On June 10, 2015, the European Supervisory Authorities published their second consultation on draft regulatory technical standards on risk mitigation techniques for OTC derivatives not cleared by a CCP. Under the European Market Infrastructure Regulation, counterparties to uncleared OTC derivative transactions are required to implement risk mitigation techniques to reduce counterparty credit risk. The draft RTS cover the regulatory amount of initial and variation margin to be posted and collected, the collateral eligible for exchange of margins, operational procedures, a procedure for intragroup exemptions to be granted and provisions for the specific treatment of certain products, such as physically settled FX swaps. This second consultation follows the proposals published in April 2014 which were extensively commented upon and seek to address the issue of how the requirements would impact firms subject to differing requirements across jurisdictions.
The second consultation seeks feedback on a narrower set of issues, including: (i) the treatment of non-financial counterparties established outside of the EU; (ii) the timing of calculation, call and delivery of initial and variation margin; (iii) whether any unintended consequences might arise due to the design or implementation of initial margin models; (iv) the requirements for trading relationship documentation; (v) the treatment of FX mismatch between collateral and OTC derivatives; (vi) whether allowing cash posted as initial margin to be re-invested will alleviate concerns that the ban on rehypothecation would result in a de facto ban of cash as initial margin; (vii) whether replacing the requirement to obtain legal opinions regarding the segregation of initial margin with a requirement for counterparties to conduct an internal assessment of the reliability and enforceability of agreements in each jurisdiction is sufficient to ease the burden on counterparties; and (viii) the revised regime for units in UCITS as eligible collateral. Responses to the consultation are due by July 10, 2015. The ESA’s propose to follow the revised international timeline adopted in March this year for implementation of the framework, proposing that the requirements enter into force on September 1, 2016 with margin requirements being phased in from that date until September 1, 2020.
The consultation paper is available at: http://www.eba.europa.eu/documents/10180/1106136/JC-CP-2015- 002+JC+CP+on+Risk+Management+Techniques+for+OTC+derivatives+.pdf