The FIA has announced the development of a new European Agent Trustee Model (EATM) for client clearing of OTC derivative transactions.

This model broadly mirrors the US-style agency model, under which a trading fund is a client of a central counterparty/clearing house (CCP), but a clearing member (i.e. a clearing broker, referred to as a ‘Futures Commission Merchant’) acts as agent on behalf of the fund. The new model has been developed in conjunction with clearing members and European CCPs.

The EATM is designed to complement, rather than substitute, the existing ‘principal’ model in Europe under which the fund has a direct relationship with a clearing broker (the client leg), which in turn contracts with the CCP and enters into transactions matching, but opposite to, those under the client leg.

The new model results in the same commercial position for participants, but with a trustee arrangement replacing the back-to-back transactions under the principal model. Instead, the fund gains a beneficial interest in the transactions entered into by the clearing broker as trustee i.e., the claims that the clearing broker has against the CCP. Another key difference is that under the EATM, collateral and payments made by the fund are passed onto the clearing broker under a title transfer collateral arrangement and will not be subject to any applicable client money/client asset rules. 

The FIA has developed an English model, under which the clearing broker holds transactions on behalf of a fund as bare trustee, and a German model, under which the clearing broker acts as a trustee with a commercial mandate. The FIA is willing to consider models for other jurisdictions (which are driven by the jurisdiction of CCPs) depending on interest from market participants. The initial scope of EATM will be directly cleared OTC derivatives.

Please speak to your usual Macfarlanes contact if you have any questions, in particular, on how the new model might affect you.