Collateral requirements under EMIR

 


 

 

General policy framework 

 

 

In September 2009, G20 Leaders agreed in Pittsburgh that all standardised OTC derivative contracts "should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements."

 

The Financial Stability Board and its relevant members were also asked by the G20 Leaders in Pittsburgh to assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse (see the Financial Stability Board Ninth Progress Report on Implementation OTC Derivatives Market Reforms, 24 July 2015).

 

In November 2011, G20 Leaders in Cannes called on the Basel Committee on Banking Supervision (BCBS), the International Organization for Securities Commission (IOSCO) together with other relevant organisations to develop for consultation standards on margining for non-centrally cleared OTC derivatives by June 2012.

 

Key implementation dates:

 

- 15 December 2016 - date of publication of the Regulation 2016/2251 in the EU Official Journal

 

- 4 January 2017 - date of entry into force of the rules

 

- 4 February 2017 - implementation date for the exchange of variation margin for firms with a group aggregate average notional amount of non-centrally cleared derivatives above EUR 3 trillion

 

- 1 March 2017 - implementation dates for the exchange of variation margin for all other firms in scope

 

- 4 February 2017 through to 1 September 2020 - phase-in period for implementation of the exchange of initial margin

 

 

The policy-making legislative process in this regard is marked, in particular, by the following documents:

 

- document of the Joint Committee of European Supervisory Authorities (ESAs): the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) Consultation Paper of 14 April 2014 "Draft regulatory technical standards on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP under Article 11(15) of Regulation (EU) No 648/2012" (JC/CP/2014/03) (which presented the preliminary thinking of the European financial authorities on OTC derivatives' mandatory collateralisation),

 

- ESAs' Second Consultation on margin RTS for non-cleared derivatives of 10 June 2015 (JC/CP/2015/002),

 

- ESAs' Final Draft Regulatory Technical Standards of 8 March 2016 on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP under Article 11(15) of Regulation (EU) No 648/2012 (ESAs 2016 23),

 

- Margin requirements for non-centrally cleared derivatives, September 2013, Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO), 

 

- Margin requirements for non-centrally cleared derivatives (agreed and adopted in March 2015 by the BCBS and the IOSCO sets out the international final policy framework regarding minimum standards for margin requirements for non-centrally cleared derivatives and serves as a global benchmark for regulatory requirements in that regard).

 

The result of the aforementioned developments is the Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty.

 

 

ESA's RTS under EMIR vs. BCBS/IOSCO international framework 


margin-emir

 

The question may, firstly, arise on interdependencies between the draft Commission Delegated Regulation adopted under EMIR and BCBS and IOSCO global framework.

 

This point has been referred to at the beginning of the aforementioned ESA's document of 10 June 2015 - European financial regulators say that in the standards' development process, the ESAs "have also kept in mind the need for international consistency and have consequently used the internationally agreed standards as the natural starting point. In addition, a number of specific issues have been clarified so that the proposed rules will implement the international standards while taking into account the specific aspects of the European financial market."

 

The document of 10 June 2015 adds, moreover, that the international standards "outline the final margin requirements, which the ESAs have endeavoured to transpose into the RTS", and, that in the ESA's opinion the Regulatory Technical Standards as proposed by the ESA's to be issued under EMIR are "in line with the principles of the international framework" (p. 6).

 

The above assurances have been upheld in the ESA's Final draft RTS of 8 March 2016.

 

When it comes to the impacts of new rules, the requirements at issue will represent a significant change in market practice and, equally, an operational and logistical challenge that will have to be properly managed (Recital 14 of the RTS). 

 

"These new rules go far beyond current market practice on margining and will be relevant to anyone entering into OTC derivative contracts where there is an EU connection," says ReedSmith in EMIR Collateral Damage.

 

The background and rationale for the new collateral requirements for the OTC market have been explained in the said ESA's document of 10 June 2015.

 

The document reads as follows:

 

"The EMIR establishes provisions aimed at increasing the safety and transparency of the over-the-counter (OTC) derivative markets. Among other requirements, it introduces a legal obligation to clear certain types of OTC derivatives through central counterparties ('CCP'). However, not all OTC derivative contracts will be subject to the clearing obligation or would meet the conditions to be centrally cleared. In the absence of clearing by a CCP, it is essential that counterparties apply robust risk mitigation techniques to their bilateral relationships to reduce counterparty credit risk. This will also mitigate the potential systemic risk that can arise in this regard."

 

 

Scope of application

 

 

EMIR Article 11(3)

 

"Financial counterparties shall have risk-management procedures that require the timely, accurate and appropriately segregated exchange of collateral with respect to OTC derivative contracts that are entered into on or after 16 August 2012.

 

Non-financial counterparties referred to in Article 10 shall have risk-management procedures that require the timely, accurate and appropriately segregated exchange of collateral with respect to OTC derivative contracts that are entered into on or after the clearing threshold is exceeded."

 

 

Article 11(3) EMIR requires financial counterparties (FCs) to have risk management procedures in place that require the timely, accurate and appropriately segregated exchange of collateral with respect to OTC derivative contracts.

 

Non-financial counterparties (NFCs) must have similar procedures in place, if they are above the clearing threshold (being the EMIR designation for sistemically important non-financial entities - so-called "NFCs+").

 

Hence, it may be concluded that the scope of the margin requirements under EMIR reflects the one of the clearing obligation and applies to all financial counterparties and NFCs+.

 

Intra-group exemption from margin requirements is, moreover, available (subject to certain conditions).

 

 

Extra-EU impact

 

 

New rules impose an obligation on EU entities to collect margin in accordance with the prescribed procedures, regardless of whether they are facing EU or non-EU entities.

 

 

"In the first consultation paper, the draft RTS were developed on the basis that counterparties in the scope of the margin requirements are required to collect margins. As two counterparties that are subject to EU regulation are both obliged to collect collateral, this would imply an exchange of initial margins. The underlying assumption was also that counterparties in equivalent third country jurisdictions would also be required to collect, so Union counterparties trading with third country counterparties were expected to post and collect initial and variation margins. Respondents to the first consultation and third country authorities highlighted that this would not always be the case, as some entities might be not covered by margin rules in a third country jurisdiction. In the final draft RTS counterparties are required not only to collect but also to post margins. This approach ensures that Union counterparties are not put at a competitive advantage with respect to entities in other major jurisdictions."

 

ESA's Final Report of 8 March 2016, p. 7

 

Recital 7 to Regulation 2016/2251 stipulates that in order to guarantee a level playing field across jurisdictions, where a counterparty established in the European Union enters into a non-centrally cleared OTC derivative contract with a counterparty that is established in a third country initial and variation margin should be exchanged in both directions.

 

Moreover, counterparties established in the Union transacting with counterparties established in third countries remain subject to the obligation of assessing the legal enforceability of the bilateral agreements of the effectiveness of the segregation agreements. 

 

When such assessments highlight the potential for the non-compliance of the agreements with new rules, European counterparties should identify alternative processes to post collateral, such as relying on third-party banks or custodians domiciled in jurisdictions where those requirements can be guaranteed.

 

There may be seen an evolution of the regulatory approach to margin requirements in transactions with third-country counterparties, if somebody would compare the first ESMA's drafts and the final Regulation - see boxes.

 

Important rule for the entities established outside the EU is stipulated in Article 24 of the said Regulation 2016/2251, which envisions that counterparties may provide in their risk management procedures that no collateral is exchanged in relation to non-centrally cleared OTC derivative contracts entered into with:

 

- non-financial counterparties below clearing threshold or


- non-financial counterparties established in a third country that would be below clearing threshold if they were established in the European Union.

 

Furthermore, counterparties established in the European Union may provide in their risk management procedures that variation and initial margins are not required to be posted for non-centrally cleared OTC derivative contracts concluded with counterparties established in a third country for which any of the conditions laid down under Article 31 of the Regulation 2016/2251 apply (see box below).

 

 

 

Article 24 and 31 and Recitals 7, 10 and 18 of the Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty

 

Article 24

Non-financial counterparties and third-country counterparties

 

By way of derogation from Article 2(2), counterparties may provide in their risk management procedures that no collateral is exchanged in relation to non-centrally cleared OTC derivative contracts entered into with non-financial counterparties that do not meet the conditions of Article 10(1)(b) of Regulation (EU) No 648/2012, or with non-financial entities established in a third country that would not meet the conditions of Article 10(1)(b) of Regulation (EU) No 648/2012 if they were established in the Union.

 

Article 31
Treatment of derivatives with counterparties in third countries where legal enforceability of netting agreements or collateral protection cannot be ensured

 

1. By way of derogation from Article 2(2), counterparties established in the Union may provide in their risk management procedures that variation and initial margins are not required to be posted for non-centrally cleared OTC derivative contracts concluded with counterparties established in a third country for which any of the following apply:
(a) the legal review referred to in Article 2(3) confirms that the netting agreement and, where used, the exchange of collateral agreement cannot be legally enforced with certainty at all times;
(b) the legal review referred to in Article 19(6) confirms that the segregation requirements referred to in Article 19(3), (4) and (5) cannot be met.
For the purposes of the first subparagraph, counterparties established in the Union shall collect margin on a gross basis.

 

2. By way of derogation from Article 2(2), counterparties established in the Union may provide in their risk management procedures that variation and initial margins are not required to be posted or collected for contracts concluded with counterparties established in a third country where all of the following conditions apply:
(a) points (a) and, where applicable, point (b) of paragraph 1 apply;
(b) the legal reviews referred to in points (a) and (b) of paragraph 1 confirm that collecting collateral in accordance with this Regulation is not possible, even on a gross basis;
(c) the ratio calculated in accordance with paragraph 3 is lower than 2,5 %.

 

3. The ratio referred to in paragraph 2(c) shall be the result of dividing the amount resulting from point (a) of this paragraph with that resulting from point (b):
(a) the sum of the notional amounts of any outstanding OTC derivative contracts of the group to which the counterparty belongs that were concluded after the entry into force of this Regulation and for which no margin has been collected from counterparties established in a third country for which point (b) of paragraph 2 applies;
(b) the sum of the notional amounts of all outstanding OTC derivative contracts of the group to which the counterparty belongs, excluding OTC derivative contracts that are intragroup transactions.

 

Recital 7

In order to guarantee a level playing field across jurisdictions, where a counterparty established in the Union enters into a non-centrally cleared OTC derivative contract with a counterparty that is established in a third country, initial and variation margins should be exchanged in both directions. Counterparties established in the Union transacting with counterparties established in third countries should remain subject to the obligation of assessing the legal enforceability of the bilateral agreements and the effectiveness of the segregation agreements.

 

Recital 10

Some third country jurisdictions may determine a different scope to Regulation (EU) No 648/2012 for the purposes of their requirements for the exchange of collateral in relation to OTC derivative contracts that are not centrally cleared. Therefore, were this Regulation to require that only non-centrally cleared OTC derivative contracts governed by Regulation (EU) No 648/2012 are included in the margin calculations for cross-border netting sets, counterparties in different jurisdictions would potentially have to duplicate required calculations to take into account different definitions or different scopes of products under the respective margin requirements. This could lead to distorted margin calculations. Furthermore, this would likely increase the risk of disputes. Therefore, allowing the use of a broader set of products in cross-border netting sets that includes all the OTC derivative contracts that are subject to exchange of collateral in one or the other jurisdiction would facilitate a smoother process of margin collection. This approach is consistent with the systemic risk-reduction goal of Regulation (EU) No 648/2012, since a broader range of products would be subject to the margin requirements.

 

Recital 18

Counterparties should always assess the legal enforceability of their netting and segregation agreements. Where, with respect to the legal framework of a third country, these assessments turn out to be negative, counterparties should rely on arrangements different from the two-way exchange of margins. With a view to ensuring consistency with international standards, to avoid that it becomes impossible for Union counterparties to trade with counterparties in those jurisdictions, and to ensure a level playing field for Union counterparties, it is appropriate to set out a minimum threshold below which counterparties can trade with counterparties established in those jurisdictions without exchanging initial or variation margins. Where the counterparties have the possibility to collect margins and can ensure that for collected collateral, as opposed to posted collateral, the provisions of this Regulation can be met, Union counterparties should always be required to collect collateral. Exposures from contracts with counterparties established in third country jurisdictions that are not covered by any exchange of collateral because of the legal impediments in those jurisdictions should be constrained by setting a limit, as capital is not considered equivalent to margin exchange in relation to the exposures arising from non-centrally cleared OTC derivative contracts and not all counterparties subject to the margin requirements under this Regulation are also subject to capital requirements. This limit should be set in such a way that it is simple to calculate and verify. To avoid the build- up of systemic risk and to avoid that such specific treatment creates the possibility to circumvent the provisions of this Regulation, the limit should be set at a conservative level. These treatments would be considered sufficiently prudent, because there are also other risk mitigation techniques as an alternative to margins.

 

 

 

Initial and variation margin requirements

 

 

To prevent the build-up of uncollateralised exposures within the system, new rules require the daily exchange of variation margin (VM) between counterparties.

Initial margin see details 

Moreover, subject to the provisions of the RTS, both financial and non-financial counterparties above the clearing threshold, are required to exchange two-way initial margin (IM) to cover the potential future exposure resulting from a counterparty default. 

 

‘Initial margin’ is defined in the Regulation 2016/2251 as 'the collateral collected by a counterparty to cover its current and potential future exposure in the interval between the last collection of margin and the liquidation of positions or hedging of market risk following a default of the other counterparty' (Article 1(1)), while ‘variation margin’, according to Article 1(2), means 'the collateral collected by a counterparty to reflect the results of the daily marking-to-market or marking-to-model of outstanding contracts referred to in Article 11(2) of Regulation (EU) No 648/2012'.

 

Initial margin is envisioned to be exchanged by both parties, without netting of amounts collected by each party (i.e. on a gross basis).

 

To act as an effective risk mitigant, initial margin recalculations are to reflect changes in both the risk positions and market conditions.

 

Consequently, counterparties are required to recalculate initial margin, at least when the portfolio between the two entities has changed, or the underlying risk measurement approach has changed.

 

In addition, to ensure current market conditions are fully captured, initial margin is subject to a minimum recalculation period of 10 days.

 

Initial margin should be exchanged by both parties, without netting of amounts collected by each party (i.e. on a gross basis), and held in such a way as to ensure that:

 

(i) the margin collected is immediately available to the collecting party in the event of the counterparty's default; and

 

(ii) the collected margin must be subject to arrangements that fully protect the posting party to the extent possible under applicable law in the event that the collecting party enters bankruptcy.

 

(Basel Committee on Banking Supervision, Board of the International Organization of Securities Commissions, Margin requirements for non-centrally cleared derivatives, March 2015, p. 9)

 

It is noteworthy, Recital 2 of the ESMA's draft final RTS contained the rule that indirectly cleared OTC derivative contracts are considered as centrally cleared and are therefore not subject to the risk management procedures prescribed, however the Commission Delegated Regulation 2016/2251 of 4 October 2016 does not stipulate thereto.

 

 

Collateral Management

 

 

New rules require counterparties collecting collateral, to introduce the risk management procedures, which ensure that all of the following are in place:

 

(a) a daily re-evaluation of collateral;

 

(b) legal arrangements and a collateral holding structure to access the received collateral where it is held in third party custody;

 

(c) where initial margin is maintained with the collateral provider, the securities should be maintained in bankruptcy or insolvency remote custody accounts;

 

(d) cash accounts in all the acceptable currencies are maintained with a party other than the collateral provider for depositing cash collateral collected as initial margin and for crediting the proceeds of repurchase agreements on the collateral;

fca video Margin uncleared OTC derivative contracts 

(e) the ability to make available the unused collateral to the liquidator or other insolvency official of the defaulted counterparty;

 

(f) arrangements to ensure that, in the event of the default of the collecting counterparty, the initial margin is freely and transferable back in a timely manner to the posting counterparty;

 

(g) the collateral shall be transferable without any regulatory or legal constraints or third party claims, including those of the liquidator of the collecting counterparty or third party custodian;

 

(h) the collateral is returned in whole other than for costs and expenses incurred for that process or other than liens routinely imposed on all securities in a clearing system in which such collateral may be held.

 

 

Operational procedures and documentation

 

 

The ESA's Final Report of 8 March 2016 recognises that the operational aspects relating to the exchange of margin requirements will require substantial effort to implement in a stringent manner.

 

As the said Report observes (p. 11):

 

- it is necessary for counterparties to implement robust operational procedures that ensure that documentation is in place between counterparties and internally at the counterparty,

 

- the operational requirements must include, among other things, clear senior management reporting, escalation procedures (internally and between counterparties) and requirements to ensure sufficient liquidity of the collateral,

 

- counterparties are required to conduct tests on the procedures, at least on an annual basis,

 

- segregation requirements must be in place to ensure that collateral is available in the event of a counterparty defaulting.

 

In general, operational and legal arrangements must be in place to ensure that the collateral is bankruptcy remote.

 

Recital 32 of the Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 underlines that operational processes used by the counterparties for the bilateral exchange of collateral must be sufficiently detailed, transparent and robust.

 

A failure by counterparties to agree upon and establish an operational framework for efficient calculation, notification and finalisation of margin calls can lead to disputes and failed exchanges of collateral that result in uncollateralised exposures under OTC derivative contracts.

As a result, it is essential that counterparties set clear internal policies and standards in respect of collateral transfers.

 

Any deviation from those policies should be rigorously reviewed by all relevant internal stakeholders that are required to authorise those deviations. Furthermore, all applicable terms in respect of operational exchange of collateral should be accurately recorded in detail in a robust, prompt and systematic way.

 

According to Article 2 of the said Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016, firms are required to establish, apply and document risk management procedures for the exchange of collateral for non-centrally cleared OTC derivative contracts, providing for or specifying the following:

 

(a) the eligibility of collateral for non-centrally cleared OTC derivative contracts;

 

(b) the calculation and collection of margins for non-centrally cleared OTC derivative contracts;

 

(c) the management and segregation of collateral for non-centrally cleared OTC derivative contracts;

 

(d) the calculation of the adjusted value of collateral;

 

(e) the exchange of information between counterparties and the authorisation and recording of any exceptions to the risk management procedures;

 

(f) the reporting of the exceptions to senior management;

 

(g) the terms of all necessary agreements to be entered into by counterparties, at the latest, at the moment in which a non-centrally cleared OTC derivative contract is concluded, including the terms of the netting agreement and the terms of the exchange of collateral agreement;

 

(h) the periodic verification of the liquidity of the collateral to be exchanged;

 

(i) the timely re-appropriation of the collateral in the event of default by the posting counterparty from the collecting counterparty; and

 

(j) the regular monitoring of the exposures arising from OTC derivative contracts that are intragroup transactions and the timely settlement of the obligations resulting from those contracts.

 


The terms of agreements referred to above in point (g) must comprise all aspects concerning the obligations arising from any non-centrally cleared OTC derivative contract to be concluded, and at least the following:

 

(a) any payment obligations arising between counterparties;

 

(b) the conditions for netting payment obligations;

 

(c) events of default or other termination events of the non-centrally cleared OTC derivative contracts;

 

(d) all calculation methods used in relation to payment obligations;

 

(e) the conditions for netting payment obligations upon termination;

 

(f) the transfer of rights and obligations upon termination;

 

(g) the governing law of the transactions of the non-centrally cleared OTC derivative contracts.

 

Where counterparties enter into a netting or an exchange of collateral agreement, they must perform an independent legal review of the enforceability of those agreements.

 

That review may be conducted by an internal independent unit or by an independent third party (the requirement to perform the review is, however, considered to be satisfied in relation to the netting agreement where that agreement is recognised in accordance with Article 296 of Regulation No 575/2013 (CRR)).

 

In addition, counterparties are required to establish policies to assess on a continuous basis the enforceability of the netting and the exchange of collateral agreements that they enter into.

 

The above risk management procedures must be tested, reviewed and updated as necessary and at least annually.

 

The said Regulation, imposes, moreover, the obligation on counterparties using initial margin models to provide, upon request, the competent authorities with any documentation relating to the risk management procedures at any time. 

 

 

Exchange of collateral agreement

 

 

The said Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 in Article 3 also stipulates for the necessary content of the exchange of collateral agreement, which must include at least the following terms:


(a) the levels and type of collateral required;


(b) the segregation arrangements;


(c) the netting set to which the exchange of collateral refers;


(d) the procedures for notification, confirmation and adjustment of margin calls;


(e) the procedures for settlement of margin calls for each type of eligible collateral;


(f) the procedures, methods, timeframes and allocation of responsibilities for the calculation of margins and the valuation of collateral;


(g) the events that are considered to be default or termination events;


(h) the law applicable to the non-centrally cleared OTC derivative contract;


(i) the law applicable to the exchange of collateral agreement.

 

Recital 33 of the Regulation at issue adds that an exchange of collateral agreement should be concluded between counterparties entering into non-centrally cleared OTC derivative contracts in order to provide legal certainty.

 

As a result, the exchange of collateral agreement should include all material rights and obligations of the counterparties applicable to non-centrally cleared OTC derivative contracts.

 

 

De minimis thresholds 

 

 

The exchange of collateral for only minor movements in valuation may, in the opinion of European financial supervisory authorities, lead to an overly onerous exchange of collateral.

Therefore, Regulation 2016/2251 introduces the thresholds to limit the operational burden and a threshold for managing the liquidity impact associated with initial margin requirements. Thresholds are consistent with international standards.

Threshold based on initial margin amount

The first threshold ensures that the exchange of initial margin does not need to take place if a counterparty has no significant exposures to another counterparty.

Eur-50-million

Specifically, it may be agreed bilaterally to introduce a minimum threshold of up to EUR 50 million, which will ensure that only counterparties with significant exposures will be subject to the initial margin requirements (if both counterparties belong to the same group the threshold's value is EUR 10 million).

 

Where counterparties apply the threshold based on initial margin amount the following rules apply:

(a) counterparties may reduce the amount of initial margin collected by the value of the threshold;

(b) the risk management procedures must include determining how to allocate the received initial margin amongst the relevant entities within the group;

(c) the risk management procedures must include monitoring, at the group level, of whether the threshold is exceeded and the maintenance of appropriate records of its exposures to each single counterparty in the same group.

 

 

Article 29 of the Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty

 

Threshold based on initial margin amounts


1. By way of derogation from Article 2(2), counterparties may provide in their risk management procedures that initial margin collected is reduced by an amount up to EUR 50 million in the case of points (a) and (b) of this paragraph or EUR 10 million in the case of point (c) where:


(a) neither counterparty belongs to any group;


(b) the counterparties are part of different groups;


(c) both counterparties belong to the same group.


2. Where a counterparty does not collect initial margins in accordance with paragraph 1(b), the risk management procedures referred to in Article 2(1) shall include provisions on monitoring, at group level, whether that threshold is exceeded and provisions for the retention of appropriate records of the group's exposures to each single counterparty in the same group.


3. UCITS authorised in accordance with Directive 2009/65/EC and alternative investment funds managed by alternative investment fund managers authorised or registered in accordance with Directive 2011/61/EU shall be considered distinct entities and treated separately when applying the thresholds referred to in paragraph 1 where the following conditions are met:
(a) the funds are distinct segregated pools of assets for the purposes of the fund's insolvency or bankruptcy;
(b) the segregated pools of assets are not collateralised, guaranteed or otherwise financially supported by other investment funds or their managers.

 

 

Minimum transfer amount

The second threshold ensures that, when market valuations fluctuate, new contracts are drawn up or other aspects of the covered transactions change; an exchange of collateral is only necessary if the change in the margin requirements exceeds EUR 500 000 (minimum transfer amount).

Eur-500000 

Similarly to the first threshold, counterparties may agree on the introduction of a threshold in their bilateral agreement as long as the minimum exchange threshold does not exceed EUR 500 000.

Therefore, the exchange of collateral only needs to take place when significant changes to the margin requirements occur. This is intended to limit the operational burden relating to these requirements. 

 

Where counterparties agree on a minimum transfer amount, the amount due, pursuant to the RTS, is to be calculated as the sum of:

(a) the variation margin due from its last collection;

(b) the initial margin due from its last collection;

(c) any excess collateral that may have been provided to or returned by both counterparties.

 

In case the amount due to the counterparty collecting collateral exceeds the minimum transfer amount agreed by the counterparties in accordance with the above rules, the risk management procedures must provide that the counterparty collecting collateral collects the full amount without deduction of the minimum transfer amount.

 

 

Recitals 8 and 9 and Article 25 of the Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty

 

(8) It is appropriate to allow counterparties to apply a minimum transfer amount when exchanging collateral in order to reduce the operational burden of exchanging limited sums when exposures move only slightly. However, it should be ensured that such minimum transfer amount is used as an operational tool and not with the view to serving as an uncollateralised credit line between counterparties. Therefore, a maximum level should be set out for that minimum transfer amount.

 

(9) For operational reasons, it might be more appropriate in some cases to have separate minimum transfer amounts for the initial and the variation margin. In those cases it should be possible for counterparties to agree on separate minimum transfer amounts for variation and initial margin with respect to OTC derivative contracts subject to this Regulation. However, the sum of the separate minimum transfer amounts should not exceed the maximum level of the minimum transfer amount set out in this Regulation. For practical reasons, it should be possible to define the minimum transfer amount in the currency in which margins are normally exchanged, which may not be the euro.

 

Article 25

Minimum transfer amount


1. By way of derogation from Article 2(2), counterparties may provide in their risk management procedures that no collateral is collected from a counterparty where the amount due from the last collection of collateral is equal to or lower than the amount agreed by the counterparties ('minimum transfer amount').


The minimum transfer amount shall not exceed EUR 500 000 or the equivalent amount in another currency.


2. Where counterparties agree on a minimum transfer amount, the amount of collateral due shall be calculated as the sum of:


(a) the variation margin due from its last collection calculated in accordance with Article 10, including any excess collateral;


(b) the initial margin due from its last collection calculated in accordance with Article 11, including any excess collateral;


3. Where the amount of collateral due exceeds the minimum transfer amount agreed by the counterparties, the collecting counterparty shall collect the full amount of collateral due without deduction of the minimum transfer amount.


4. Counterparties may agree on separate minimum transfer amounts for initial and variation margins, provided that the sum of those minimum transfer amounts is equal to or lower than EUR 500 000 or the equivalent amount in another currency.


5. Where counterparties agree on separate minimum transfer amounts in accordance with paragraph 4, the collecting counterparty shall collect the full amount of initial or variation margin due without any deduction of those minimum transfer amounts where the amount of initial or variation collateral due exceeds the minimum transfer amount.

 

 

Threshold based on notional amount

 

In order to align with international standards, the requirements of the RTS will apply only to key OTC derivative market participants.

Eur-8-billion 

According to Article 28 of the respective Regulation counterparties may provide in their risk management procedures that initial margins are not collected for all new OTC derivative contracts entered into within a calendar year where one of the two counterparties has an aggregate month-end average notional amount of non-centrally cleared OTC derivatives for the months March, April and May of the preceding year of below EUR 8 billion.

 

The aggregate month-end average notional amount referred to above is to be calculated at the counterparty level or at the group level where the counterparty belongs to a group.


Where a counterparty belongs to a group, the calculation of the group aggregate month-end average notional amount must include all non-centrally cleared OTC derivative contracts of the group including all intragroup non-centrally cleared OTC derivatives contracts.


For the purposes of the said calculations OTC derivative contracts, which are internal transactions, are only taken into account once.

 

Specific rules apply to UCITS (see below in the box Article 28(3) of the said Regulation).

 

Threshold based on notional amount has been considered necessary, since uniform application of margin requirements would violate the proportionality principle and would entail the significant change in market practice and potential costs associated with these requirements.

This is also acknowledged in the BCBS-IOSCO framework.

 

In the absence of this threshold, the Impact Assessment Document attached to the RTS argues these costs have the potential to fall disproportionately on smaller market participants, and, in extremis, discourage the use of derivatives markets, in particular for risk-reducing activities such as hedging.

 

 

Article 28 and Recitals 12 - 15 of the Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty

 

Article 28

Threshold based on notional amount

 

1. By way of derogation from Article 2(2), counterparties may provide in their risk management procedures that initial margins are not collected for all new OTC derivative contracts entered into within a calendar year where one of the two counterparties has an aggregate month-end average notional amount of non-centrally cleared OTC derivatives for the months March, April and May of the preceding year of below EUR 8 billion.
The aggregate month-end average notional amount referred to in the first subparagraph shall be calculated at the counterparty level or at the group level where the counterparty belongs to a group.


2. Where a counterparty belongs to a group, the calculation of the group aggregate month-end average notional amount shall include all non-centrally cleared OTC derivative contracts of the group including all intragroup non-centrally cleared OTC derivatives contracts.
For the purposes of the first subparagraph, OTC derivative contracts which are internal transactions shall only be taken into account once.


3. UCITS authorised in accordance with Directive 2009/65/EC and alternative investment funds managed by alternative investment fund managers authorised or registered in accordance with Directive 2011/61/EU of the European Parliament and of the Council (9) shall be considered distinct entities and treated separately when applying the thresholds referred to in paragraph 1 where the following conditions are met:
(a) the funds are distinct segregated pools of assets for the purposes of the fund's insolvency or bankruptcy;
(b) the segregated pools of assets are not collateralised, guaranteed or otherwise financially supported by other investment funds or their managers.

 

Recital 12

 

When setting the level of initial margin requirements, the Basel Committee on Banking Supervision and the Board of the International Organization of Securities Commissions have explicitly considered two aspects, as reflected in their framework, "Margin requirements for non-centrally cleared derivatives" of March 2015 ('BCBS- IOSCO framework'). The first aspect is the availability of high credit quality and liquid assets covering the initial margin requirements. The second is the proportionality principle, as smaller financial and non-financial counterparties might be hit in a disproportionate manner from the initial margin requirements. In order to maintain a level playing field, this Regulation should introduce a threshold that is exactly the same as in the BCBS-IOSCO framework below which two counterparties are not required to exchange initial margin. This should substantially alleviate costs and operational burden for smaller participants and address the concern about the availability of high credit quality and liquid assets without undermining the general objectives of Regulation (EU) No 648/2012.

 

Recital 13


While the thresholds should always be calculated at group level, investment funds should be treated as a special case as they can be managed by a single investment manager and captured as a single group. However, where the funds are distinct pools of assets and they are not collateralised, guaranteed or supported by other investment funds or the investment manager itself, they are relatively risk remote in relation to the rest of the group. Such investment funds should therefore be treated as separate entities when calculating the thresholds, in line with the BCBS-IOSCO framework.

 

Recital 14


With regard to initial margin, the requirements of this Regulation are likely to have a measurable impact on market liquidity, as assets provided as collateral cannot be liquidated or otherwise reused for the duration of the non-centrally cleared OTC derivative contract. Such requirements represent a significant change in market practice and present certain operational and practical challenges that will need to be managed as the new requirements come into effect. Taking into account that the variation margin already covers realised fluctuations in the value of non-centrally cleared OTC derivatives contracts up to the point of default, it is considered proportionate to apply a threshold of EUR 8 billion in gross notional amounts of outstanding contracts to the application of the initial margin requirements. This threshold applies at the group level or, where the counterparty is not part of a group, at the level of the single entity. The aggregated gross notional amount of outstanding contracts should be used as an adequate reference given that it is an appropriate metric for measuring the size and complexity of a portfolio of non-centrally cleared OTC derivative contracts. It is also a reference that is easy to monitor and report. These thresholds are also in line with the BCBS-IOSCO framework for non-centrally cleared OTC derivative contracts and are therefore consistent with international standards.

 

Recital 15


Exposures arising either from contracts or counterparties that are permanently or temporarily exempted or partially exempted from margins, should also be included in the calculation of the aggregated gross notional amount. This is due to the fact that all the contracts contribute to the determination of the size and complexity of a counterparty's portfolio. Therefore, non-centrally cleared OTC derivative contracts that may be exempted from the requirements of this Regulation are also relevant for determining the size, scale and complexity of the counterparty's portfolio and should therefore also be included in the calculation of the thresholds. 

 

 

Calculation at a group level

 

"The group-wide aggregate notional amount determines when counterparties are in the scope of the variation margin requirements and determines when and what counterparties are in the scope of the initial margin requirements. The RTS prescribe that all intragroup OTC derivatives are to be included in the calculation and but should be counted only once. Intragroup derivatives exempted under Articles 11(5) to (10) of the EMIR should also be included in the calculation. This is in line with the similar treatment of intragroup transactions for the calculation of the aggregated notional amount for the clearing threshold. Furthermore, this approach was chosen to align with prevailing international practices."

 

ESA's Final Report of 8 March 2016, p. 7, 8

 

 

It needs to be underlined, the above de minimis thresholds are to be calculated at group level with the exception reserved to investment funds.

 

Recital 13 of the respective Regulation refers to this issue as follows:

 

"While the thresholds should always be calculated at group level, investment funds should be treated as a special case as they can be managed by a single investment manager and captured as a single group. However, where the funds are distinct pools of assets and they are not collateralised, guaranteed or supported by other investment funds or the investment manager itself, they are relatively risk remote in relation to the rest of the group. Such investment funds should therefore be treated as separate entities when calculating the thresholds, in line with the BCBS-IOSCO framework."

 

All requirements prescribed in terms of the 'group' or 'group level' refer to the definition of a group included in Regulation (EU) No 648/2012 (EMIR).

 

Other exemptions

 

Counterparties may provide in their risk management procedures that no collateral is exchanged in relation to non-centrally cleared OTC derivative contracts entered into with:

 

- CCPs authorised as credit institutions in accordance with Directive 2013/36/EU,


- non-financial counterparties qualifying as the so-called NFC-, or


- non-financial entities established in a third country that would be NFC- if they were established in the European Union (Articles 23 and 24 of the Regulation 2016/2251).

 

 

Physically-settled foreign exchange contracts 

 

 

Physically-settled foreign exchange swaps and forwards are the derivative instruments of which the underlying financial products (i.e. foreign currency) are physically delivered in exchange for a specific payment. 

 

To maintain international consistency, entities subject to the EMIR regulatory technical standards on margin may agree in their risk management procedures not to collect initial margin on physically-settled foreign exchange forwards and foreign exchange swaps, or the principal in currency swaps.

 

The reasons for the exemption from initial margin have been explained by the ESA's Second Consultation Paper of 10 June 2015 (p. 65) as follows:


a) the BCBS-IOSCO framework specify that certain physically-settled foreign exchange products and swaps should be exempt from the exchange of initial margin, with the intention that the risks associated with the exemption will be considered by the monitoring group established in 2014;


b) given the interconnectedness of the market and international practice, in particular in the US market, the initial margin requirement for physically-settled foreign exchange swaps and forwards would give the EU a comparative disadvantage vis-à- vis other players;


c) therefore, to reflect the international dimension of the foreign exchange markets and to maintain international consistency between jurisdictions, in the European financial regulators' opinion, it will be beneficial if the technical standards are consistent with the BCBS-IOSCO framework.

Nevertheless, the counterparties are still expected to post and collect the variation margin associated with these contracts, which is assessed to sufficiently cover the risk and ensure a proportionate approach.

 

 

Article 27 and Recitals 16 and 42 of the Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty

 

Article 27

Foreign exchange contracts

 

By way of derogation from Article 2(2), counterparties may provide in their risk management procedures that initial margins are not collected with respect to:


(a) physically settled OTC derivative contracts that solely involve the exchange of two different currencies on a specific future date at a fixed rate agreed on the trade date of the contract covering the exchange ('foreign exchange forwards');


(b) physically settled OTC derivative contracts that solely involve an exchange of two different currencies on a specific date at a fixed rate that is agreed on the trade date of the contract covering the exchange, and a reverse exchange of the two currencies at a later date and at a fixed rate that is also agreed on the trade date of the contract covering the exchange ('foreign exchange swaps');


(c) the exchange of principal of non-centrally cleared OTC derivative contracts under which counterparties exchange solely the principal amount and any interest payments in one currency for the principal amount and any interest payments in another currency, at specified points in time according to a specified formula ('currency swap').

 

Recital 16

 

It is appropriate to set out special risk management procedures for certain types of non-centrally cleared OTC derivative contracts that show particular risk profiles. In particular, the exchange of variation margin without initial margin should, consistent with the BCBS-IOSCO framework, be considered an appropriate exchange of collateral for physically-settled foreign exchange contracts. Similarly, as cross-currency swaps can be decomposed into a sequence of foreign exchange forwards, only the interest rate component should be covered by initial margin.

 

Recital 42

 

Commission Delegated Regulation specifies the definition of physically settled foreign exchange forwards within the Union. However, at this juncture, that definition is not applicable and those products are defined in a non-homogenous way in the Union. Therefore, in order to avoid creating an un-level playing field within the Union, it is necessary that the application of the corresponding risk mitigation techniques are aligned to the date of application of the relevant Delegated Act. A specific date on which the relevant requirements should in any case apply is also set out to avoid excess delays in the introduction of the risk mitigation techniques.

 

See also: FX spot contract

 

 


 

 

 

Concentration limits

 

 

RTS propose the introduction of concentration limits on the collateral collected from a counterparty.

From several options available the approach has been chosen that applies concentration limits for margins irrespective of the position size.

  

Alternative regulatory possibilities like:


(i) no concentration limits at all, as well as


(ii) concentration limits for exposures from collected margins that represent a significant proportion of the overall exposures for the collecting counterparty;


have been rejected in the RTS.

 

The policy objective is to ensure that the collateral taker is able to realise sufficient value from the collateral to replace the OTC contracts associated with a defaulted counterparty.

 

As opposite to all other types of collateral, collateral posted in the form of cash is treated by the regulatory technical standard preferentially. 

 

Recital 36 of the Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 stipulates:
"Given the difficulties in segregating cash, the current practices for the exchange of cash collateral in certain jurisdictions and the need for reliance on cash instead of securities in certain circumstances where transferring securities may be impeded by operational constraints, cash collateral collected as initial margin should always be held by a central bank or third-party credit institution, since this ensures the separation from the two counterparties to the contract.
To ensure such separation, the third-party credit institution should not belong to the same group as either of the counterparties."

 

Imposing concentration limits on all other types of collateral is intended to help promote a diversified collateral pool, which will be less likely to face liquidation issues in the event of a counterparty default.

 

Regulators acknowledge, however, in the RTS Impact Assessment Document, the concentration limits make more difficult for counterparties to find suitable collateral and put an additional operational burden as the limits have to be monitored and collateral might occasionally have to be replaced in order not to breach the thresholds.

 

The option choosen might force the collection of diversified collateral even though the initial margin in total is small compared to the overall credit exposure that the collecting counterparty has.

 

A disadvantage of this option is also that smaller counterparties may face difficulties or impediments in posting collateral different from local sovereign debt securities.

 

Proportionality thresholds (below which the concentration limits would not apply) have not been included in RTS.

 

 

 

Eligible collateral

 

                          Concentration limits for initial margin

 

 

Article 4 of the Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016

 

1. A counterparty shall only collect collateral from the following asset classes:


(a) cash in the form of money credited to an account in any currency, or similar claims for the repayment of money, such as money market deposits;


(b) gold in the form of allocated pure gold bullion of recognised good delivery;


(c) debt securities issued by Member States' central governments or central banks;


(d) debt securities issued by Member States' regional governments or local authorities whose exposures are treated as exposures to the central government of that Member State in accordance with Article 115(2) of Regulation (EU) No 575/2013;


(e) debt securities issued by Member States' public sector entities whose exposures are treated as exposures to the central government, regional government or local authority of that Member State in accordance with Article 116(4) of Regulation (EU) No 575/2013;


(f) debt securities issued by Member States' regional governments or local authorities other than those referred to in point (d);


(g) debt securities issued by Member States' public sector entities other than those referred to in point (e);


(h) debt securities issued by multilateral development banks listed in Article 117(2) of Regulation (EU) No 575/2013;


(i) debt securities issued by the international organisations listed in Article 118 of Regulation (EU) No 575/2013;


(j) debt securities issued by third countries' governments or central banks;


(k) debt securities issued by third countries' regional governments or local authorities that meet the requirements of points (d) and (e);


(l) debt securities issued by third countries' regional governments or local authorities other than those referred to in points (d) and (e);


(m) debt securities issued by credit institutions or investment firms including bonds referred to in Article 52(4) of Directive 2009/65/EC of the European Parliament and of the Council;


(n) corporate bonds;


(o) the most senior tranche of a securitisation, as defined in Article 4(61) of Regulation (EU) No 575/2013, that is not a re-securitisation as defined in Article 4(63) of that Regulation;


(p) convertible bonds provided that they can be converted only into equities which are included in an index specified pursuant to point (a) of Article 197 (8) of Regulation (EU) No 575/2013;


(q) equities included in an index specified pursuant to point (a) of Article 197(8) of Regulation (EU) No 575/2013;


(r) shares or units in undertakings for collective investments in transferable securities (UCITS), provided that the conditions set out in Article 5 are met.


2. A counterparty shall only collect collateral from the asset classes referred to in points (f), (g) and (k) to (r) of paragraph 1 where all the following conditions apply:


(a) the assets are not issued by the posting counterparty;


(b) the assets are not issued by entities which are part of the group to which the posting counterparty belongs;


(c) the assets are not otherwise subject to any significant wrong way risk, as defined in points (a) and (b) of paragraph 1 of Article 291 of Regulation (EU) No 575/2013.

 

 

 

 

 

 

 

 

 

Article 8 of the Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016

 

1. Where collateral is collected as initial margin in accordance with Article 13, the following limits shall apply for each collecting counterparty:

 

(a) the sum of the values of the initial margin collected from the asset classes referred to in points (b), (f), (g), and (l) to (r) of Article 4(1) issued by a single issuer or by entities which belong to the same group does not exceed the greater of the following values:

 

(i) 15 % of the collateral collected from the posting counterparty;

 

(ii) EUR 10 million or the equivalent in another currency;

 

(b) the sum of the values of the initial margin collected from the asset classes referred to in points (o), (p) and (q) of Article 4(1), where the asset classes referred to in points (p) and (q) of that Article are issued by institutions as defined in Regulation (EU) No 575/2013, does not exceed the greater of the following values:

 

(i) 40 % of the collateral collected from the posting counterparty;

 

(ii) EUR 10 million or the equivalent in another currency.

 

The limits laid down in the first subparagraph shall also apply to shares or units in UCITS where the UCITS primarily invests in the asset classes referred to in that subparagraph.

 

2. Where collateral is collected as initial margin in accordance with Article 13 in excess of EUR 1 billion and each of the counterparties belong to one of the categories listed in paragraph 3, the following limits to the amount of initial margin in excess of EUR 1 billion collected from a counterparty shall apply:

 

(a) the sum of the values of the initial margin collected from the asset classes referred to in points (c) to (l) of Article 4(1) issued by a single issuer or by issuers domiciled in the same country shall not exceed 50 % of the initial margin collected from that counterparty;

 

(b) Where initial margin is collected in cash, the 50 % concentration limit referred to in point (a) shall also take into account the risk exposures arising from the third-party holder or custodian holding that cash.

 

3. The counterparties referred to in paragraph 2 shall be one of the following:

 

(a) institutions identified as G-SIIs in accordance with Article 131 of Directive 2013/36/EU;

 

(b) institutions identified as O-SIIs in accordance with Article 131 of Directive 2013/36/EU;

 

(c) counterparties which are not pension scheme arrangements and for which the sum of the values of the collateral to be collected exceeds EUR 1 billion.

 

4. Where collateral is collected as initial margin in accordance with Article 13 in excess of EUR 1 billion by or from a pension scheme arrangement, the collecting counterparty shall establish procedures to manage concentration risk with respect to collateral collected from the asset classes referred to in points (c) to (l) of Article 4(1), including adequate diversification of that collateral.

 

5. Where institutions referred to in points (a) and (b) of paragraph 3 collect initial margin in cash from a single counterparty that is also an institution referred to in those points, the collecting counterparty shall ensure that not more than 20 % of that initial margin is held by a single third-party custodian.

 

6. Paragraphs 1 to 4 shall not apply to collateral collected in the form of financial instruments that are the same as the underlying financial instrument of the non-centrally cleared OTC derivative contract.

 

7. The collecting counterparty shall assess compliance with the conditions laid down in paragraph 2 of this Article at least every time that initial margin is calculated in accordance with Article 9(2).

 

8. By way of derogation from paragraph 7, a counterparty referred to in points (a), (b) and (c) of Article 2(10) of Regulation (EU) No 648/2012 may assess compliance with the conditions laid down in paragraph 2 quarterly, provided that the amount of initial margin collected from each individual counterparty is at all times below EUR 800 million during the quarter preceding the assessment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

It is noteworthy that, according to Article 7(5) of the Regulation 2016/2251, counterparties are not allowed to use assets classes referred to above as  eligible collateral "where they have no access to the market for those assets or where they are unable to liquidate those assets in a timely manner in case of default of the posting counterparty".

 

 

Ban on re-use of collateral collected as initial margin

 

Firms implementing re-use, re-pledge or re-hypothecation of initial margin as an essential component of their business models will have to reconsider strategies. Collateral transformation services may also be affected.

 

The aforementioned Consultation Paper of 14 April 2014 proposed the re-hypothecation, re-pledge or otherwise re-use of the collateral collected as initial margin to be forbidden. It was explained the purpose of the the said restriction was to mitigate the risk in the case the counterparty, to which initial margin has been posted, defaults.

 

The BCBS-IOSCO report has also been cited, which presented the following argumentation:

 

“The risk would be exacerbated if the counterparty re-hypothecates, re-pledges or re-uses the provided margin, which could result in third parties having legal or beneficial title over the margin, or a merging or pooling of the margin with assets belonging to the others as a result of which the firm’s claim to the margin becomes entangled in legal complications, thus delaying or even denying the return of re-hypothecated / re-used assets in the event that the counterparty defaults."

 

As the above Consultation Paper of 14 April 2014 further elaborated, the BCBS-IOSCO, in order to achieve a delicate balance between allowing some flexibility and still preserve the efficiency of the initial margin framework permitted each jurisdiction to allow if they deem it necessary a limited re-use of initial margin under strict conditions.

 

However, as was further argued, the implementation of those conditions leads to multiple legal and technical difficulties, such as the requested degree of insolvency protection of the initial posting counterparty taking into account the diversity of insolvency laws, the return of the collateral from the third counterparty to the initial posting counterparty in case the collecting party defaults, or the one-time re-use of cash collateral. The European Supervisory Financial Authorities therefore considered in the Consulatation Paper of 14 April 2014 appropriate to propose a full ban on the re-use of initial margin. 

 

In turn, the final policy framework as set out in the aforementioned Margin requirements for non-centrally cleared derivatives adopted in March 2015 by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) has sustained the stance for the allowable re-use of initial margin under strict conditions.

 

The authorities underlined in the above final policy set-up of March 2015 the need to ensure such collateral use would only allow a one-time re-hypothecation, re-pledge or re-use in the global financial system; that is, once initial margin collateral has been re-hypothecated, re-pledged or re-used to a third party no further re-hypothecation, re-pledging or re-use of such initial margin collateral by the third party is permitted. Moreover, collected collateral must be segregated from the initial margin collector's proprietary assets.

 

Pursuant to the said BCBS and IOSCO final policy framework adopted in March 2015 cash and non-cash collateral collected as initial margin from a customer may be re-hypothecated, re-pledged or re-used (henceforth re-hypothecated) to a third party only for purposes of hedging the initial margin collector's derivatives position arising out of transactions with customers for which initial margin was collected and it must be subject to conditions that protect the customer's rights in the collateral, to the extent permitted by applicable national law.

 

The BCBS and IOSCO final policy framework adopted in March 2015 enumerates, moreover, the following preconditions for the re-hypothecation of the customer's collateral: 

 

1. The customer, as part of its contractual agreement with the initial margin collector and after disclosure by the initial margin collector of (i) its right not to permit re-hypothecation and (ii) the risks associated with the nature of the customer's claim to the re-hypothecated collateral in the event of the insolvency of the initial margin collector or the third party, gives express consent in writing to the re-hypothecation of its collateral. In addition, the initial margin collector must give the customer the option to individually segregate the collateral that it posts.

 

 


 

2. The initial margin collector is subject to regulation of liquidity risk.

 

3. Collateral collected as initial margin from the customer is treated as a customer asset, and is segregated from the initial margin collector's proprietary assets until re-hypothecated. Once re-hypothecated, the third party must treat the collateral as a customer asset, and must segregate it from the third party's proprietary assets. Assets returned to the initial margin collector after re-hypothecation must also be treated as customer assets and must be segregated from the initial margin collector's proprietary assets.

 

4. The collateral of customers that have consented to the re-hypothecation of their collateral must be segregated from that of customers that have not so consented.

 

5. Where initial margin has been individually segregated, the collateral must only be re-hypothecated for the purpose of hedging the initial margin collector's derivatives position arising out of transactions with the customer in relation to which the collateral was provided.

 

6. Where initial margin has been individually segregated and subsequently re-hypothecated, the initial margin collector must require the third party similarly to segregate the collateral from the assets of the third party's other customers, counterparties and its proprietary assets.

 

7. Protection is given to the customer from the risk of loss of initial margin in circumstances where either the initial margin collector or the third party becomes insolvent and where both the initial margin collector and the third party become insolvent.

 

8. Where the initial margin collector re-hypothecates initial margin, the agreement with the recipient of the collateral (i.e. the third party) must prohibit the third party from further re-hypothecating the collateral.

 

9. Where collateral is re-hypothecated, the initial margin collector must notify the customer of that fact. Upon request by the customer and where the customer has opted for individual segregation, the initial margin collector must notify the customer of the amount of cash collateral and the value of non-cash collateral that has been re-hypothecated.

 

10. Collateral must only be re-hypothecated to, and held by, an entity that is regulated in a jurisdiction that meets all of the specific conditions mentioned and in which the specific conditions can be enforced by the initial margin collector.

 

11. The customer and the third party may not be within the same group.

 

12. The initial margin collector and the third party must keep appropriate records to show that all the above conditions have been met.

 

With respect to the EU market the said ESAs' Second Consultation on margin RTS for non-cleared derivatives of 10 June 2015 adopted the following stance:

 

"The international standards do not generally allow re-use or re-hypothecation of initial margins and restrict the re-use to very specific cases. After considering the characteristics of the European Market, where the re-use and the re-hypothecation subject to the restrictions of the international standards would be of limited use the ESAs propose that the RTS do not include such possibility. As a special case, re-investment of initial margin posted in cash to secure the collateral posted seems to be common market practice and it should allowed as long as the investments are used for no other purpose than protecting the collateral poster."

 

This statement has been upheld in the ESA's Final Report of 8 March 2016.

 

 

Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty

 

Article 20

Treatment of collected initial margins


1. The collecting counterparty shall not rehypothecate, repledge nor otherwise reuse the collateral collected as initial margin.


2. Notwithstanding paragraph 1, a third-party holder may use the initial margin received in cash for reinvestment purposes.

 

Recital 35

 

The re-hypothecation, re-pledge or re-use of collateral collected as initial margins would create new risks for counterparties due to claims of third parties over the assets in the event of a default. Legal and operational complications could delay the return of the collateral in the event of a default of the initial collateral collector or the third party or even make it impossible. In order to preserve the efficiency of the framework and ensure a proper mitigation of counterparty credit risks, the re-hypothecation, re-pledge or re-use of collateral collected as initial margin should therefore not be permitted.

 

The draft RTS attached to the above ESA's Final Report of 8 March 2016 consequently included the provision with the following wording:

 

"Article 34

Treatment of collected initial margins

1. The collecting counterparty shall not re-hypothecate, re-pledge nor otherwise re-use the collateral collected as initial margin.

2. The requirement laid down in paragraph 1 shall be deemed to be met where a third party holder or custodian reinvests the initial margin received in cash."

 

The European financial market regulators referred, moreover, to the respondents' views that the difficulties in segregating cash could have resulted in a de-facto ban of cash as eligible collateral for initial margin.

 

The European financial market regulators consider, in order to avoid unwanted effects of the segregation requirements, the obligation concerning the re-use of collateral should exclude cash to the extent that the collected margin is reinvested to protect the liability that the counterparty collecting the collateral has towards the posting party.

 

Securities obtained from the (re)investment of cash collateral should be segregated and not re-used in line with the treatment of initial margin.

 

In the European regulators' opinion, this would appear to solve the issue that may inadvertently have resulted in a de facto ban of cash as initial margin, which was not the regulators' intention.

 

Article 20 and Recital 35 of the Commission Delegated Regulation 2016/2251 of 4 October 2016 reflect the analogous stance (see box). 

 

 

Phase-in implementation

 

 

The policy option adopted with respect to the implementation of margin rules under EMIR assumed the alignment with international standards and a phase-in period of four years. 

 

Key implementation dates 

 

- 15 December 2016 - date of publication in the Official Journal of the Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty


- 4 January 2017 - date of entry into force of the Regulation 2016/2251


- 4 February 2017 - implementation date for the exchange of variation margin for firms with a group aggregate average notional amount of non-centrally cleared derivatives above EUR 3 trillion

 

- 1 March 2017 - implementation dates for the exchange of variation margin for all other firms in scope

 

- 4 February 2017 through to 1 September 2020 - phase-in period for implementation of the exchange of initial margin

 

The intention was to give smaller participants more time in the transition period, i.e. more time to put into place all the necessary processes and systems. Additionally, by adopting the international standards, the policy accounts for the proportionality principle and sets a level playing field.

 

These requirements would privilege smaller players in terms of costs, but it also leaves smaller entities exposed to counterparty risk for this period.

 

The initial assumption was that the requirements should be phased-in over a period of four years starting from 1 December 2015 (being the scheduled date of entry into force of the RTS), however, these deadlines were delayed.

 

Earlier proposals set a phased implementation schedule for initial margin starting from December 1, 2015 for the largest derivatives users and extending through to December 2019. Variation margin requirements were scheduled to come into force for all covered entities on December 1, 2015.

 

Specifically, from 1 December 2015, market participants that have an aggregate month-end average notional amount of non-centrally cleared derivatives exceeding EUR 3.0 trillion were intended to be subject to the requirements from the outset while from 1 December 2019, any counterparty belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives exceeds EUR 8 billion was set to be subject to the requirements.

 

Market participants had been preparing extensively for those rules, but it was argued it would be nearly impossible to complete the relevant modifications by the original December 2015 effective date.

 

In the light of the circumstances the aforementioned framework of the Basel Committee on Banking Supervision of March 2015 had extended the start date for non-cleared derivatives margin rules (see also Press release of 18 March 2015 Basel Committee and IOSCO issue revisions to implementation schedule of margin requirements for non-centrally cleared derivatives).

 

RTS (as proposed by the aforementioned ESAs' Second Consultation on margin RTS for non-cleared derivatives of 10 June 2015 (JC/CP/2015/002)) fully aligned the requirements envisioned for the use in the EU under the EMIR framework with the BCBS and IOSCO standards (as amended in March 2015). Draft RTS envisioned that the requirements will enter into force on 1 September 2016 with the initial margin phased-in period of four years.  

 

However, these schedules in June 2016 had been once more called into question - due to legislative delays on the part of the EU institutions - see EU Collateral Rules Lag U.S. in $493 Trillion Swap Market.

 

Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty has been published in the EU Official Journal on 15 December 2016 and provides for the following key implementation dates (see details in Articles 35 - 40 of the said Regulation):

 


- 4 January 2017 - date of entry into force of the rules,

 

- 4 February 2017 - implementation date for the exchange of variation margin for firms with a group aggregate average notional amount of non-centrally cleared derivatives above EUR 3 trillion,

 

- 1 March 2017 - implementation dates for the exchange of variation margin for all other firms in scope,

 

- 4 February 2017 through to 1 September 2020 - phase-in period for implementation of the exchange of initial margin.

 

It is noteworthy, the initial wording of the Commission Delegated Regulation (EU) 2016/2251 contained an error in Article 37, which should contain a phase-in provision on variation margin requirements to intra-group transactions in a way analogous to initial margin requirements.

 

Commission Delegated Regulation (EU) of 20.1.2017 correcting Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty (C(2017) 149 final) has, therefore, been proposed.


The ESA's draft regulatory technical standards on which Delegated Regulation (EU) 2016/2251 is based, included the same phase-in period for both initial and variation margins.

 

The need for the correction was due to a technical error in the process leading to the adoption of Delegated Regulation (EU) 2016/2251 where the inclusion of the two paragraphs on the phase-in of the variation margin requirements to intra-group transactions was omitted.

 

The Explanatory Memorandum to the correcting draft Regulation gives the following overview of the content of the proposal:

"This Delegated Regulation corrects the Delegated Regulation (EU) 2016/2251 by adding two new paragraphs to Article 37, which is the Article specifying the phase-in schedule for variation margin requirements. These paragraphs are analogous to the existing Articles 36(2) and 36(3), with the result that where an intragroup transaction takes place between a Union entity and a third country entity, the exchange of variation margin will not be required until three years after entry into force of the Regulation where there is no equivalence decision for that third country. Where there is an equivalence decision, the requirements will apply either four months after the entry into force of the equivalence decision, or according to the general timeline, whichever is later."

 

 

 

Initial and variation margin phase-in pursuant to to Basel Committee on Banking Supervision, Board of the International Organization of Securities Commissions, Margin requirements for non-centrally cleared derivatives, March 2015

 

From 1 September 2016, any covered entity belonging to a group whose aggregate month-end average notional amount of non-centrally clear derivatives for March, April, and May of 2016 exceeds €3.0 trillion will be required to exchange variation margin when transacting with another covered entity (provided that it also meets that condition). The requirements to exchange variation margin between these covered entities only applies to new contracts entered into after 1 September 2016. Exchange of variation margin on other contracts is subject to bilateral agreement.

 

- From 1 March 2017, all covered entities will be required to exchange variation margin. Subject to the issue raised above, the requirement to exchange variation margin between covered entities only applies to new contracts entered into after 1 March 2017. Exchange of variation margin on other contracts is subject to bilateral agreement.

 

- The requirement to exchange two-way initial margin with a threshold of up to €50 million will be staged as follows.

 

- From 1 September 2016 to 31 August 2017, any covered entity belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives for March, April, and May of 2016 exceeds €3.0 trillion will be subject to the requirements when transacting with another covered entity (provided that it also meets that condition).

 

- From 1 September 2017 to 31 August 2018, any covered entity belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives for March, April, and May of 2017 exceeds €2.25 trillion will be subject to the requirements when transacting with another covered entity (provided that it also meets that condition).

 

- From 1 September 2018 to 31 August 2019, any covered entity belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives for March, April, and May of 2018 exceeds €1.5 trillion will be subject to the requirements when transacting with another covered entity (provided that it also meets that condition).

 

- From 1 September 2019 to 31 August 2020, any covered entity belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives for March, April, and May of 2019 exceeds €0.75 trillion will be subject to the requirements when transacting with another covered entity (provided that it also meets that condition).

 

- On a permanent basis (ie from 1 September 2020), any covered entity belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives for March, April, and May of the year exceeds €8 billion will be subject to the requirements described in this paper during the one-year period from 1 September of that year to 31 August of the following year when transacting with another covered entity (provided that it also meets that condition). Any covered entity belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives for March, April, and May of the year is less than €8 billion will not be subject to the initial margin requirements described in this paper.

 

- For the purposes of calculating the group aggregate month-end average notional amount for determining whether a covered entity will be subject to the initial margin requirements described in this paper, all of the group's non-centrally cleared derivatives, including physically settled FX forwards and swaps, should be included.

 

- Initial margin requirements will apply to all new contracts entered into during the periods described above. Applying the initial margin requirements to existing derivatives contracts is not required.

 

- Genuine amendments to existing derivatives contracts do not qualify as a new derivatives contract. Any amendment that is intended to extend an existing derivatives contract for the purpose of avoiding margin requirements will be considered a new derivatives contract.

 

 

 


 

 

 

CCP collateral under EMIR - requirement for fully-backed guarantees

 

 

Another aspect involved with collateral requirements under EMIR is CCP-eligible collateral, where the expired EMIR exemption made it - as from 15 March 2016 - much more costly for non-financial counterparties.

 

EMIR in Article 46(1) requires that bank guarantees, used as collateral for CCP clearing of power and gas derivatives, are fully backed by collateral that meets the following conditions:

- it is not subject to wrong way risk based on a correlation with the credit standing of the guarantor or the non-financial clearing member, unless that wrong way risk has been adequately mitigated by haircutting of the collateral;

- the CCP has prompt access to it and it is bankruptcy remote in case of the simultaneous default of the clearing member and the guarantor.

 

All CCPs were given a three year exemption in regards to EMIR Article 46(1) allowing non-financial participants to continue to use non-fully backed bank guarantee as collateral in respect to positions that were:


a) derivatives relating to electricity or natural gas produced, traded or delivered in the European Union;


b) derivatives relating to the transportation of electricity or natural gas in the European Union.

 

The three year exemption period lapsed on 15 March 2016 (Article 62 of the Regulation 153/2013). 

 

ESMA did not decide to further extend the grace period of three years for the non-financial firms' use of non-collateralised bank guarantees to cover transactions in energy derivatives cleared by CCPs (ESMA statement of 19 November 2015 (ESMA/2015/1750)).

 

The firms were, moreover, reminded that from 15 March 2016 CCPs authorised under EMIR need to fully collateralise commercial bank guarantees used to cover transactions in derivatives relating to electricity or natural gas produced.

 

Given that the exemption was not extended, the relevant requirements of Article 39 of the Commission Delegated Regulation (EU) No 153/2013 of 19 December 2012 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory technical standards on requirements for central counterparties and Annex I thereto are binding.

 

Article 39 of the Regulation 153/2013 stipulates that for the purposes of Article 46(1) of EMIR "financial instruments, bank guarantees and gold that meet the conditions set out in Annex I shall be considered as, highly liquid collateral".

 

Pursuant to point (h) in Section 2 of the Annex I to the Regulation 153/2013 a commercial bank guarantee, to be accepted as collateral under Article 46(1) EMIR must be fully backed by collateral that meets, among others, the following conditions:

 


(i) it is not subject to wrong way risk based on a correlation with the credit standing of the guarantor or the non- financial clearing member, unless that wrong way risk has been adequately mitigated by haircutting of the collateral;

 


(ii) the CCP has prompt access to it and it is bankruptcy remote in case of the simultaneous default of the clearing member and the guarantor.

 

 

 

EMIR Article 46(1) Collateral requirements

 

A CCP shall accept highly liquid collateral with minimal credit and market risk to cover its initial and ongoing exposure to its clearing members. For non-financial counterparties, a CCP may accept bank guarantees, taking such guarantees into account when calculating its exposure to a bank that is a clearing member. It shall apply adequate haircuts to asset values that reflect the potential for their value to decline over the interval between their last revaluation and the time by which they can reasonably be assumed to be liquidated. It shall take into account the liquidity risk following the default of a market participant and the concentration risk on certain assets that may result in establishing the acceptable collateral and the relevant haircuts.

 

Commission Delegated Regulation (EU) No 153/2013

 

Article 39 Financial instruments

 

For the purposes of Article 46(1) of Regulation (EU) No 648/2012, financial instruments, bank guarantees and gold that meet the conditions set out in Annex I shall be considered as, highly liquid collateral.

 

Article 62 Entry into force and application

 

This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union. Point (h) Section 2 of Annex I shall apply from three years after the date of entry into force of this Regulation in respect of transactions on derivatives, as referred to in points (b) and (d) of Article 2(4) of Regulation (EU) No 1227/2011 of the European Parliament and of the Council.

 

Annex I Section 2 Bank guarantees

 

1. A commercial bank guarantee, subject to limits agreed with the competent authority, shall meet the following conditions to be accepted as collateral under Article 46(1) of Regulation (EU) No 648/2012:

(a) it is issued to guarantee a non-financial clearing member;

(b) it has been issued by an issuer that the CCP can demonstrate to the competent authority that it has low credit risk based upon an adequate internal assessment by the CCP. In performing such assessment the CCP shall employ a defined and objective methodology that shall not fully rely on external opinions and that takes into consideration the risk arising from the establishment of the issuer in a particular country;

(c) it is denominated in one of the following currencies:
(i) a currency the risk of which the CCP can demonstrate to the competent authorities that it is able to adequately manage;
(ii) a currency in which the CCP clears contracts, in the limit of the collateral required to cover the CCP's exposures in that currency;

(d) it is irrevocable, unconditional and the issuer cannot rely on any legal or contractual exemption or defence to oppose the payment of the guarantee;

(e) it can be honoured, on demand, within the period of liquidation of the portfolio of the defaulting clearing member providing it without any regulatory, legal or operational constraint;

(f) it is not issued by:
(i) an entity that is part of the same group as the non-financial clearing member covered by the guarantee;
(ii) an entity whose business involves providing services critical to functioning of the CCP, unless that entity is an EEA central bank or a central bank of issue of a currency in which the CCP has exposures;

(g) it is not otherwise subject to significant wrong-way risk;

(h) it is fully backed by collateral that meets the following conditions:
(i) it is not subject to wrong way risk based on a correlation with the credit standing of the guarantor or the non- financial clearing member, unless that wrong way risk has been adequately mitigated by haircutting of the collateral;
(ii) the CCP has prompt access to it and it is bankruptcy remote in case of the simultaneous default of the clearing member and the guarantor.

(i) the suitability of the guarantor has been ratified by the board of the CCP after a full assessment of the issuer and of the legal, contractual and operational framework of the guarantee in order to have a high level of comfort on the effectiveness of the guarantee, and notified to the competent authority.

 

 

 

Another nuance is that after the MiFID II entry into force the EU Member States' discretion with respect to determining collateral available for CCPs will become further restricted.

 

Pursuant to Article 29(1) of MiFIR the operator of a regulated market "shall ensure that all transactions in derivatives that are concluded on that regulated market are cleared by a CCP."

 

It means, collateral applied for regulated markets trading will have to fulfil identical requirements to the ones already used for OTC markets' settlements under EMIR.

 

Hence, after the MiFID II entry into force derivatives trading settlements carried out on regulated markets will be governed by the aforementioned Article 46 of EMIR.

 

Given strict requirements CCPs are subject to under EMIR, this is likely to entail higher collateral costs as from 2018.

 

  

 

Article 29 MiFIR

Clearing obligation for derivatives traded on regulated markets and timing of acceptance for clearing

 

1. The operator of a regulated market shall ensure that all transactions in derivatives that are concluded on that regulated market are cleared by a CCP.

 

2. CCPs, trading venues and investment firms which act as clearing members in accordance with Article 2(14) of Regulation (EU) No 648/2012 shall have in place effective systems, procedures and arrangements in relation to cleared derivatives to ensure that transactions in cleared derivatives are submitted and accepted for clearing as quickly as technologically practicable using automated systems.

In this paragraph, 'cleared derivatives' means

(a) all derivatives which are to be cleared pursuant to the clearing obligation under paragraph 1 of this Article or pursuant to the clearing obligation under Article 4 of Regulation (EU) No 648/2012;

(b) all derivatives which are otherwise agreed by the relevant parties to be cleared.

 

3. ESMA shall develop draft regulatory technical standards to specify the minimum requirements for systems, procedures and arrangements, including the acceptance timeframes, under this Article taking into account the need to ensure proper management of operational or other risks.

ESMA shall have ongoing authority to develop further regulatory technical standards to update those in force if it considers that that is required as industry standards evolve.

ESMA shall submit the draft regulatory technical standards referred to in the first subparagraph to the Commission by 3 July 2015.

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first and second subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.

 

 

 

Perspectives

 

 

When it comes to potential modifications of the EMIR legal framework for the margins it is to be noted that the European Commission Proposal of May 2017 for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories (COM(2017)208) envisions new requirement that risk-management procedures for exchange of collateral of counterparties, or any significant change to those procedures, must be approved by supervisors before they are applied.

 

Recital 16 of the said draft Regulation reads:

 

"To avoid inconsistencies across the Union in the application of the risk mitigation techniques, supervisors should approve risk-management procedures requiring the timely, accurate and appropriately segregated exchange of collateral of counterparties, or any significant change to those procedures, before they are applied."

 

It is, moreover, envisioned that the supervisory procedures for the said approval will be stipulated in the regulatory technical standards in the form of the European Commission's delegated act developed by EBA, EIOPA and ESMA.

 

Referring, in turn, to the broader impacts of the respective regime, it is useful to observe that the higher collateral requirements on bilateral transactions introduced by the EMIR has attracted many entities towards central clearing, even though they do not fall within the scope of the EMIR mandatory clearing.

 

Commission Staff Working Document of 13 June 2017 provides an example of the Germany's KfW, a development bank exempt from EMIR, which in early April 2017 indicated that it would begin centrally clearing its euro-denominated interest-rate derivatives through Deutsche Boerse's Eurex Clearing platform.

 

KfW highlighted that the use of central clearing was justified both by the need to expand the number of its derivatives partners and by the benefits of central clearing from a risk management perspective.

 

This followed a similar move by Germany's sovereign debt agency, Finanzagentur, which began centrally clearing OTC interest-rate derivatives through Eurex in late 2016.

 

According to the European Commission Staff, this shift towards voluntary central clearing is likely to lead to further increases in the volume of transactions being managed by CCPs.

 

However, it is expected that even after all reform areas are implemented, some portion of the OTC derivatives market (specifically, non-standardised derivatives) will remain non-centrally cleared (OTC Derivatives Market Reforms Twelfth Progress Report on Implementation, Financial Stability Board, 29 June 2017, p. 12).

 

When it comes to the geographical reach of the respective requirements, the said FSB Tweflth Progress Report observes as follows (p. 15):

 

"The BCBS–IOSCO standards for margin requirements for NCCDs set out internationally agreed phase-in schedules for variation and initial margin requirements that began on 1 September 2016.

 

With respect to variation margin, implementation of the second and final phase began on 1 March 2017, with several jurisdictions granting forms of time-limited transitional relief or supervisory guidance until 1 September 2017.

 

With respect to initial margin, the 5-year phase-in period that began on 1 September 2016 will finish on 1 September 2020.


By September 2016 only Canada, Japan, and the US had margin requirements in force in accordance with the internationally agreed implementation schedule for these reforms.

 

Additional jurisdictions have implemented these requirements since then, with 14 jurisdictions that have comprehensive requirements in place as of end-June 2017.

 

Brazil, South Africa, and Korea expect to have such requirements in place by end-2017, and Mexico by end-2018."

 

The said Report mentions, moreover, six jurisdictions (Argentina, China, India, Indonesia, Russia, and Turkey) which do not report planning to have comprehensive margin requirements in place by end-2018.

 

 

 

 

 

 

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Last Updated on Friday, 14 July 2017 13:19
 

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