On 15 December 2016 the delegated regulation on margin (RTS) was published in the Official Journal of the European Union. The RTS covers both initial and variation margin, but this update focuses solely on the variation margin requirements which, for most of those affected, come into force on 1 March 2017.
The obligation to post margin is one of the risk mitigation techniques under EMIR which are designed to mitigate the risks associated with over the counter (OTC) derivatives transactions that are not cleared by a central counterparty.
Who is affected by the RTS?
Financial counterparties (such as investment funds and pension schemes) and non-financial counterparties that exceed the clearing threshold who have uncleared OTC derivatives transactions are within the scope of the RTS.
When do the new rules on variation margin apply?
For all but the largest users of derivatives (those that are part of a group which collectively has an aggregate average notional amount of uncleared OTC derivatives transactions above €3,000 billion) the new rules come into force on 1 March 2017.
The new rules only need to be applied to uncleared OTC derivatives transactions entered into on or after 1 March 2017 but if an existing transaction is materially amended counterparties will need to consider whether this would require variation margin to be exchanged in respect of that transaction.
What steps must be taken?
Affected parties will need to put in place documentation to allow for the transfer of variation margin or amend their existing documentation (such as a credit support annex) to ensure compliance with the new rules. Points to consider include:
- Is variation margin currently exchanged on a bilateral basis?
- Are the types of variation margin currently posted permitted under the RTS?
- Are the haircuts applied consistent with the requirements of the RTS?
- Are valuations to assess whether variation margin needs to be transferred carried out with sufficient regularity?
- Does any Minimum Transfer Amount need to be reduced?
There are a variety of ways in which the necessary documentation can be put in place or amended. There is an ISDA published protocol that can be adhered to or a bilateral agreement can be negotiated.