Smaller market participants are facing considerable operational challenges in meeting the EMIR variation margin ("VM") requirements. The European Supervisory Authorities, or ESAs, and the Central Bank of Ireland have recently published statements indicating that they are aware of these challenges and are prepared to take them into account for supervisory purposes.
Pursuant to EMIR (here), certain derivative market participants (Financial Counterparties (FCs) and certain nonfinancial counterparties (NFC+s)) must exchange initial margin (IM) and VM in respect of most uncleared OTC derivatives. Commission Delegated Regulation 2016/2251 (here) sets out the applicable requirements in this regard. In scope entities with, or belonging to groups with, over 3 trillion of uncleared OTC derivatives have been subject to both the IM and VM requirements since 4 February 2017. Other in scope entities were required to exchange VM from 1 March 2017, with the IM requirements being phased in between 1 September 2017 and 1 September 2020. See our related briefing (here).
On 7 February 2017, ISDA, together with a number of other trade bodies requested a number of relevant regulators to consider regulatory forbearance in respect of the 1 March VM compliance deadline (see here).
On 23 February 2017 the three ESAs, namely the European Banking Authority, European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority published a statement confirming that there would be no delay to the 1 March deadline and that none of the ESAs and the EMIR national competent authorities (NCAs) had any formal power to disapply directly applicable EU legal text (eg by way of a "no-action letter" or "white-letter ruling"). However, the ESAs went on to acknowledge the difficulties that smaller market participants were experiencing in achieving EMIR VM compliance by the 1 March deadline and noted the risk-based approach taken by NCAs to enforcing legislation. In particular, they noted that NCAs could, on a case by case basis, take into account the size of relevant exposures, counterparty default risk and the steps being taken by in scope entities to achieve full compliance and contain the risk of non-compliance (eg operation of non-EMIR VM compliant collateral arrangements).
The Central Bank of Ireland updated its EMIR Q&A to address this issue on 24 February 2017. According to the updated Q&A (here), while the Central Bank expects all in scope entities to make "every effort" to achieve full compliance at the "earliest possible date", it recognises that there are operational challenges in meeting the 1 March 2017 deadline and applies a riskbased approach to the supervision of the adequacy of processes adopted by entities. The Central Bank confirmed that it did not expect in scope entities to unwind or avoid transactions that they would have otherwise entered into in circumstances where there is evidence of robust planning to achieve compliance at the earliest possible time.