The European Commission has made a number of substantive changes to the draft Regulatory Technical Standards ("RTS") on risk mitigation techniques for over-the-counter (OTC) derivative contracts not cleared by a central counterparty (the "draft RTS").
As set out in our previous briefings (here and here), EMIR requires financial counterparties and non-financial counterparties that are above the clearing threshold to use risk mitigation techniques for non-centrally cleared OTC derivatives transactions. On 8 March 2016 the European Supervisory Authorities ("ESAs") jointly submitted draft RTS to the European Commission regarding:
- the risk-mitigation procedures, including the levels and type of collateral and segregation requirements;
- the procedures concerning the application of intragroup exemptions; and
- the criteria for the identification of practical or legal impediments to the prompt transfer of own funds and repayment of liabilities between counterparties belonging to the same group.
The draft RTS provided for a staged implementation, with different phasein periods applying for the various requirements starting from 1 September 2016.
On 28 July 2016 the European Commission indicated in a letter to the ESAs that it intends to endorse the draft RTS with amendments and published an amended version of the draft RTS ("amended draft RTS"). It subsequently published an addendum containing a number of clarifications on the amended draft RTS.
The amended draft RTS include a new recital justifying the phase-in of margin requirements for equity options. In addition, they clarify that:
- Union counterparties wishing to obtain an intragroup transaction exemption may submit the relevant application after the RTS enter into force;
- for the purpose of cash initial margin segregation, a custodian in an equivalent non-EU jurisdiction under the Capital Requirements Regulation can be used (the draft RTS limit this to EU custodians only); and
- variation margin requirements concerning in-scope FX derivative contracts will start to apply from the date of application of the relevant Delegated Act under the Markets in Financial Instruments Directive II framework as opposed to the date of entry into force of the delegated Regulation.
The amended draft RTS also contain new requirements regarding the concentration limits for pension scheme arrangements. According to the European Commission, while it supports the ESA's view that concentration risk must be adequately managed, it considers that this can best be achieved by replacing the concentration limits in the draft RTS with specific management risk tools to monitor and address potential risks.
As the implementation dates set out in the draft RTS are no longer viable, the Commission is proposing an adjusted implementation timeline with the first wave of the initial margin requirements applying from one month after the date of entry into force of the RTS, which is likely to be February/March 2017.
The ESAs now have 6 weeks in which they may amend the draft RTS on the basis of the Commission's proposed amendments and resubmit it in the form of a formal opinion to the Commission. The draft RTS will then have to be considered by the European Parliament and the Council of Ministers. They will apply from one month after they enter into force.