CLIFFORD CHANCE OPINION LETTER - RULEBOOK OF LCH. CLEARNET LIMITED

Transcription

1 CLIFFORD CHANCE OPINION LETTER - RULEBOOK OF LCH. CLEARNET LIMITED v

2 10 UPPER BANK STREET LONDON E14 5JJ TEL FAX DX CANARY WHARF June 2014 LCH.Clearnet Limited Aldgate House 33 Aldgate High Street London EC3N 1EA Our ref: Direct Dial: simon.gleeson@cliffordchance.com Opinion letter in respect of the Rulebook of LCH.Clearnet Limited 1. INTRODUCTION AND TERMS OF REFERENCE We have acted as your English legal advisers in connection with the application of LCH.Clearnet Limited (the "Clearing House") for "Recognised Central Counterparty" status, pursuant to Article 17 of Regulation (EU) No 648/2012 of the European Parliament and the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories ("EMIR") and Section 288 of the Financial Services and Markets Act 2000 ("FSMA") (the "EMIR Application"). Terms not otherwise defined in this opinion shall have the meanings ascribed to them in the EMIR Rulebook (as defined below). The Clearing Membership Agreement and the Rulebook (as defined below) together establish the framework for the contractual relationship between the Clearing House and each of its Clearing Members. In the context of the EMIR Application, we have assisted the Clearing House in a review of the Pre-EMIR Rulebook and the Clearing Membership Agreement in order to assess their compliance with the requirements of EMIR, the CCP RTS and the Indirect Clearing RTS (each as defined below) (the "EMIR Review"). As a result of the EMIR Review, a number of amendments to the Pre-EMIR Rulebook have been incorporated into a revised draft of the Rulebook (the "EMIR Rulebook", as more fully described below). We summarise and explain a number of the key requirements of the EMIR Level 1 and Level 2 Regulations (as defined below) and the amendments made to the Pre- EMIR Rulebook in respect thereof in paragraph 4 (Summary of Key Requirements of the Level 1 and Level 2 EMIR Regulations) v CLIFFORD CHANCE LLP IS A LIMITED LIABILITY PARTNERSHIP REGISTERED IN ENGLAND AND WALES UNDER NO. OC THE FIRM'S REGISTERED OFFICE AND PRINCIPAL PLACE OF BUSINESS IS AT 10 UPPER BANK STREET LONDON E14 5JJ. THE FIRM USES THE WORD "PARTNER" TO REFER TO A MEMBER OF CLIFFORD CHANCE LLP OR AN EMPLOYEE OR CONSULTANT WITH EQUIVALENT STANDING AND QUALIFICATIONS. THE FIRM IS AUTHORISED AND REGULATED BY THE SOLICITORS REGULATION AUTHORITY.

3 The purpose of this opinion letter is to opine on the contractual validity and enforceability of the EMIR Rulebook and the compliance of the EMIR Rulebook with relevant provisions of the EMIR Level 1 and Level 2 Regulations. The EMIR Level 1 and Level 2 Regulations impose a large number of obligations on the Clearing House. Whilst, the EMIR Rulebook provides a framework for the operation of the Clearing House it does not address each of the requirements of the EMIR Level 1 and Level 2 Regulations. In addition to making amendments to the Rulebook, we understand that the Clearing House has amended and supplemented or will amend and supplement its internal policies, procedures and all other relevant documentation (including, but not limited to its website), practices and guidance (whether written or not) (together, the "Ancillary Practices and Procedures") to ensure that such Ancillary Practices and Procedures are, and the Clearing House as a whole is, compliant with the requirements of the EMIR Level 1 and Level 2 Regulations. Save to the extent expressly stated to the contrary in this opinion letter, we express no opinion on the compliance of the Ancillary Practices and Procedures with the requirements of the EMIR Level 1 and Level 2 Regulations or on whether the Clearing House operates and conducts itself in accordance with or complies with the requirements of the EMIR Level 1 and Level 2 Regulations. In particular and furthermore, we express no opinion as to whether the account structures described in the EMIR Rulebook (i) will be operated in compliance with the EMIR Level 1 and Level 2 Regulations, including but not limited to Article 39 of EMIR or (ii) reflect the accounts actually operated by the Clearing House. This opinion letter does not address issues related to the effectiveness of the segregation, default management, collateralisation, set-off, netting and porting arrangements provided for in the EMIR Rulebook in a default of a Clearing Member (whether insolvency-related or otherwise). These issues are considered, as a matter of English law in our opinion entitled "Opinion letter in respect of the LCH.Clearnet Limited EMIR-compliant model" and dated 12 June 2014 (the "Affiliated Opinion"), which should be read in conjunction with this opinion. 2. TERMS OF REFERENCE 2.1 Defined terms In this opinion letter: "Articles of Association" means the articles of association of the Clearing House (adopted by special resolution on 1 May 2013); "CCP RTS" means Commission Delegated Regulation (EU) No. 153/2013 of 19 December 2012 with regard to regulatory technical standards on requirements for central counterparties ("CCPs"); v

4 (d) (e) (f) "Certificates of Incorporation" means the Certificate of the Incorporation of a Company (relating to The London Produce Clearing House, Limited and dated 1 October 1945), the Certificate of Incorporation on Change of Name (relating to a change of name from The London Produce Clearing House, Limited to International Commodities Clearing House Limited and dated 14 May 1973), the Certificate of Incorporation on Change of Name (relating to a change of name from International Commodities Clearing House Limited to The London Clearing House Limited and dated 4 June 1991) and the Certificate of Incorporation on Change of Name (relating to a change of name from The London Clearing House Limited to LCH.Clearnet Limited and dated 19 December 2003); "EMIR Level 1 and Level 2 Regulations" means EMIR, the CCP RTS and the Indirect Clearing RTS, each as interpreted in light of the ESMA Q&A; "ESMA Q&A" means the Questions and Answers on the Implementation of the Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR) published by the European Securities and Markets Authority on 22 October 2013 (ESMA/2013/1527); "Indirect Clearing RTS" means Commission Delegated Regulation (EU) No 149/2013 of 19 December 2012 with regard to regulatory technical standards on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, and risk mitigation techniques for OTC derivative contracts not cleared by a CCP; (g) "Pre-EMIR Rulebook" means the version of the Rulebook dated June 2013 (as published on the Clearing House's website); (h) (i) (j) "Rulebook" means the General Regulations, Procedures, Default Rules, Settlement Finality Regulations and such other rules of the Clearing House, as published and amended from time to time; "Schedule of Matters Reserved" means the Clearing House's schedule of matters (stated to be adopted by the board of directors of the Clearing House on 1 May 2013) as set out in a document entitled "LCH.Clearnet Group - Board Reserved Matters & Reglement Interieur, Executive Delegation, Roles and Responsibilities, Delegated Authorities and Principal Boards and Committees" accessed from the Clearing House's website on 11 June 2013; and headings are for ease of reference only and shall not affect the interpretation of this opinion letter v

5 2.2 Opinion Documents The opinions given in this opinion letter relate to the following documents, which are expressed to be governed by English law: (d) the version of the Rulebook dated 9 June 2014 and submitted to and approved by the Bank of England as part of the EMIR Application (the "EMIR Rulebook"); the Product Specific Contract Terms and Eligibility Criteria Manual; the Clearing Membership Agreement (such agreement, together with the documents referred to in paragraphs and above, being the "Opinion Documents"); and in respect of paragraphs 4.6 and 6(g) only, the Policy for identification of conflicts of laws issues dated 16 May 2013 and the Policy for changes to Rulebook of LCH.Clearnet Ltd dated 16 May 2013 (the "Policy for Rule Changes" and together with the conflicts of law policy referred to in this paragraph (d), the "Relevant Policy Documents"). For the purpose of issuing this opinion letter we have reviewed only the documents and completed only the searches and enquiries referred to in Schedule 1 (Documents and enquiries) to this opinion letter. 2.3 Applicable law This opinion letter and the opinions given in it are governed by English law and relate only to English law as applied by the English courts as at today's date. All noncontractual obligations and any other matters arising out of or in connection with this opinion letter are governed by English law. We express no opinion in this opinion letter on the laws of any other jurisdiction. 2.4 Taxation We express no opinion on any taxation matter, and none is implied or may be inferred. 2.5 Assumptions and reservations The opinions given in this opinion letter are given on the basis of the assumptions set out in Schedule 2 (Assumptions) and are subject to the reservations set out in Schedule 3 (Reservations) to this opinion letter. The opinions given in this opinion letter are strictly limited to the matters stated in paragraph 6 (Opinions) and do not extend to any other matters v

6 3. CLEARING MEMBERSHIP AGREEMENT 3.1 Contractual arrangements In accordance with Procedure of the Pre-EMIR Rulebook each applicant for Clearing Member status must execute a Clearing Membership Agreement. Pursuant to clause 2.10 of the Clearing Membership Agreement, the relevant Clearing Member agrees to abide by the Clearing House's General Regulations, Default Rules, Default Fund Rules, Settlement Finality Regulations and Procedures and such other rules of the Clearing House as published and amended from time to time. 3.2 Amendment procedure Regulation 34 (Alteration of Regulations and the Procedures) of the Pre-EMIR Rulebook provides that: "[u]nless the Clearing Membership Agreement or these Regulations specifically provide [otherwise] the Clearing House may from time to time, by notice delivered to the Exchanges and Members amend or extend these Regulations and such amendment or extension may be made with immediate effect or with such deferred effect as the Clearing House shall determine". Regulation 34 (Alteration of Regulations and the Procedures) of the Pre-EMIR Rulebook provides that the Clearing House has equivalent authority to amend the Procedures. These provisions give the Clearing House wide powers to amend the versions of the Regulations and Procedures contained in the Pre-EMIR Rulebook and, through the Clearing Membership Agreement, amendments made in accordance with such provisions (including as set out in the EMIR Rulebook) will constitute contractual arrangements between the Clearing House and each Clearing Member. 4. SUMMARY OF KEY REQUIREMENTS OF THE EMIR LEVEL 1 AND LEVEL 2 REGULATIONS 4.1 Account segregation and client clearing Pursuant to 39(2) and Article 39(3), respectively, of EMIR, CCPs are required to offer to keep separate records and accounts enabling each clearing member to distinguish in accounts with the CCP (i) the assets and positions of that clearing member from those held for the accounts of its clients ("omnibus client segregation") and (ii) the assets and positions held for the account of a client from those held for the account of other v

7 clients ("individual client segregation"). Article 39(9) of EMIR further specifies that the obligation to distinguish assets and positions in accounts is satisfied where the assets and positions are recorded in separate accounts; the netting of positions recorded on different accounts is prevented; and the assets covering the positions recorded in an account are not exposed to losses connected to positions recorded in another account. A number of amendments have been made to the Pre-EMIR Rulebook to provide the levels of segregation required pursuant to EMIR in respect of each of the Services. In particular, Regulation 11 of the EMIR Rulebook (Client Clearing Business) provides a framework for the provision of omnibus client segregation and individual client segregation and Regulation 10 (Accounts) of the EMIR Rulebook provides for account structures, in respect of both Proprietary Accounts and Client Accounts, which are intended to reflect the requirements of Article 39(9) of EMIR. 4.2 Indirect clearing Pursuant to Article 3(1) of the Indirect Clearing RTS, a CCP may not subject indirect clearing arrangements to business practices "which act as a barrier to their establishment on reasonable commercial terms" and must "[a]t the request of the a clearing member maintain separate records and accounts enabling each client to distinguish in accounts held with the CCP the assets and positions of the client from those held for the accounts of the indirect clients of the client" Regulation 11(j) of the EMIR Rulebook introduces a framework for the provision of indirect clearing services by a Clearing Client. In particular: only Individual Segregated Clearing Clients may provide indirect clearing services to Indirect Clearing Clients; and a single Indirect Omnibus Segregated Account will be opened in respect of all of the Indirect Clearing Clients of an Individual Segregated Clearing Client who are receiving indirect clearing services in respect of a particular Service v

8 4.3 Default waterfall Article 45(4) of EMIR requires a CCP "to use its own resources before using the default fund contributions of non-defaulting clearing members". Article 35 of the CCP RTS specifies that the amount of dedicated resources for the purposes of Article 45(4) of EMIR should be not less than 25% of minimum capital and that where the CCP has established more than one default fund, the total dedicated own resources appearing in the waterfall prior to non-defaulters' contributions shall be allocated to each of the default funds in proportion to the size of each default fund. In addition, Article 36 of the CCP RTS provides that where the CCP has not yet had the opportunity to reinstate its dedicated own resources after the first default, only the residual amount of such dedicated own resources shall be applied to losses resulting from subsequent defaults. Accordingly, Default Rule 15 of the EMIR Rulebook: references Article 35 of the CCP RTS as the basis for quantifying the Clearing House's own resources contributions to the default waterfall; references Article 35 of the CCP RTS as the reference by which the Clearing House's own resources contributions to the default waterfall are to be allocated between default funds in different Services; and states that, in the case of a subsequent default where the Clearing House has not yet reinstated its own resources after the first default, only the residual amount of the own resources shall be applied. 4.4 Access to the Clearing House Article 37 of EMIR requires that admission criteria for clearing members be nondiscriminatory, transparent and objective and that the CCP may only impose participation criteria that restrict access to the extent that their objective is to control risk for the CCP. It also requires that the CCP s rules allow it to gather certain information from Clearing Members on the criteria and arrangements for allowing clients to access the service. In addition, Article 7(1) of EMIR provides that: "a CCP that has been authorised to clear OTC derivative contracts shall accept clearing such contracts on a non-discriminatory and transparent basis, regardless of the trading venue" v

9 Procedure 1 (Clearing Member, Non-Member Market Participant and Dealer Status) of the EMIR Rulebook specifies that admission as a Clearing Member should be determined by reference to criteria that are non-discriminatory and objective; and conditions which restrict the access of Clearing Member to the Clearing House may only be imposed where they are aimed at controlling the exposure of the Clearing House to risk. Furthermore, Regulation 11(e) (Client Clearing Business) in the EMIR Rulebook provides that the Clearing House shall be entitled to require the delivery of information from Clearing Members regarding the Clearing Members criteria and arrangements for allowing clients to access Client Clearing Services. In addition and in light of the transparency requirement imposed by Article 7(1) of EMIR, sub-section (Approved Trade Source Systems) of Section 2C of the Procedures (SwapClear), sub-section (Approved Trading Platform) of Section 2D of the Procedures (EquityClear), sub-section (OTPs) of Section 2E of the Procedures (LCH EnClear OTC Services) and sub-section (ForexClear Matchers) of Section 2I of the Procedures (ForexClear) of the EMIR Rulebook state that the information regarding applications by trading venues will be contained on the website. 4.5 Interoperability Articles 51 to Article 54 of the EMIR Rulebook set out the key provisions in respect of interoperability arrangements (i.e. an arrangement between two or more CCPs that involves a cross-system execution of transactions). In both the Pre-EMIR Rulebook and the EMIR Rulebook the term "Co-operating Clearing House" is used to describe a CCP who is party to an interoperability arrangement with the Clearing House. For the sake of clarity, Regulation 6 (Cooperating Clearing House) of the EMIR Rulebook provides a high level explanation of the status of a Co-operating Clearing House under the EMIR Rulebook and notes that the admission of Co-operating Clearing Houses is governed by the policies of the Clearing House and not the Procedures. 4.6 Compliance policies and procedures Pursuant to Article 5(2) of the CCP RTS a CCP must identify and analyse the soundness of the rules, procedures and contractual arrangements of the CCP and have a process for proposing and implementing changes to its rules and procedures and, prior to implementing any material changes, consult with all affected clearing members and submit proposed changes to the competent authority. In light of this provision, the EMIR Rulebook rationalises the Rulebook amendment process as previously provided for in the Pre-EMIR Rulebook. Pursuant to Regulation v

10 44 (Alterations of Regulations and the Procedures) of the EMIR Rulebook, the process and wording of Rulebook alterations, amendments and extensions will be determined by the Rules Change Committee in accordance with the Policy for Rule Changes. 4.7 Business continuity Article 34 of EMIR and Articles 17 to 23 of the CCP RTS impose a number of obligations in respect of the business continuity obligations of CCPs. Accordingly Procedure 6 (Business Continuity) of the EMIR Rulebook has been amended to be consistent with the relevant policies and procedures of the Clearing House. 4.8 Record keeping Pursuant to Article 29(1) of EMIR, a CCP must retain records on the services and activity provided for a period of at least ten years. Clause 4.2 of the Clearing Membership Agreement provides that: "the Clearing House agrees that for a period of six years after termination of a Registered Contract it shall maintain records thereof". In light of Article 29 of EMIR, Regulation 43 (Records) of the EMIR Rulebook makes clear that: 4.9 Reporting "[n]otwithstanding any provision in the Clearing Membership Agreement [the Clearing House] shall maintain all records and information on all contracts it has processed for a period of at least ten years". Article 9(1) of EMIR requires CCPs to report details of contracts to trade repositories. The Pre-EMIR Rulebook contains does not make provision for the Clearing House to report to trade repositories. In contrast, Regulation 41 (Disclosure and Reporting) and Section 1.10 of Procedure 3 (Financial Transactions) of the EMIR Rulebook authorise the Clearing House to make reports to trade repositories. 5. ARBITRATION Regulation 51 of the EMIR Rulebook provides that v

11 "any dispute arising from or in relation to any Contract or in relation to these Regulations shall, unless resolved between the Clearing House and a Member, be referred to arbitration under the Relevant Rules in accordance with Regulation 33". Regulation 33 of the EMIR provides for arbitration of disputes relating to certain types of Contracts namely: Cleared Exchange Contracts, EquityClear Contracts or LCH EnClear OTC Contracts (for Physical Delivery) which are to be resolved pursuant to the arbitration provisions in the relevant Exchange Rules (Regulation 33 ); Turquoise Derivatives Cleared Exchange Contracts which are to be referred to arbitration under the LCIA Rules (see Regulations 33 (d) (f)); and LCH EnClear OTC Contracts which are to be referred to arbitration under the LCIA Rules (see Regulations 33(g) (i)). Regulation 33 of the EMIR Rulebook does not provide for arbitration in respect of disputes arising in relation to SwapClear Contracts, RepoClear Contracts, ForexClear Contracts, Nodal Contracts, NLX Contracts or FEX Contracts or disputes in relation to the Regulations more generally. 6. OPINIONS We are of the opinion that: Corporate existence The Clearing House is a company duly incorporated in England and the Articles of Association do not contain restrictions which expressly restrict the objects of the Clearing House and has the capacity and power to adopt the rules, regulations and procedures in the form of the EMIR Rulebook and to exercise its rights and to perform its obligations thereunder. Legal, valid, binding and enforceable obligations The obligations expressed to be assumed by the Clearing House in the Opinion Documents (including such obligations as are assumed under the provisions described in Section 4 above) constitute its legal, valid, binding and enforceable obligations v

12 Governing law (i) (ii) In any proceedings for the enforcement of the contractual obligations of the Clearing Members, the English courts or a duly constituted arbitral tribunal with its seat in England would give effect to the choice of English law as the governing law of the Opinion Documents subject to, and in accordance with, the provisions of Council Regulation (EC) No 593/2008 of 17 June 2008 on the law applicable to contractual obligations (the "Rome I Regulation") or, if the Rome I Regulation does not apply to proceedings before an arbitral tribunal, the provisions of the Arbitration Act 1996 and the LCIA Arbitration Rules. In any proceedings for the enforcement of any non-contractual obligations of the Clearing Members arising from or in connection with the Opinion Documents, the English courts or a duly constituted arbitral tribunal with its seat in England would give effect to the parties' agreement to submit to English law any non-contractual obligations arising from or in connection with the Opinion Documents subject to, and in accordance with, Council Regulation (EC) No 864/2007 of 11 July 2007 on the law applicable to non-contractual obligations (the "Rome II Regulation") or, if the Rome II Regulation does not apply to proceedings before an arbitral tribunal, the provisions of the Arbitration Act 1996 and the LCIA Arbitration Rules provided that (if the Rome II Regulation applies) the non-contractual obligation is within the scope of the Rome II Regulation, the provision of the Opinion Documents setting out the choice was freely negotiated and all the parties to the Opinion Documents are pursuing a commercial activity. (d) Arbitration (i) (ii) The arbitration agreement contained in the Opinion Documents is a valid and effective agreement to submit to arbitration. The English courts will, on the application of a party to an arbitration agreement, stay proceedings in respect of a matter which under the Opinion Documents is to be referred to arbitration. (e) Submission to jurisdiction The submission to the jurisdiction of the courts of England and Wales by the Clearing Members contained in the Opinion Documents is legal, valid and binding v

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14 SCHEDULE 1 DOCUMENTS AND ENQUIRIES 1. DOCUMENTS We have reviewed only the following documents for the purposes of this opinion letter. (d) (e) A PDF copy of each of the Opinion Documents. A PDF copy of each of the Relevant Policy Documents. A PDF copy of the Articles of Association. A PDF copy of each of the Certificates of Incorporation. A copy of the Schedule of Matters Reserved. 2. SEARCHES AND ENQUIRIES We have undertaken only the following searches and enquiries for the purposes of this opinion letter. A search was conducted with the Registrar of Companies in respect of the Clearing House on 11 June An enquiry by telephone was made at the Companies Court in London of the Central Index of Winding Up Petitions on 11 June 2014 at 4:14 p.m. with respect to the Clearing House v

15 SCHEDULE 2 ASSUMPTIONS The opinions in this opinion letter have been made on the following assumptions. 1. ORIGINAL AND GENUINE DOCUMENTATION All copy documents are complete and conform to the originals. Any certificate referred to in Schedule 1 (Documents and enquiries) is correct in all respects. 2. CORPORATE AUTHORITY OF THE CLEARING HOUSE There have been no amendments to the form of the Articles of Association or Certificates of Incorporation. All required corporate action has been taken to authorise the adoption by the Clearing House of the EMIR Rulebook and the exercise by it of its rights and the performance by it of its obligations under the EMIR Rulebook. Without prejudice to the generality of paragraph above, the board of directors of the Clearing House has delegated authority as deemed appropriate, in accordance with the Articles of Association: (i) for any matters which might otherwise be matters reserved for decision by it in accordance with the Schedule of Matters Reserved; and, in particular (ii) for approval of changes made to the Clearing House's Default Fund Rules for the purposes of preparing the EMIR Rulebook. 3. NO INSOLVENCY No Clearing Member is subject to a reconstruction, arrangement, compromise or scheme with creditors or any insolvency, liquidation, administration, moratorium or reorganisation proceedings or any similar proceedings generally affecting the rights of creditors. 4. OBLIGATIONS OF THE CLEARING MEMBERS Each Clearing Member has the capacity, power and authority to enter into and to exercise its rights and to perform its obligations under the Opinion Documents. Each Clearing Member has duly executed and delivered the Clearing Membership Agreement v

16 5. SEARCHES AND ENQUIRIES There has been no alteration in the status or condition of the Clearing House as disclosed by the searches and enquiries referred to in Schedule 1 (Documents and enquiries). However, it is our experience that the searches and enquiries referred to in paragraphs 2 and of Schedule 1 (Documents and enquiries) may be unreliable. In particular, they are not conclusively capable of disclosing whether or not insolvency proceedings have been commenced in England, nor do they indicate whether or not insolvency proceedings have begun elsewhere. 6. ACTIONS Each Clearing Member and the Clearing House acts in accordance with the provisions of the EMIR Rulebook. 7. AMENDMENTS In making amendments to the Pre-EMIR Rulebook for the purposes of preparing the EMIR Rulebook, the Clearing House has complied with all applicable obligations and the requirements of all applicable processes including, without limitation: the obligation to notify Clearing Members and Exchanges in accordance with Regulation 34 of the Pre-EMIR Rulebook; any obligation to consult with, or to conduct a ballot of, the Clearing Members; and any obligation to consult, or to seek the prior approval of, any Regulatory Body. 8. AUTHORISATION Each Clearing Member has obtained all authorisations and/or licences required in order to perform its obligations under the Opinion Documents. 9. OTHER DOCUMENTS Apart from any circulars, notifications and equivalent measures published by the Clearing House in accordance with the Rulebook, is no other agreement, instrument or other arrangement between any of the parties to any of the Opinion Documents which modifies or supersedes any of the Opinion Documents v

17 There is no document, instrument or agreement which modifies or supersedes the Relevant Policy Documents. 10. OTHER LAWS All acts, conditions or things required to be fulfilled, performed or effected in connection with the Opinion Documents under the laws of any jurisdiction other than England have been duly fulfilled, performed and effected v

18 SCHEDULE 3 RESERVATIONS The opinions in this opinion letter are subject to the following reservations and qualifications. 1. LIMITATIONS ARISING FROM INSOLVENCY LAW Any provision in any Opinion Document which confers, purports to confer or waives a right of set-off or similar right may be ineffective against a liquidator, administrator or creditor. Any rights or powers expressed to be available to the Clearing House or a Clearing Member under the Opinion Documents may be affected by the opening of insolvency proceedings or the institution of reorganisation measures in respect of a Clearing Member or the Clearing House (as applicable). However, Part 7 of the Companies 1989 ("Part 7") provides for certain protections in the context of insolvency proceedings in respect of a Clearing Member. The effects of Part 7 are discussed in the Affiliated Opinion which should be read in conjunction with this opinion. 2. ENFORCEABILITY OF CLAIMS In this opinion letter "enforceable" means that an obligation is of a type which the English courts or, as the case may be, a duly constituted arbitral tribunal with its seat in England may enforce. It does not mean that those obligations will be enforced in all circumstances in accordance with the terms of the Opinion Documents. In particular: the opinion set out in paragraph 6 (Legal, valid, binding and enforceable obligations) of this opinion letter is subject to any limitations arising from insolvency proceedings, measures for reorganisation, moratorium, reconstruction, administration or resolution, a scheme of arrangement under section 425 of the Companies Act 1985, a scheme within the meaning of Part VII of FSMA, a compromise or any similar proceedings generally affecting the rights of creditors and any direction issued to the Clearing House pursuant to Part XVIII of FSMA. As noted above, Part 7 provides for certain protections in the context of insolvency proceedings in respect of a Clearing Member. The effects of Part 7 are discussed in the Affiliated Opinion which should be read in conjunction with this opinion; the power of an English court or arbitral tribunal to order specific performance of an obligation or other equitable remedy is discretionary and, accordingly, v

19 an English court or arbitral tribunal might make an award of damages where specific performance of an obligation or another equitable remedy is sought; (d) (e) (f) (g) (h) where any party to the Opinion Documents is vested with a discretion or may determine a matter in its opinion, that party may be required to exercise its discretion in good faith, reasonably and for a proper purpose, and to form its opinion in good faith and on reasonable grounds; enforcement may be limited by the provisions of English law applicable to agreements held to have been frustrated by events happening after their execution; proceedings to enforce a claim may become barred under the Limitation Act 1980 or the Foreign Limitation Periods Act 1984 or may be or become subject to a defence of set-off or counterclaim; a party to a contract may be able to avoid its obligations under that contract (and may have other remedies) where it has been induced to enter into that contract by a misrepresentation or where there has been any bribe or other corrupt conduct and the English courts and arbitral tribunals will generally not enforce an obligation if there has been fraud; any provision providing that any calculation, determination or certification is to be conclusive and binding may not be effective if such calculation, determination or certification is fraudulent, arbitrary or manifestly incorrect and an English court or arbitral tribunal may regard any certification, determination or calculation as no more than prima facie evidence; and by virtue of the International Monetary Fund Act 1979 and the Bretton Woods Agreements Order in Council (SI 1946/36), any obligation of a Clearing Member under the Opinion Documents which involves the currency of any member of the International Monetary Fund and which is contrary to the exchange control regulations of that member may not be enforceable in the English courts. 3. APPLICATION OF FOREIGN LAW If any obligation arising under the Opinion Documents is or is to be performed in a jurisdiction outside England, it may not be enforceable in the English courts or in an arbitral tribunal to the extent that performance would be illegal or contrary to public policy under the laws of the other jurisdiction. Further an English court or arbitral tribunal may give effect to any overriding mandatory provisions of the law of the place of performance insofar as they render the v

20 performance unlawful or otherwise take into account the law of the place of performance in relation to the manner of performance and the steps to be taken in the event of defective performance. An arbitral tribunal may, in practice, take account of mandatory rules or the public policy of a third country in which its award is to be enforced. 4. DEFAULT INTEREST AND INDEMNITIES BETWEEN PARTIES Any provision of the Opinion Documents requiring any person to pay amounts imposed in circumstances of breach or default may be held to be unenforceable on the grounds that it is a penalty. If the Opinion Documents do not provide a contractual remedy for late payment of any amount payable thereunder that is a substantial remedy within the meaning of the Late Payment of Commercial Debts (Interest) Act 1998, as amended, the person entitled to that amount may have a right to statutory interest (and to payment of certain fixed sums) in respect of that late payment at the rate (and in the amount) from time to time prescribed pursuant to that Act. Any term of the Opinion Documents may be void to the extent that it excludes or varies that right to statutory interest or purports to confer a contractual right to interest that is not a substantial remedy for late payment of that amount, within the meaning of that Act. There is some possibility that an English court or arbitral tribunal would hold that a judgment on any Opinion Document, whether given in an English court or elsewhere, would supersede that Opinion Document so that any obligations relating to the payment of interest after judgment or any currency indemnities would not be held to survive the judgment. An agreement requiring a party to pay the whole or part of the costs of arbitration in any event is valid only if made after the dispute in question has arisen. An English court or arbitral tribunal may in its discretion decline to give effect to any provision for the payment of legal costs incurred by a litigant. 5. PRIVITY OF CONTRACT Where the operation of the provisions of the Contracts (Rights of Third Parties) Act 1999 is expressly excluded in any document, any person who is not a party to such agreement may be unable to enforce provisions of that agreement which are expressed to be for the benefit of that person but such exclusion does not affect any right or remedy of such party that exists or is available apart from pursuant to that Act v

21 6. CROSS-ISA CLIENT EXCESS DEDUCTION Pursuant to the arrangements for a Cross-ISA Client Excess Deduction the Opinion Documents permit a Clearing House to apply Client Excess held in an Individual Segregated Account of a Clearing Member on behalf of an Individual Segregated Account Clearing Client to meet margin calls on other Individual Segregated Accounts held by such Clearing Member on behalf of the same Individual Segregated Account Clearing Client. Article 39(3) of EMIR provides that "a CCP shall offer to keep separate records and accounts enabling each clearing member to distinguish in accounts with the CCP the assets and positions held for the account of a client". Article 39(9) of EMIR further provides that "the requirement to distinguish assets and positions with the CCP in accounts is satisfied where [...] the assets covering the positions recorded in an account are not exposed to losses connected to positions recorded in another account". The use of the term "another account" in Article 39(9) of EMIR could be interpreted as precluding a CCP from applying Client Excess held on one Individual Segregated Account to meet margin calls on another Individual Segregated Account (even where both "accounts" are held by the same Clearing Member on behalf of the same client). However, the obligation in Article 39(3) requires the CCP to distinguish "assets and positions held for the account of a client from those held for the account of other clients". In light of Article 39(3), the reference to "another account" in Article 39(9) should, in our view, be interpreted as referring to an account of another client. A Cross-ISA Excess Deduction can only be made between two Individual Segregated Accounts held for the account of an individual client and does not expose the relevant client to losses connected to positions of other clients of the Clearing Member. Accordingly, in our view a Cross-ISA Excess Deduction is consistent with the obligation under Article 39(3) and the better interpretation is that Article 39(9) of EMIR should not preclude Cross- ISA Excess Deductions. Nevertheless, it cannot be excluded that a court could take a different view and could determine that Cross-ISA Excess Deductions are not compliant with a literal interpretation of the obligations imposed under EMIR v

22 7. ARBITRATION (d) (e) (f) There remains a doubt as to whether, under English law, an agreement to arbitrate disputes may be validly combined with a clause giving one or more parties the right to elect for court proceedings. The current practice of the English courts is to uphold such provisions and in our view they will continue to do so. Moreover, and without prejudice to the foregoing, an English court may not allow election for arbitration proceedings where the party making the election participated in court proceedings or has otherwise conducted itself so as to lead another party to understand that the matters in dispute would be determined in court proceedings. A party will lose the right to apply for a stay of English court proceedings in respect of a matter which under the Opinion Documents is to be referred to arbitration if he has taken any step in those proceedings to answer the substantive claim. An arbitral tribunal may decline jurisdiction, and an English court may decline to stay English court proceedings if the subject matter is deemed incapable of being resolved by arbitration or is otherwise non-arbitrable for reasons of public policy (or otherwise) or where the court or arbitral tribunal is satisfied that the arbitration agreement has become inoperable or incapable of being performed. An English court may be unable to restrain proceedings commenced in another court, notwithstanding the provisions of the Opinion Documents requiring that the subject matter of those proceedings is to be referred to arbitration. Under certain circumstances, an English court may determine whether there is a valid arbitration agreement or whether an arbitral tribunal has jurisdiction to determine any question, notwithstanding any provision to the contrary in the Opinion Documents. Further, an English court may be required to recognise and give effect to a decision of a court of another Member State of the European Union or of Iceland, Norway or Switzerland that an arbitration agreement is not valid or not effective, given as a preliminary issue in proceedings before that court, notwithstanding the fact that the subject matter of those proceedings has been referred to arbitration with a seat in England in accordance with the arbitration provisions in the Opinion Documents. Under English law, the parties may waive the right to appeal against an arbitral award on a question of law. An arbitral award may, however, be v

23 challenged on the grounds set out in sections 67 (substantive jurisdiction) and 68 (serious irregularity) of the Arbitration Act 1996 or on the ground of public policy. (g) (h) (i) Unless the parties have agreed otherwise, an arbitral tribunal has no power to order consolidation of separate arbitration proceedings, whether under the same arbitration agreement or different arbitration agreements. An English court will not grant leave to enforce an award if it is shown that the arbitral tribunal lacked substantive jurisdiction to make the award or if the subject matter of the award is not capable of settlement by arbitration or if the award is contrary to English public policy. We express no opinion as to whether an arbitral award may be enforced otherwise than by leave of the court under the Arbitration Act There is some doubt as to whether the Rome I Regulation and the Rome II Regulation would apply to arbitration proceedings. 8. OTHER QUALIFICATIONS (d) (e) The parties to an Opinion Document may be able to amend that Opinion Document by oral agreement or by conduct despite any provision to the contrary. Any provision of any Opinion Document which constitutes, or purports to constitute, a restriction on the exercise of any statutory power by any party to an Opinion Document or any other person may be ineffective. To the extent that any matter is expressly to be determined by future agreement or negotiation, the relevant provision may be unenforceable or void for uncertainty. Any provision of the Opinion Documents stating that a failure or delay, on the part of the Clearing House, in exercising any right or remedy under the Opinion Documents shall not operate as a waiver of such right or remedy may not be effective. The effectiveness of any provision of an Opinion Document which allows an invalid provision to be severed in order to save the remainder of that Opinion Document will be determined by the English courts or arbitral tribunal in their discretion v

24 (f) (g) (h) The opinions expressed in this opinion letter are subject to the effects of any United Nations, European Union or United Kingdom sanctions or other similar measures implemented or effective in the United Kingdom with respect to any party to the Opinion Documents which is, or is controlled by or otherwise connected with, a person resident in, incorporated in or constituted under the laws of, or carrying on business in a country to which any such sanctions or other similar measures apply, or is otherwise the target of any such sanctions or other similar measures. In some circumstances an English court may, and in certain circumstances it must, terminate or suspend proceedings commenced before it, or decline to restrain proceedings commenced in another court, notwithstanding the provisions of the Opinion Documents providing that the courts of England have jurisdiction in relation to the subject matter of those proceedings. In decision no (26 September 2012), the French Cour de cassation decided that a jurisdiction clause in a form similar to that in the Opinion Documents was ineffective because it did not comply with the requirements of article 23 of Council Regulation (EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters and, as a result, that the clause did not confer jurisdiction on the court identified in it. The decision of the Cour de cassation is not binding on other courts in the European Union, and we believe that there are strong arguments why its decision should not be followed. However, whilst we consider that currently the English courts would not on their own adopt the same approach, the matter might be referred to the Court of Justice of the European Union either by another court in the European Union or indeed by an English court, for example where the relevant court considered that the French decision resulted in the position being uncertain. It is possible that the Court of Justice of the European Union (whose decisions are binding on all courts within the European Union, including the English courts), would reach the same conclusion as the Cour de cassation. If so, the Opinion Documents may be ineffective to confer jurisdiction on the courts of England, in which case the jurisdiction of the English and other courts would be determined by reference to the general law applicable in those courts. Similar concerns arise where jurisdiction is determined on the basis of the Agreement between the European Community and the Kingdom of Denmark on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters and the 2007 Lugano Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters v

25 (i) We express no opinion as to whether the execution or delivery of the Clearing Membership Agreement by the Clearing Members or the performance by Clearing Members of their obligations under the Opinion Documents contravenes any requirement imposed on Clearing Members by FSMA (as amended) or any applicable rules made under that Act (as amended) v