Jakarta 12190 T +62 21 2505125 F +62 21 2505001, 5121, 5122,5392 E enurmansyah@abnrlaw.com Philip Payne Foreign Of CounselGraha CIMB Niaga 24th Floor Jl. Jend. Sudirman Kav. 58 Jakarta 12190 T +62 21 2505125 F +62 21 2505001, 5121, 5122,5392 E ppayne@abnrlaw.com Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey

  49. A premier law firm in Asia Pacific with deep ties to leading local players We have been active in the Asia Pacific region for more than 50 years: • with eight offices across the region and more than 400 lawyers in Bangkok, Beijing, Hong Kong, Perth, Shanghai, Singapore, Sydney and Tokyo • practising English, US, Hong Kong, Japanese, Singapore, Thai and Australian law and providing local law advice in all offices, where the regulatory framework permits, and working with local lawyers in other jurisdictions • receiving one of the first Qualifying Foreign Law Practice licences issued by the Singapore Government, allowing us to provide Singapore law advice • with a joint marketing and cooperation arrangement with VILAF-Hong Duc in Vietnam • creating strong working relationships with local law firms in Malaysia, Indonesia, the Philippines, South Korea and elsewhere in Asia Pacific • providing a multilingual service to reflect the nature of the region. Our lawyers advise a diverse client base including domestic and multi-national corporates, banks and other financial institutions, governments and other regulatory bodies, and international partnerships. Legal Workshop: GMRA Adoption Strategy, Key Business Issues, Case Studies of Other Jurisdictions and Output of Initial Legal Survey 22 November 2011

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