UK Regulators Propose Changes to Margin Requirements for Non-Centrally Cleared Derivatives

The U.K. Prudential Regulation Authority and Financial Conduct Authority have issued a joint consultation paper on proposals to amend the U.K. Binding Technical Standards on margin requirements for non-centrally cleared derivatives (i.e., the U.K. version of Commission Delegated Regulation (EU) 2016/2251 on risk mitigation techniques). The BTS on risk mitigation techniques were onshored for Brexit, and the PRA and FCA are responsible for setting the requirements and are empowered to make adjustments, subject to approval from HM Treasury. The BTS supplement the European Market Infrastructure Regulation as onshored for Brexit, which requires counterparties to uncleared OTC derivative transactions to implement risk mitigation techniques to reduce counterparty credit risk. The BTS 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. Responses to the consultation may be submitted until October 12, 2022. The regulators will consider the feedback and then send their proposed draft amending BTS to HM Treasury for approval. It is proposed that the changes would take effect on publication by the regulators of the revised BTS.

The regulators are proposing to amend the list of instruments eligible to be used as collateral for meeting the margin requirements. Currently, only U.K. UCITS may be used as collateral. EEA UCITS are eligible, but only until December 31, 2022. The proposal is the addition to the list of third-country funds, meaning that the list will expand beyond EEA UCITS. However, to be eligible as collateral, a third-country fund must satisfy certain conditions, including investing only in government securities and cash, and the firms accepting the collateral must carry out a risk assessment of the fund's legal framework.

Another proposal is to introduce a fall-back transitional provision for firms that would otherwise come into immediate scope of the margin requirements for the first time. The transitional period is intended to give firms time to establish compliant margin arrangements.

Finally, the PRA is proposing to amend the scope of application of the margin requirements to exempt trades with CCPs that are recognized by the Bank of England where those trades link to the CCP's activities as set out in its recognition order. Trades that are not so linked to those activities will be subject to the margin requirements. As currently formulated, there is an exemption from the margin requirements for regulated banks that also have a CCP licence (adopted from the EU Technical Standards). However, unlike in the EU where there are CCPs that hold bank licences, (e.g., several EU CCPs are required to have bank licences under national member state laws), there are no U.K. CCPs operating under this model.

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