European Supervisory Authorities Publish Final Draft Technical Standards Amending Margin Requirements for Non-Centrally Cleared OTC Derivatives

The Joint Committee of the European Supervisory Authorities has published a final report containing final draft Regulatory Technical Standards amending the requirements for risk-mitigation techniques for uncleared OTC derivative contracts where those contracts relate to physically settled FX forwards. The European Market Infrastructure Regulation requires counterparties to uncleared OTC derivative transactions to implement risk mitigation techniques to reduce counterparty credit risk. The RTS prescribe required margin amounts to be posted and collected and the methodologies by which the minimum amount of initial margin and variation margin should be calculated, as well as listing securities eligible as collateral, such as sovereign bonds, covered bonds, some securitization instruments, corporate bonds, gold and some equities. The variation margin requirements have applied to all counterparties since March 1, 2017 although they will only be applicable for physically-settled FX forwards from January 3, 2018.

Market participants have experienced difficulties in exchanging VM, in particular, in transactions with end-users. In addition, the EU's implementation of the international standards on margin exchange is more extensive than that in some other jurisdictions.

The ESAs are proposing to amend the RTS to align the treatment of VM for physically-settled FX forwards with the supervisory guidance applicable in other key jurisdictions. The effect of the change will be that the requirement to exchange VM for physically settled FX forwards will capture only transactions between credit institutions and investment firms, rather than all counterparties within the scope of EMIR.

The ESAs recognize that, due to the EU legislative process, the amended RTS are likely to enter into force after January 3, 2018. The ESAs therefore recommend that, prior to the amended RTS coming into force, national regulators should apply the EU framework in a risk-based and proportionate manner for transactions between credit institutions or investment firms and other counterparties.

View the final report and proposals to amend the RTS.