The European Supervisory Authorities (collectively, the "ESAs") presented a revised and finalized report (the "Final Report") on Margin Regulatory Technical Standards ("RTS") to the European Market Infrastructures Regulation ("EMIR"). The revisions served to align with the Basel Committee on Banking Supervision ("BCBS") and IOSCO international framework. In addition, the ESAs provided a statement (the "Statement") on the impact of introducing benchmark fall-backs into legacy derivatives contracts.
The ESAs' amendments concerning bilateral margining and address:
the application of variation margin to FX contracts, by clarifying when a counterparty is not required to collect variation margin for physically-settled FX forward contracts and swap contracts (noting that the revised EMIR rules contain a recital to that effect, i.e., the detailed rules are being discussed with the European Commission);
the "initial margin phase-in" to align with the agreement of the BCBS and IOSCO which extended by one year the final implementation of the margin requirements. The ESAs noted that the draft RTS are still subject to endorsement by the European Commission and a non-objection period by the European Parliament and Council, meaning that legal certainty on the one-year extension proposal from the ESAs would be confirmed only after these steps and the publication in the Official Journal;
the intragroup derogation of transactions within groups with third-country entities by extending the derogation date to December 20, 2020; and
equity options derogations by extending the derogation date to January 4, 2021.
The Final Report has now been sent to the European Commission. The ESAs stated that they cannot disapply EU law, but (A) in view of some remaining steps as outlined in the Final Report and (B) in light of some of the soon approaching deadlines with regards to the bilateral margin requirements and the treatment of physically settled FX forward and swap contracts, intragroup contracts, equity option contracts, and the implementation of the last phase of the initial margin requirements, the ESAs expect competent authorities to apply the EU framework in a risk-based and proportionate manner until the amended RTS enter into force.
In the Statement, the ESAs recognized the possibility for interplay between (A) the introduction of fall-backs to strengthen contracts referencing certain benchmarks and (B) the EMIR requirement to exchange collateral for specific OTC derivative contracts. However, the ESAs emphasized that amendments made to outstanding uncleared OTC derivative contracts (also known as "legacy contracts"), intended to be used solely for the introduction of fall-backs, should not introduce new EMIR obligations into legacy contracts. The ESAs noted that it is important to provide legal certainty on this matter, considering that it may not be expressly stated in some jurisdictions. While further legal certainty is expected on this via legislative change, the ESAs stated that they do not expect competent authorities to prioritize their supervisory actions towards EMIR margining requirements (and thus the clearing obligation as well) arising as a result of the introduction of fall-backs in legacy contracts.