EU Delays Derivatives Margin for Brexit Novations

An EU Commission Delegated Regulation amending Regulatory Technical Standards on the application of EU bilateral margining requirements under the European Market Infrastructure Regulation has been published in the Official Journal of the European Union. The amendments to the RTS further extend the temporary exemptions from bilateral margining requirements for the following products and transactions:
 

• for single-stock or index equity options, a further three-year extension will be introduced, meaning that relevant requirements will not apply until January 4, 2024; and
• for intra-group transactions with a third-country entity (in the absence of an equivalence decision), a further 18 month extension has been introduced, meaning that relevant requirements will not apply until June 30, 2022.

The amendments permit Brexit-related novations of contracts to occur without triggering initial margin obligations.  The initial margin obligation for such novations is deferred until February 18, 2022, provided the obligation was not triggered by February 18, 2021 and the contracts are novated for the sole purpose of replacing the counterparty established in the U.K. with a counterparty established in a Member State. Similar provisions have been enacted for the clearing obligation.

In particular, for intra-group derivatives transactions conducted with a third-country entity, the exemption from the clearing obligation will be extended until June 30, 2022. The EU has failed to determine whether many third countries are "equivalent" for intra-group exposure purposes, meaning that another delay is necessary to avoid penal charges on such exposures for EU financial groups.

In addition, the anticipated revised phase-in of the requirements to post and collect initial margin have been implemented. Therefore, the initial margin requirements for covered entities belonging to a group whose aggregate month-end average notional amount (AANA) of non-centrally cleared derivatives exceeds:
 

• €8 billion, will apply from September 1, 2022; and
• €50 billion, will apply from September 1, 2021.

Finally, a permanent exemption is introduced from bilateral margining requirements for physically settled foreign exchange forward and swap contracts, when entered into between institutions and end-users.

The amending Regulation is directly applicable across the EU from February 18, 2021.

View the amending Commission Delegated Regulation.

View details of the amendments to the clearing obligation.

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