On September 8, 2016, the Joint Committee of the ESAs published an Opinion on the European Commission's proposed amendments to the final draft RTS on risk mitigation techniques for uncleared OTC derivatives under the European Markets Infrastructure Regulation. The Joint Committee is made up of the EBA, ESMA and the European Insurance and Occupational Pensions Authority. The Opinion includes a revised version of the final draft RTS. Under the European Market Infrastructure Regulation, counterparties to uncleared OTC derivative transactions are required to implement risk mitigation techniques to reduce counterparty credit risk. One of these risk mitigation techniques is the exchange of initial and variation margin in relation to uncleared OTC derivatives. These RTS provide greater detail of the requirements such as the margin amounts to be posted and collected, the methodologies by which the minimum amount of initial margin and variation margin should be calculated and the list of securities which are eligible as collateral and the ways in which margin should be segregated as well as various product and structural-based exemptions.
On July 28, 2016, the European Commission requested the ESAs to amend the final draft RTS and submit a modified version for approval. The Commission's proposed changes to the RTS, included that cash initial margin may be held with EU credit institutions and their third country equivalents, the timing of applications for intragroup exemptions and the effective date of the requirements for FX derivatives, which will be after the implementation of the MiFID II framework. The Commission proposed to delay implementation of the EU margin for uncleared swaps rules, which were due to apply from September 1, 2016. This delay means that the EU rules will not be implemented in line with the international standards and will apply after the equivalent rules in other jurisdictions, including the USA and Japan.
The ESAs have rejected certain amendments relating to concentration limits on initial margin for pensions scheme arrangements. The Commission also proposed amendments to the calculation of the threshold against non-netting jurisdictions, but the ESAs have concluded that no change should be made as no new supporting evidence has been presented to warrant the change. The ESAs also noted that the treatment of covered bonds in the final draft RTS was designed pursuant to EMIR and they have maintained that no substantive changes as per the Commission’s proposals should be made. The ESAs have also rejected amendments regarding 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 ESAs are also proposing some non-substantive amendments, including the introduction of a recital containing the reasoning for a delayed phase-in of the requirements for equity options and clarification on the process around the intragroup exemption.
As the ESAs have submitted the draft RTS with amendments inconsistent with those proposed by the Commission, the Commission may now adopt RTS with the proposed amendments it considers relevant, or reject any amendments accordingly. The European Parliament and the Council of the European Union will have three months to object to the RTS from the date the Commission adopts it, which is expected to take place on October 4, 2016.
The Commission’s letter is available at: http://ec.europa.eu/finance/financial-markets/docs/derivatives/160728-letter-esas_en.pdf, the Commission’s adopted RTS is available at: http://ec.europa.eu/finance/financial-markets/docs/derivatives/160728-delegatedregulation_en.pdf, the annex to the adopted RTS is available at: http://ec.europa.eu/finance/financialmarkets/docs/derivatives/160728-delegated-regulation-annex_en.pdf, the addendum to the adopted RTS is available at:
http://ec.europa.eu/finance/financial-markets/docs/derivatives/160728-delegated-regulation-addendum_en.pdf and the ESA’s final draft RTS is available at: