On March 8, 2016, the European Supervisory Authorities published final draft regulatory technical standards on risk-mitigation techniques, including details on specific operational procedures, for OTC-derivative contracts not cleared by a Central Counterparty. Under the European Market Infrastructure Regulation, counterparties to uncleared OTC derivative transactions are required to implement risk mitigation techniques to reduce counterparty credit risk. These draft 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. The draft RTS outlines a broad list of securities eligible as collateral for the exchange of margins, such as sovereign securities, covered bonds, specific securitisations, corporate bonds, gold and equities. The criteria for eligible securities include diversification of collateral and the removal of wrong-way risk. The draft RTS also provides procedures relating to the treatment of intragroup derivative contracts by counterparties, including delayed implementation of the requirements for intra-group agreements with counterparties in “non-equivalent” jurisdictions. There will also be an exemption for transactions with non-financial counterparties below the clearing threshold, wherever in the world they are located. The requirements for initial margin will be phased in annually over four years from September 1, 2016, initially for the largest counterparties, those counterparties who have or belong to groups, each of which that has an aggregate average notional amount of non-centrally cleared derivatives that is above EUR 3 trillion. The aggregate average notional amount for applicable counterparties will then decrease by EUR .75 trillion for the next three years: 2.25 trillion, 1.5 trillion and then .75 trillion. Finally, after four years from the date of entry into force, the requirements will apply to any counterparty belonging to a group whose aggregate average notional amount of non-centrally cleared derivatives exceeds EUR 8 billion. The requirements for variation margin will be binding upon major market participants from September 1, 2016, with all other counterparties from March 1, 2017.
The draft final RTS is available at: http://www.eba.europa.eu/documents/10180/1398349/RTS+on+Risk+Mitigation+Techniques+for+OTC+contracts+%28JC- 2016-+18%29.pdf.