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hi everyone its Joe with OPG and it's one o'clock right on the nose we are getting ready to get started today and talk with heads legal and decided we're still having people sign a they have a large group today so I'm going to give it about two minutes on hold you won't hear any noise and then will come back on and get started just so that not too many people missed out on the beginning so hold on hold tight for about two minutes we'll come right back thanks you you okay hi everybody again its Joe with OPG we're going to kick it off it's about 103 so we'll get started we have about half of our attendees who registered currently logged-in so we'll get things rolling just a few basic housecleaning items for OPG members please take this opportunity to RSVP to a few other really important webinars we're doing and a couple of open surveys let's take a moment to do that for those we open this up to a larger group today because I think it's such a broad topic and a great topic so if you're not an OPG member feel free to email us and I can talk to you about becoming a member of the peer group you can email admin at our peer group comm I'll send it out to a group in the middle of the webinar for you to be in a chat function if you have questions as we go along there's a questions bar directly in the webinar panel please submit them through there and we'll keep an eye on those make sure that we can address them if we can or certainly hold on to them so that they can be addressed after we're done so I just want to introduce beside and beside and reximus we're saying last name right then yes RIT's enos enos okay mine Signorelli so seldom does anybody yeah and poseidons the founder of hedge legal and it's been nice enough to do a second session with us we did one together I think in November and for the OPG group and had a really nice crowd and got a lot of positive feedback and it was really valuable so we've been working together to set up another one so I really appreciate the time so we could talk about some insta stuff so I'm gonna throw it over to you and and you run with it great thanks very much John thanks everyone for attending so Joe thank you for organizing this for those that do not know our peer group it's a group that Joe founded Joe has 25 years plus experience in the industry as a CEO oh he's one of the best in the industry and he's found at our peer group to really help CEOs and CFOs navigate and understand you know the important issues that are going on community was one another and also you know he provides a lot of very helpful insight and industry information to them so that's what OPG does so Joe thank you very much for for organizing this I'm going to start on the topic now of the is the master agreement negotiation this is a crash course we're gonna condense as much as we can into a very short period of time is de is a fairly broad topic so there's a lot of places we can go with this the focus here is really on what's important for the buy-side what's important for hedge fund managers and people sitting in that seat of a CEO or CFO or potentially even GC so without further ado on the this is a little bit about myself I have 13 years of experience in the field a lot of experience negotiating is does I worked on in private practice and on the buy side and have had a pretty good experience across working with with many different hedge fund managers different strategies as well as negotiating with the different banks and the and the swap dealers on the street the table of contents what we're going to cover today we'll start with the is de overview and architecture then we'll dig into the key terms and the operational issues we'll look at the uncleared margin rules um are and the impact that this is having and finally we'll talk a little bit about hedge legal and and how we can help the first thing that we need to ask ourselves and and really and and you know make clear is what is and is there what is the is de master agreement why is this used when is this relevant and what are derivatives so is an is the master agreement is an industry template document that was created to facilitate and enhance the ability of market participants to trade in OTC derivatives OTC derivatives not to be confused with listed derivatives so in under the category of the derivative you'd have two main categories listed derivative which would be like a futures traded which is cleared on on an exchange and you would have unco TC derivatives which are bilateral they're between two parties and those are not there they're not listed in any way those are subject to these de within that subcategory of OTC derivatives there is a category of cleared OTC derivatives which are not covered under an is de those are typically those are done under a framework similar to the futures clearing so a futures clearing agreement press plus an addendum so those are the three main categories what we're looking at here is really uncleared OTC derivatives and a derivative is is essentially a contract or an agreement between two parties which is based on the where that contracts value is derived based on some other underlying asset or thing so for instance you use a derivative when you want to get exposure to a certain asset or an index which you either don't want to buy physically or you can't access it physically an example a typical example is is an equity derivative so you can go out and buy Apple stock or you can enter into a derivative which references the value of that of that Apple stock and and have that governed by an is de so equity swaps are very typically used by the buy side we also have currency FX forwards which are also very heavily used in this in this space now why do we need the is de what do we do if whatever we do with you if we didn't have it years though that's that's the question if you did not have an is de and you wanted to trade these types of derivatives that was the case pre nineteen 1980 or 1992 when the first is the Master Agreement came out before that date in order to do one of these transactions you needed to enter into a contract documenting the terms and conditions of that arrangement now if as you can imagine if you're entering to a lot of these transactions which which parties typically are you would need a separate contract for each of these specific arrangements so the paperwork is very heavy that that because this is a or really was and now it's becoming more regulated but it started off being quite unregulated there were no standards there were no ways to be able to compare you know if you've done an equity swap at a at one bank versus an equity or an interest rate swap at another bank there were no commonalities amongst those terms so the the market was very inefficient it was very difficult for for for participants to to enter into these trades and to effectively deal with them the is de master agreement was developed and is the stands for the International Swaps and Derivatives Association that came out of in the in the 80s this this organization came together to standardize and put together a common framework that could be used by participants across the globe to transact in these these these derivatives and so the the is de master agreement was created the first major is the Master Agreement was the 1992 version it helped proliferate and helped the market trade these dot these these these contracts much more efficiently and and so that's really why we need it it's to make the make the transaction process a lot more efficient and also to to give parties comfort around the enforceability so here I have a note about legal opinions there are legal opinions in the different jurisdictions that that that come to support the enforceability of certain provisions of the is de of its netting and of the collateral which we'll talk a little bit about the features of the is de this thing we should ask ourselves is why why does the by slight need to negotiate the document if this is an if this is the master agreement is based on an industry standard form one would think that there's really nothing to negotiate the terms are already there it's true that the document is based on an industry standard form but the banks skew the documentation in their favor and and in some cases quite heavily in their favor meaning the the document is the Master Agreement starts out on a level playing field but the draft the first draft that any any hedge fund will receive from from their bank from the swap dealer is going to be changed and and skewed in their favor with additional termination events giving the bank different ways out of the arrangement as well as certain covenants and obligations on the fund so what's really important in all of this is that understanding what's in the document and being able to limit it in the negotiation to what is market practice and what what the banks will actually really need because if you don't if you go in a negotiated form there will be many ways out for the bank there will be many ways that that your relationship can get can get killed from from the by sigh perspective I think the most important thing you want coming into this relationship is is stability you want stability with your with your trading counterparty you want to know that the terms that the trades are ending entering into won't go to term and that the calculations and the payments related to them will be made from the bank's perspective they're looking to make to make money off the business but they're also looking to really protect themselves from a risk counterparty risk and credit perspective hence why they they stock the agreement in their favor so when there are signs of trouble they can pull the plug if the plug gets pulled that's going to be costly for one there will be a loss of exposure which can be quite devastating depending on the situation of the market being being closed out in a bad market can be really harmful to a longer-term strategy but also the termination itself and the way that the the calculation of those payments at the terminate we'll also be unfavorable if the fund is found to be in default or subject to a termination event some other considerations here is that the documentation is quite complex even though it's based on an industry standard and it's very heavily negotiated so there are multiple layers of it so coming into a negotiation not understanding the complexities and what market practices will be it'll be challenging to be able to negotiate effectively final point I wanted to make on this slide is but yeah go ahead Joe besides I just had a question coming through I just thought I'd throw it out later on the slide could you just for a few seconds cover you know what some of these clothes out shutdown things are and you know you're sort of what your recommended first thing to do is you mean that you fall into that category of I guess you would call it a termination event yes I'm gonna I'm gonna go into the termination events at length and so and and discuss what are the most important changes are so if that's okay I'll just I'll just wait to get to that because it's coming up um okay great one other things to just consider here is is cross default bad terms in an is des can create defaults or it can be imported as cross defaults into other agreements so it's important we're we're a fund has multiple agreements with the same bank or even agreements with other counterparties it's important to be mindful of terms because bad terms in one agreement and and being put into default under one agreement can trigger defaults in other agreements and create a cascading effect documents work we've touched on this already it's an agreement is the master gates agreement between the fun of the bank it's it's based on a standard master agreement and there's negotiation that takes place in the schedule to the ista as well as paragraph eleven and thirteen of the credit support annex this is the overall framework in architecture of the is des there's the Asda Master Agreement either a 1992 or a 2002 version more most often these days the 2002 version is used there are a couple of differences between the two for instance how termination closeout is is determined and it is thought that for the most part in 90 1992 version is a little bit more beneficial to the buy-side since it has some longer built in grace periods the negotiation to the to that Master Agreement occurs in the schedule then we tack on the credit support annex which is the document that governs the transfer of collateral so what we're talking about here is there is collateral that's put up in support of the obligations both an initial margin or an independent amount at the start of the trade and a variation margin which is a margin computer on a daily basis based on the mark-to-market or basically the market movement that how that how the swap is changing in value on a daily basis basis based on the underlying asset which it's referencing so pet payments settlements and payments typically don't occur on a daily basis they may occur monthly so without any collateral in support of the obligations there can be significant exposures built up over the course of that month or whatever the term the settlement terms are of the particular swap every trade called transaction is documented by a confirmation so once you enter into a trade there will be a confirmation issued that needs to get signed there's a workaround to that which is a master confirmation agreement a lot of the terms that would be normally baked into a confirmation are put into the master confirm and this allows for a quicker the issuance of a what's called a transaction supplement so a smaller document that that just really details the economic terms to that trade and usually that does not need to be signed so that that this master conformation can make the trading process a lot more efficient and reduce the paperwork that's needed over here we have a bunch there are is the definitions instead has published a number of definitions which tie into this month this framework and cover specifics related to certain markets or certain types of instruments that are traded again all of this this creates a common language so that parties transacting in these agreements are able to do so efficiently and quickly this concept this is a concept we touched on earlier and at a fundamental basis this is this is the the most important thing underpinning the the the is the Master Agreement and what it is and it's the concept that you can have multiple transactions multiple trades which without the Asda master would be documented separately these multiple transactions are form part of the same agreement they are they can be netted for payment purposes they can be netted for all the margin calls and exposures and also at termination they are netted and terminated together and there's one single amount paid so from a credit perspective it allows to have the entire relationship governed under one under one framework quickly an umbrella is duh you may hear about this or you may use it for managers that have multiple funds dealing with the same banks so for instance fund one fund two with the same Bank instead of having a separate is de documented or separate paperwork you can have what's and I'm putting umbrella in quotation marks is that's not you can have an umbrella is the one one document that would actually create separate agreements between the fund and the bank usually the different funds would be listed in the annex so this is a helpful tool particularly when you have multiple funds and then when amendments or changes need to be made to documentation you can amend one document instead of amending multiple is does on that is that the recourse between the funds needs to be distinct so the is the one which is between fund one and Bank recourse by bank should only be against fund one it should not go to any other funds we touch more on limited recourse later but this is one one very clear application now Joe coming to your question on the key term so now we're gonna do we're gonna dig into the key terms and the key negotiation points events of default termination events and additional termination events operational matters and then there are other provisions that come up which are helpful to know about before we talk about the specific events events of default and termination events I think it's important to clarify why do we have these two concepts what's the difference between an event of default and a termination event the the the the I guess the distinction is rather simple event of default usually means something has gone wrong at a certain party and the consequences of that are a little bit more severe and a termination event is a category of event where neither party is at fault but it's it's not possible or not practicable to continue the relationship anymore so there needs to be a termination there are different consequences events of default result in an early termination of all transactions termination events only result in the termination of transactions which which are affected by that term by that termination event how the closeout amount is determined is also different so basically who-who determines what the payment is at the end of the day can can differ depending on an event of default or termination event and importantly there is a condition precedent that a party only needs to make continue making payments to the other party if that other party is not in in default or a potential event of default that doesn't apply to termination events so if your counterparty is subject to a termination event you would still continue to need to big make payments to them so the event of default if there's an event of default or potential event of default active against you as a fund manager your counterparty can withhold making payments to you so that can be pretty sick again there's also an obligation to notify termination events but not not yo DS now what are the event of the default the events of default are baked in to the is that the standard is the Master Agreement they are negotiated on a number of points but the what's good about the Master Agreement is that the framework of these events of the vault is there and managers should be mindful to try and keep the events of the default as close to the is the standard as possible areas where where banks will usually insist on changes for instance is under the default under specified transaction they'll look to expand the types of transactions which would create this default so a specified transaction at its essence is it is another is a trade between the fund and the bank which is not governed under this is de and it could also affect any specified entities of the bank so usually they'll they'll bring in affiliates as well they'll also look to expand this to be a specified transaction to go beyond just what a derivative is and to bring in other types of payments or margin obligations particularly when when you have an is de and a prime brokerage agreement with the same counterparty they will look to make two to expand specified transaction to include a margin loan so that so that a default under the PB gets pulled into this directly another area is the cross default cross default pertains to defaults that one party to the agreement might have under agreements other agreements outside of the as de so if the fund has and is there with with bank a and also has has an incident with Bank B a default under the the Bank B is that can be imported as through this cross default provision into the into the is de Master Agreement now the the standard terms of cross default is related to something called specified indebtedness and specified indebtedness is doesn't typically include derivatives although banks will seek to expand that so there's there's a number of changes here that the bank make to expand the application of these which which the the buy-side should push back on and in particular on cross default something that the bank that that the by site should look to negotiate in is making cross default a cross acceleration provision what this what this the difference between a cross default and a cross acceleration is as in that example I gave earlier a default under another agreement can become a default under the is de however for if this becomes cross acceleration it it needs to be more than just default under the other agreement it needs to be a default which the other party is acting on in terminating that other agreement so it's a much more severe event so moving this to a cross acceleration standard is helpful and will minimize can will minimize situations where this could be used against a by side firm next on the events there's a little bit less to say on these the illegality force majeure attacks events and credit event those are standard events baked into the into the is des they are sometimes altered but this is not where most of the negotiation takes place where the negotiation really centers is around what's known as the additional termination events additional termination events are a really a hybrid between an event of default and a termination event remember we said event of default means something has gone wrong at a party and it's a serious event for instance a failure to pay and a termination event as we saw here is something that that's usually external to the party so a change in law could create an illegality there could be a force measure event there could be tax events that occur based on changes in tax law which which make the the transaction you know change the economics of the transaction significantly the additional termination events are really things that in some ways have gone wrong at at the fund or are warning signs of things that maybe may get may go bad at a fund so the counterparties the banks will put these in and will really try and stack the deck here to give themselves more outs where where these events have occurred against the fund the the most commonly the most common one is the nav triggers the nav decline triggers which we're going to discuss in much more detail in the next few slides but essentially that an average is where the funds nav has been adversely impacted that should give rise to the right for the bank to to terminate the ESDA sorry just before I go I go a little bit forward here I wanted to mention that the the the rationale and the reason why the bank's stack the deck in their favor a big part of it is the is the credit risk and and and the fact that a bank the risk of a bank defaulting is less than the risk of a fund defaulting given given you know their credit profile and so that's that's really the the argument that's used to underpin all these all of these events that are here the fund is is in the business of trading it may be taking on more risk and the risk of a blot of a fund is much more significant so the bank needs to have these early warning signs available to it in order to be able to to terminate and get out of it I get out of the trades now coming to the events change in key persons usually the key person is the founder or or the important decision-maker at the fund or at the manager level it's important here to make sure that the right individuals are identified and what you want to do is you want to add in more than one person and make it such that both of those people or two out of three of people need to cease to act if you have one key person and that key person ceases to act that may give rise to an 80 but if you have two key people and you see both of these two people need to cease to act then you have you have there's there's less likelihood of that happening in addition you should add in that if the key person ceases to act there needs to be an opportunity to replace that person with somebody else was reasonably acceptable failure to deliver reports the banks will require that the fun deliver its monthly nav statement financial statements and other potentially other information any failure to deliver these reports is typically put up as an eighty an additional termination event what's important is that there be a grace period associated to this if there's been a failure to deliver a report there should be at least a two business day grace period after after the counter party has notified the fund of such a failure in able to remedy it a lot of times these reports are sent out by my funded mins or other operational staff it could be missed and it's not that significant changes in breaches of investment guidelines this one I would say you should try and strike it completely take it out if it needs to stay in there it should be limited to breaches which are really material and breaches that have a material adverse effect on the funds ability to perform its obligations under the agreement so it's important to qualify this I'll say it's important to qualify a lot of these ATS with these with these types of things such as you know I'm that such failures creating material adverse effect on on the on the funds ability to perform the same thing would apply here with these reputational risks regulatory actions what we're talking about here is is events that that events additional termination events that relate to a key person or an employee or trading personnel of the manager becoming subject to some litigation or being subject to some regulatory action important here to try and limit the individuals that would actually be in scope that to specify that any of the type of regulatory action or litigation should really relate to the person's capacities and the functions related to their the investment activities and and also to leave some some carve-outs for any of those litigations or or actions regulatory investigations against them being dismissed within it within a within a period of time for instance thirty days here there's an obligation so there is an obligation to notify your counterparty of your 80s and as we'll see later we're going to look and I'll it's called the fish or cut bait provision or a deemed waiver we're going to want to notify our counterparties of these additional termination events so that we can limit the time in which they have to act on them so more on that later 180 that that funds should add against the banks is the credit downgrade event so this would be an 80 that would get triggered if a bank they trade this the swap dealer falls below investment-grade and this is justified if bank is in is in trouble and falling below investment-grade it should give rise to the right for the fund to be able to terminate the transactions and do so in a way that's favorable to them okay next slide the nav triggers these these are very heavily negotiated there are four key points in this the amount the percentage of the decline the time period over which that decline is being calculated typically we see monthly quarterly and annual as well as as a as a nav floor the starting and stopping point of each of those calculation periods for instance is it a rolling calculation period does it go from any day to any other day or does it go from month end to month end and period end to period end you really want to have this going from a period end to from the start of a period to an end of the period so that you're not you don't need to monitor this on a daily basis and look back to multiple periods remember there's an obligation to notify of the 80 and so it can become operationally cumbersome if not impossible to be monitoring this on a daily basis and notifying it if it were to occur the last item is the factors used to calculate the funds nav meaning is this a total nav or are we looking at a performance-based nav this table shows all of these the considerations and and really I think is a good guide as to how you should be looking at all of your nav triggers so on the left here we have the periods the monthly period a quarterly annual and the nav floor this is a range a percentage reign of decline thresholds that will typically see the ten twenty thirty this is really on the lower end and I've seen this in cases where you have much smaller smaller managers or very risky strategies but I would say the minimum thresholds that the buy-side should be able to achieve are as follows a fifteen percent 25 35 and 50 on the on the on the floor and importantly the monthly and quarterly triggers should be based on a nav per share or a nav that excludes subscriptions redemptions and withdrawals these are not offered up in the standard terms usually the template is that's provided by the by the by the prime broker by the by the counterparties excuse me will provide for pretty low pretty low triggers for determinations calculation periods to be going from any day to any day and for all of these to be based on a total nav and not nav per share so these these are minimums that I think most most funds should be able to achieve ok carrying on with other operational matters these are other matters that come up in the document that are details and they're important to be looked at methods of notification how are things being notified to one another making sure that it's going to people that are going to be able to act on things both for legal notices as well as operational margin calls collateral timing what is the timing for the posting of collateral and those cutoff for those cutoff times importantly what is the what are the types of eligible collateral what types of currencies is the fund able to post and receive is if unable to post securities if so what are the haircuts that are applicable to those securities importantly how is the collateral requirement determined and how can collateral and margin calls be disputed particularly around the independent amount or the or the initial margin we want to make sure that the independent amounts and how those those initial margin amounts are determined because those that the fund will be on call to provide those to the banks we want to make sure that those independent amounts are clear that they can't easily be changed or if they are changed it's based on a very particular specific formula that the manager is aware of so that you're not caught off guard with with changes in margin requirements lastly here the delivery of the nav statements making sure that you can deliver all of the financial information they're looking for and in the time periods they want it nafta statements will typically be you know after month and a lot of times you may see banks looking to get this nav statement within ten days after the end of a month for some managers that's not possible then the final nav is only available at twenty or twenty-five days at the after the end of a month so that's it's important to be able to to deliver those in a timely way and also to have email addresses of and ideally documented in the insta of where you can send this information to some of the other that come up amendments and assignment sometimes banks will throw in that they can amend or make or assign the agreement to their affiliates without consent those should be taken out there are some tax concerns the doodoo is there any possibility for treaty application can you get a reduced rate of withholding so you want to try and cover those off if there's any benefits to be had there is the protocols and market counterparty manager anyone who's done it is there before is familiar with these and and you know basically what they are the is the protocols are our industry-wide amendments that can be adopted into documentation so when when there's a change in law or a change in market practice instead of every party needing to bilaterally amend all of their is does is that will issue a protocol which allows for the market at wide to adopt those changes this this is the case for the dodd-frank protocols and also coming up for the DI bore the benchmark reforms market counterparty manager also known as one part of that is is de amend ties into the protocols and again here every manager onboarding a fund will need to populate information into market counterparty manager with respect to dodd-frank one and two when dealing with the u.s. swap dealer and so these are things to be aware of these are things that that can take time in in the course of an onboarding and you know their details that should be addressed properly some other things that come up we have side letters side letter from the investment manager some banks will insist that the investment manager provide representations as to its capacity its authority and also provides certain indemnity so it's really important to be mindful and careful about what you're representing in these investment managers side letters so that you're not taking on more liability at the investment manager level then then you should be finally some terms that the blye side must add into the agreement so these are things that you will not get they will not be appearing in the document you need to add them in first one is the fish or cut bait provision or let's call it a deemed waiver what this does is it forces the non defaulting party to act within a certain period of time or lose its right to terminate example if you've hit an avid decline trigger if with the in the absence of any fish or cut bait wording once that NAV trigger is hit it it remains into the future so a counterparty could come back eight months or a year or two years down the road and use a nav trigger that would have occurred in the past against a fund it sounds bad but it's in it is possible and so with the fish or cut bait provision we want to bring in all of the events of default and all of the termination events additional termination events into this to say that if any of these events if we fail to pay you and or if we've had an AB decline trigger and we've notified you have such facts you have 30 60 or 90 days to act on it getting 30 days is best but usually you know if you end up with a 60 or 90 days it's it's not as bad it's better to have this at any at any day or any level than not having it because in the absence of it you need to go out and seek waivers from from your counterparties to waive those events otherwise you're at risk that they could use them against you in the future the agent the calculation agent makes a lot of determinations of four amounts to be paid under under the documentation so it's it's important that you know because we're dealing in in an OTC derivative market space and and and some some some transactions are easier to mark than others it's important to be able to for one hear dispute any calculations that have been made by the calculation agent in the normal course of business so you want to have a dispute process baked into the agreement which allows you to challenge to challenge the calculations that they've made and if you're not able to agree with them to appoint a substitute independent third party to make those calculations and also if because the calculation agent will will will be the bank it will typically be the counterparty the the swap dealer and you also want to have expressed language in there that if if the swap dealer is in default that the the fund can act as the calculation agent finally limitation of Liability in is in an is de and in every other trading agreement that your funder has you must include a limitation of Liability wording this is the limit recourse by the bank against against other funds that you might manage against the manager itself and against any investors so this is it's important it's a belts and suspenders but it's important to have it there to protect yourself and to protect your investors and and and a number of investors will look for this type of thing in their due diligence okay so we've come the key terms I'm gonna I'm going to I'm looking at the time 142 I'm gonna very quickly touch on the uncleared margin rules because they have a profound impact on the is de architecture as it as it relates to the posting of collateral the uncleared margin rules are pretty much they're a pretty big game changer when it comes to initial margin initial margin for the buy side has always been really have been required to be posted so the the buy side must post initial margin to to their swap dealers conversely the buy set is not receiving initial margin from their swap dealers the uncured margin rules change that for them for participants that are in scope because not everyone is in scope and we'll look at that in the next couple of slides but for for anyone who is for counterparties that are in scope and relationships that are in scope it requires that initial margin be exchanged between both parties and also that it be held in a segregated third third party custody account again this third party segregated initial margin or segregated custody collateral is not required is not done in the normal course of business with credits with is does and credit support annex is collateral is usually just exchanged directly between the parties so the adding in of this custodian adds a significant layer of complexity in operational complexity now the implementation in green here we see what's already been implemented things have been implemented in phases depending on the the aggregate notional amounts that funds or entities have in notion you know in notional derivatives exposure phases one to four captured the largest market participants that's already implemented phases five and six are coming next phase five was supposed to come into force September first 2020 so it was supposed to be this year but it recently got pushed back largely due to co vid and this impacts firms that have an aggregate average notional amount above fifty billion of uncleared OTC exposure phase six is four eight billion so phase five will not capture that many bicep participants it's expected that phase six will capture a much larger portion of by side participants we covered this this is what the docq this is another view of the documentation architecture free um our so let's say if you're not impacted by um our this is what you'll have your view is the master your schedule your credit support annex the swab dealer will be the bank will be party a they'll post variation margin through to the fund the fund will post independent amount or initial margin plus variation margin over to the swap dealer now get ready for this when we moved to to to UM when we move into the next slide the post um our architecture there's there's a number of other elements added this this this part here remains the same but there's a new workflow added here for an initial margin si si and this is for the regulatory initial margin requirement so not only do you need to exchange initial margin but it needs to be done in accordance with regulatory requirements in terms of calculating what that amount is you need to appoint a custodian there needs to be a custodian oh this on this side they should also see another custodian here that's dropped off but the the hedge fund has a custodian and the swap dealer will also have a custodian there will be an account control agreement between those two sets of account control agreements here and here which are try party between the fund the swap dealer and this custodian which governs the transfer and when that collateral can be can be released so suffice to say if you are if you think you're impacted by this you should be looking into it now there are significant impacts this will significantly impact the operational workflow how we can help so hedge legal we focus in on on the negotiation so we can help negotiate new agreements we can help benchmark existing agreements that managers have and and you know basically mined the data points so that managers with a lot of agreements know what's in their documentation and we also help with um our implementation on the next you slides there's a little bit more information about our firm and and our team here here here is the core of our team and on this slide we also have a number of consultants which are industry experts in certain areas which we we can work with for larger launches and ramp up when when larger projects are needed so Joe that brings us that brings us to the end of the presentation we still have a reasonable amount of time for questions so why don't I turn it back to you let me know if you think there are any and if there are any questions or if the audience wants to ask any questions about anything we've discussed I'm happy to to dig in deeper on some of the issues we've covered or or ones we haven't yeah that's great now it was I was writing my own questions out as you went I wanted to cover you you systematically answered almost all of them so it's very thorough it was terrific and in sort of easy to understand in a very complicated area so I appreciate that what on the UM RS are you finding that the brokers are you know proactively reaching out the funds with adjustments to their wording and setting up these tri-party agreements actively or do you think that the funds have to be taking the more active role when reaching out and saying hey we need to do this I I find you know the funds and the banks tend to be pretty you know tight on when these changes come about sort of forcing them on to everybody so I'm wondering what you're seeing yeah I think I think there certainly that's certainly happening in banks some have been more proactive than others in in reaching out and educating their their clients about the impacts and and really getting them you know you know familiar with the subject so that they need to reach out there there's a limit as to how much the banks can do though because because of this the the way that the relationship changes so with a lot of the previous regulatory changes so for instance the variation margin rules that came in in 2017 the banks were all over that and they were they were reaching out to their their counterparties to the the funds to make sure that they were getting set up and to be compliant that was a lot easier because it didn't require the the the the the you know putting the putting in place of a of a custodian account it was really the variation margin rules everything was able to be done bilaterally between the banks and that and and my side so that is not the case here if you don't have a custodian you need to on board with a new custodian that can take many months so to answer your question I think the banks are being somewhat proactive the fact that things have been delayed by a year has a lot of people have taken the foot off the gas and have not been looking at this over the last few months it was becoming a pretty hot topic freak Ovid you know in February in early March but with the extension that's been granted I think a number of funds have have have you know and even banks or maybe slowing down in terms of their implementation I think I think that for for those who think they may be impacted it's wise to look at this and to and to start moving forward quickly so as you to not be caught at the end I I think that when this this type of change because it's so involved if you try and wait to the last minute or wait till the banks are really pushing you you may find that you're going to be in a tough situation because the banks might not have capacity but importantly the custodians might not have capacity so setting up a relationship within you custodian when they don't have capacity it's going to be it could be could be quite tricky right yeah I feel like the try parties became popular back in Toledo 9 to begin with when everybody got all worried about collateral and holding of collateral and everything so you know there's probably a good portion of people that are already sort of using that have less less documentation to maybe update but it's definitely a big deal I agree a couple of questions came in here let me see if I can make them so first one is what happens to um our if only one party to an insta is in scope I'm not sure I follow that but I thought I'd read it out well I mean think I understand the question if I mean if only one party is in scope so the the the bank's the swap dealers are pretty much wholesale in scope so then the question is are you as a fund or you in scope yes both parties so fund and and bank need to be in scope but we're really we're really concerned at looking at whether or not the fund is in scope since the banks are are already subject to this so that the the relationships between banks and and you know phases 1 to 4 have been done so those those participants in phases 1 to 4 both parties were subject to it and now we're we're going to smaller and smaller users of derivatives with these with these thresholds in the subsequent phases understood understood ok let's see we got another question and this was the same one actually that I had so I feel better if someone else had this as well what's going on I'm not the only one I guess what's going on with sort of the the LIBOR fall back issues and LIBOR going away and and how have they changed if they're done at all yet existing documents like the ninety two's or um you know choose as far as their definitions so there's a fallback to deal with once you know potentially the LIBOR goes away yeah so the is there has been quite this dissociation has been quite to the forefront of this in terms of publishing fall backs that are available I believe those fall backs are already available to participants to include I'm not sure exactly where we are in the implementation of this but there will and whether or not a protocol is available now or if it will be soon I haven't seen from my side I haven't seen that much change happening yet in terms of managers moving to you to use these new the new benchmarks are changing documentation I think going forward people will want to start using the new benchmarks hopefully and I think from a documentation perspective I think that it will be relatively light in terms of how this will impact the actual legal documents because of the protocols that will be implemented there's certainly quite a few considerations around you know how does the how does the new benchmark compare to the the outgoing LIBOR one and how does that impact the economics of the transaction so certainly something that that that managers are looking at and I think should continue to be looking at so that they're there they're prepared for those changes as and when they come got it okay what's good to know actually see banks is the size requirement of the relationships is the a whim of the fund or is there a minimum size of trade required and does that impact the is bit chirps so I think they're simply asking about the size of the fund in the relationship there yeah so size of fund is a factor I've heard the number floated around around 25 million as a minimum AUM there are there are some a number of banks that with with with an entity that's smaller than 25 million they're not able to get you know approval and they won't they won't consider it so there is there is a minimum size requirement for some you can there's also so that and the size the size will affect the quality of the terms as will the the significance of the business relationship so if you know as with any other trading agreement but if the business relationship it stands to be quite lucrative for the bank they're going to be much more open to to negotiation of legal terms and and the business and sales folks at at the banks will be pushing document negotiators and may help and also may help working through issues with credit credit these you know is really an independent function at the banks they will assess the the riskiness of the portfolio and and the trading that's intended to be under done so there's there's a limit as to how much the importance of the business and the economics will we'll be able to move the credit folks depending on how they view the fund but certainly smaller funds smaller funds don't get the same terms that big funds get there is there is there is a there is a difference and as you get to the larger and the really large funds they're able to command much better much better terms that's that I think a lot of you know a number of the things that we discussed I think are ours are attainable even for smaller funds and there's there's but the things that smaller funds should be asking for understood mr. a practical question on something you touched on earlier you know under the category of fish attack bait or now have triggers and notifications etcetera so assuming we don't have any language covering it assuming you trigger an app trigger and a lot of these banks I've always found to be a bit disjointed and you know maybe understaffed or not following some of this as closely as they could so much should notify them hey I'm 15% trigger for a month you know or 20% down for the month here's our notification to it a lot of times believe it or not when things are going really bad there's thousands of funds not doing well you might not hear anything from them so assuming you don't have the language that gives them a certain amount of time to respond well what what do you typically do in that type of situation to deal with it you give them some type of you know negative confirmation request a bit on here for me on a certain time you know your and what do you well how do you recommend dealing with that so yeah that that can certainly happen I recommend that you know this what you suggested about kind of a negative affirmation request I don't think that would be effective because the is that has specific language around waivers that no waivers are granted unless agreed in writing so I don't I don't think that that would be that would be of any effect I think what you do in that case well first of all if you see an avid decline coming if you think you're going to be subject to something get out ahead of it don't wait until month end don't wait until your monthly nav report has been issued you know 10 and 15 20 days after month end have the discussion as soon as possible with with the counterparty try and get to them before for everyone else has rushed in that's one the other thing is help them help them help you meaning if you want a waiver if you want an amendment to an agreement I suggest you draft that document yourself you be proactive you you don't you don't just go to them and say hey we've hit this can you please wave send us a waiver because that means that they need to go back and you need to get documentation people working if you're more proactive and you say we've hit this we've drafted this waiver for you please sign at the bottom it's easier to get it through to their to their to their legal and to get things approved so that's you know those are two tips I would give and that and that's situation and what happens when they just never respond I mean if they never respond I think your your your your your rights are limited I mean I think if they're not responding to you at all I mean maybe maybe it's some cause for concern I would say it's probably cause for concern and and you know you may you may want to limit trading with them going forward or move trades or I mean I I don't know if you're not getting any response at all then that's that that's pretty significant you know if you're if you're sales people or not able to get any traction you know that's that's that's actually the point I mean the the whole the relationship aspect is one the legal terms are important but the relationship aspect is is just as important in some cases more important you need to make sure that you're keeping good relationship with your with your with your your swap dealers and your PBS at all times you want to be a good client to them you want to make things easy for them so I think if you managers that approach that and approach things as a partnership throughout the life of their you know their relationship are going to be better off than the ones that that don't treat their you know that don't treat their counterparties well you know when things are not going well for them ya know it's a good point relationships matter for sure especially when it comes to this topic alright let it's excellent well you know what it's a we're right on schedule so that we got really nice to kind of super thorough and got some good questions and so what I will do is I'm recording this for everybody so I will distribute this back out so everybody including everybody who was registered and not in attendance and I will excuse me share your contacts on there and everything so if people want they can reach out directly and you know this was great I hope we can do a third one in a couple of months and go on new topic that was great at pre sheet huh great no my pleasure thanks very much Joan thanks for everyone for attending terrific talk to you soon thank you everybody Thanks