Shearman & Sterling LLP | Financial Regulatory Developments Focus | EU Final Secondary Legislation on Margin for Uncleared Derivatives
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  • EU Final Secondary Legislation on Margin for Uncleared Derivatives
    12/15/2016

    A Commission Delegated Regulation outlining Regulatory Technical Standards supplementing the European Market Infrastructure Regulation on risk mitigation techniques for uncleared OTC derivatives was published in the Official Journal. EMIR requires counterparties to uncleared OTC derivative transactions to implement risk mitigation techniques to reduce counterparty credit risk. These RTS prescribe the regulatory 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 outlining a broad list of securities eligible as collateral for the exchange of margins, such as sovereign securities, covered bonds, specific securitizations, corporate bonds, gold and equities. 

    The RTS provide for the largest counterparties to begin providing and collecting margin one month after the RTS enter into force. The requirements relating to variation margin will apply from one month after the RTS enter into force where both counterparties have, or belong to groups each of which has, an aggregate average notional amount of uncleared OTC derivatives above EUR 3,000 billion. For all other counterparties, the variation margin requirements will apply from the latest of 1 March 2017 or one month after the RTS enter into force.

    The requirements relating initial margin will be phased in according to the following timetable:
    • from one month after the RTS enter into force where both counterparties have, or belong to groups each of which has, an aggregate average notional amount of uncleared OTC derivatives above EUR 3,000 billion;
    • from September 1, 2017, where both counterparties have, or belong to groups each of which has, an aggregate average notional amount of uncleared OTC derivatives above EUR 2,250 billion;
    • from September 1, 2018, where both counterparties have, or belong to groups each of which has, an aggregate average notional amount of uncleared OTC derivatives above EUR 1,500 billion;
    • from September 1, 2019, where both counterparties have, or belong to groups each of which has, an aggregate average notional amount of uncleared OTC derivatives above EUR 750 billion;
    • from September 1, 2020, where both counterparties have, or belong to groups each of which has, an aggregate average notional amount of uncleared OTC derivatives above EUR 8 billion.
    The RTS entered into force on January 4, 2017. The Joint Committee of the European Supervisory Authorities submitted final draft RTS to the Commission on March 8, 2016. The Joint Committee is made up of the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority. On July 28, 2016, the European Commission requested the ESAs to amend the final draft RTS and submit a modified version for approval. The ESAs rejected many of the proposed amendments in an Opinion published on September 8, 2016, including certain amendments relating to concentration limits on initial margin for pensions scheme arrangements, the proposed amendments to the calculation of the threshold against non-netting jurisdictions, amendments relating to the treatment of covered bonds and the treatment of bilateral derivative contracts where a counterparty is a CCP, transactions with third country counterparties and the process for regulators on the exemption of intragroup derivative contracts. The Commission adopted the draft RTS on October 4, 2016.

    View the RTS
    TOPIC: Derivatives