SWITZERLAND Law and Practice Contributed by: Olivier Favre and Tarek Houdrouge, Schellenberg Wittmer Ltd
a clearing broker providing clearing services and, pos - sibly, a client of such clearing broker providing indirect clearing services. For investors other than small non- financial counterparties in the sense of the FinMIA and for Swiss parties involved in the clearing chain, ETDs are subject to a reporting requirement from the perspective of Swiss derivatives regulation under the FinMIA, but not to other regulatory requirements. For Swiss banks or securities firms providing clearing services in the clearing chain for clients, the positions resulting from ETDs are not subject to regulatory capi - tal requirements, except where they indemnify the cli - ent for any losses incurred due to changes in the value of the transaction in the event of default by the quali - fying CCP, or they guarantee to the clients that the qualifying CCPs or clearing services provider perform their obligations. However, to the extent that banks or securities firms hold ETDs for their own account, or in the event that they were to guarantee the exposures resulting from the ETDs to their clients, the banks or securities firms must take into account the positions resulting from the ETDs for the purposes of their own regulatory capital analysis. For the purposes of such analysis, a risk weight of 2% applies, to the extent that the ETDs are cleared with a qualifying CCP and legal opinions of the relevant jurisdictions involved confirm the following: • the ETD transactions are identified as “client trans - actions”; • margin assets held through the clearing chain with the qualifying CCP will be segregated for the ben - efit of indirect clients, that is, the indirect clients will not incur any losses in the event of: (a) the insolvency of the clearing services provider through whom the bank or securities firm acts; (b) an insolvency of other indirect clients of such clearing services provider; or (c) an insolvency of the clearing services provider and other indirect clients; and • in the event of an insolvency of the clearing ser - vices provider through whom the bank or securities firm acts as direct client of a clearing broker, the applicable laws and regulations lead to the conclu - sion that the positions and margin would either be upheld directly with the qualifying CCP or they
could be transferred at the market value to another clearing broker (porting) or, upon request of the cli - ent, they could be closed out. OTC Derivatives OTC derivatives are traded as bilateral contracts between two parties under the market standard doc - umentation for such transactions. This is typically an ISDA Master Agreement, together with the relevant supporting documents, or an SMA for OTC deriva - tives transactions, as published by the Swiss Bankers Association. Such OTC derivatives are subject to the regulatory requirements of the FinMIA, which are closely aligned with EMIR (see 1.1 Overview of Derivatives Markets ). As regards their regulatory capital analysis, derivatives dealers trading OTC derivatives may account for OTC derivatives traded under netting set on a net basis if the following requirements, as implemented in Swit - zerland on the basis of the Basel rules, are met: • A master agreement customarily used in the OTC derivatives market (a “Master Agreement”), including a close-out netting arrangement, is in place that provides for a single lump sum termina - tion amount including all the relevant derivatives transactions, provided that the Master Agreement includes termination events for the possible default or insolvency of the counterparty. • Reasoned legal opinions confirm that the con - tractual provisions of the Master Agreement (as described above) are legally binding and enforce - able: (a) according to the place of incorporation of the counterparty, including in the event of a default or insolvency of the relevant counterparty; (b) according to the law governing the individual transactions forming part of the netting ar - rangement; and (c) according to the agreement governing the net - ting arrangement. • The bank has processes in place to monitor ongo - ing changes to the applicable laws that are relevant for the enforceability of the netting arrangement.
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