Indirect Clearing - Exchange Traded Derivatives

1 Introduction

DNB Bank ASA (“DNB”) is an investment firm, licensed to perform investment services by the Norwegian Financial Supervisory Authority (Finanstilsynet). In DNB, investment banking activities are performed by the business area DNB Markets. In this document, DNB refers to activities in DNB Markets.

DNB is not a direct clearing member at certain EU Central Counterparties (“CCPs”) in respect of certain or all services. For such services, DNB will use a third party as clearing broker. DNB will normally be the client of the clearing broker, but in a few marketplaces we may trade through a client of clearing broker (as an indirect client). A client of DNB who has entered into an “agreement concerning trading in listed derivatives in marketplaces outside Norway”, with the exception of derivatives listed in Stockholm where DNB is a clearing member, will be an indirect client in these set-ups (hereafter a “Indirect Client”).

These “General Terms and Conditions for Indirect Clearing” (the “Terms”) should be read by each Indirect Client in conjunction with related bilateral agreements with DNB.

DNB will only offer Indirect Clearing based on an individual agreement with each client. DNB reserves the right to deny this service to a client based on an overall assessment.

The exchange traded derivatives and CCPs available may vary from time to time. DNB will give the Indirect Client further information when relevant.

2. Purpose

To enable DNB to comply with our obligations as a direct client under MiFIR, which require that, where we are providing indirect clearing services to Indirect Clients that involve us clearing derivatives through a clearing broker on an EU central counterparty (“CCP”), we must:

• offer each Indirect Client a choice of a basic omnibus indirect client account and a gross omnibus indirect client account;
• disclose to the Indirect Client the details of the different levels of segregation;
• publicly disclose the general terms and conditions under which we provide services to Indirect Clients; and
• describe the risk associated with each type of account.

In respect of the treatment of margin and collateral at CCP level, Indirect Clients should refer to the CCP disclosures that the CCPs are required to prepare.

3. Collateral

Depending on the exposure and market value of each Indirect Client’s relevant exchange traded derivatives DNB will demand collateral from the client in accordance with individual agreements with and direct information to each client. Accordingly, DNB will be required to post collateral at CCPs via an Indirect Client Account at the clearing broker.

DNB is liable to the CCP or the clearing broker for the transactions we transmit on behalf of each Indirect Client. For this reason, each Indirect Client shall with a separate pledge undertake to give and maintain collateral in favour of DNB at least corresponding to the currently valid margin requirement determined by DNB. The margin requirement will be based on the information DNB receive from our clearing broker, the clearing rules and market practices of the clearing broker or CCP. DNB may nevertheless, based on our own determination, require margin/collateral that differs from the margin/collateral required or used by the CCP or its clearing broker.

DNB may set requirements as to which collateral is acceptable, subject to individual communication to each client.

Collateral requirements will essentially be calculated from the Indirect Client’s positions in exchange traded derivatives and the provided collateral.

4. Indirect client account types

The Indirect Clearing Delegated Regulation requires DNB to provide the Indirect Client with the option of two indirect client accounts at the clearing broker – a "standard" or "basic" omnibus indirect client segregated account (a "Standard OSA") and a gross omnibus indirect client segregated account (a "Gross OSA"). However, for certain marketplaces, where DNB is an Indirect Client and our clients are Second Indirect Client, we can only offer Standard OSA.

Unless an Indirect Client contacts us (after receiving notice from us), DNB will ask the clearing broker to manage the Indirect Client’s positions and related margin in a Standard OSA. Our doing so does not preclude the Indirect Client from changing its indirect client account type in the future, and any Indirect Client wanting to change should contact its DNB representative for further information about the terms of a Gross OSA account.

Both the Standard OSA and Gross OSA are omnibus accounts, and so, at the level of the clearing broker and the CCP, the Indirect Clients positions and assets will be comingled with the positions and assets of other clients of DNB but segregated from the clearing brokers and DNB Bank ASAs own positions.

Under a Standard OSA, both DNB and the clearing broker may net the client transactions that are recorded in the same basic omnibus indirect client account. The assets provided in relation to the client transaction credited to that basic omnibus indirect client account can be used in relation to any client transaction credited to that basic omnibus indirect client account.

Under a Gross OSA the clearing member shall ensure that the positions of an indirect client do not offset the positions of another indirect client and that the assets of an indirect client cannot be used to cover the positions of another indirect client. Under this setup, DNB, a client of the clearing member, shall provide the clearing member with all the necessary information on a daily basis to allow the clearing member to identify the positions held for the account of each Indirect Client.

Hence, due to the increased operational complexity and funding implications generally connected with Gross OSA this account type should be expected to involve higher costs than a Standard OSA.

In the case of default of DNB Bank ASA towards a clearing broker, under a Gross OSA the clearing member shall request all necessary information from DNB in order to promptly return to the Indirect

Client the proceeds from the liquidation of the positions and assets held for the account of the Indirect Client.

5. Default mechanisms/risks

For both Standard OSA and Gross OSA the Indirect Client will be exposed to counterparty risk towards DNB when margin posted by the Indirect Client is in transit to the clearing member.

In addition in the standard OSA, margin is posted on a net basis, and any excess margin will be held by DNB. Where cash collateral is held in pledged account in DNB Bank ASA in the name of the

Indirect Client, the account may be covered by the deposit guarantee in the Norwegian Banks’ Guarantee Fund (a limited amount subject to applicable rules and based on the clients total assets in DNB Bank ASA). Otherwise, in the case of DNB Bank ASAs insolvency any claim for redelivery of equivalent collateral will be an unsecured claim against DNB Bank ASA.

Upon an event of default by DNB Bank ASA, our clearing broker may communicate directly with each Indirect Client and/or give instructions via DNB.

In the event of default by DNB Bank, there will be a prompt liquidation of the positions and assets in the standard OSA structure, ie the Indirect Client’s positions will be terminated and the clearing broker will perform a close-out calculation.

In a standard OSA, in the event of default by DNB, the assets provided in relation to the Indirect

Client’s positions with the clearing broker may be used to cover any losses in the account.

In a Gross OSA, the assets provided in relation to the Indirect Client’s positions with the clearing broker may not be used to cover the positions and obligations of another indirect client.

In the gross OSA, the clearing broker may, at the Indirect Clients request try to transfer (port) the Indirect Clients positions and assets to another clearing broker and/or direct client. If porting cannot be achieved, the clearing broker will terminate the transactions relating to the Indirect Client and perform a close-out calculation.

With respect to either account type, a case of termination of the Indirect Clients transactions involves a risk of non-cash assets being liquidated at a value different from the Indirect Clients perception of the full value. This may be influenced by the market conditions for the assets and any haircut applied.

In the event of insolvency/default by DNB Bank ASA, if DNB has accepted other collateral than cash, the Indirect Client may not receive back the same type of asset originally provided to DNB as collateral. This is because the clearing broker is likely to have a wide discretion to liquidate and value assets and make payments in various forms, and also because the clearing broker may not know what type of asset the Indirect Client originally provided as collateral.

With respect to either account type, in the event of default by DNB, the Indirect Client is also exposed to the insolvency or other failure of the clearing broker and CCPs. This will depend on the law of the country in which the clearing broker or CCP is incorporated and the specific protections put in place.

6. Costs - pricing guidelines

In general, the Indirect Clients costs related to setting up and operating an indirect client account are likely to be influenced by:

• The chosen Indirect Client Account Type.
• The clearing broker and CCP involved, given that that these charge differing costs or fees which DNB would generally pass through to the Indirect Client.
• The size of the Indirect Clients initial margin from time to time, and transaction volume/turnover
• Capital costs

A Gross OSA is likely to involve higher costs than a Standard OSA both with regards to fixed (minimum) fees and variable fees. This is due to the additional operational complexity involved.

The Indirect Client will be charged for all direct costs DNB has in relation to the Indirect Clients positions and accounts. In addition DNB will charge a transaction fee and an annual fee based on the

Indirect Clients positions and initial margin. The fees shall together cover capital costs, operational costs and profit.

7. Amendments

DNB reserves the right to amend the Terms. Significant amendments take effect when they are notified in writing to the client. Other amendments come into force from the date when they are published on DNBs webpages for agreements.

8. Law

Disputes arising in the relationship between the Indirect Client and DNB are to be resolved pursuant to Norwegian law, with Oslo District Court as the legal venue.