The European Supervisory Authorities have published final draft amending Regulatory Technical Standards on the application of EU bilateral margining requirements and the clearing obligation under the European Market Infrastructure Regulation in light of Brexit. The draft RTS are set out in two separate reports – one published jointly by the ESAs (covering the bilateral margining requirements for uncleared derivatives), the other published by the European Securities and Markets Authority (covering the clearing obligation for certain derivatives).
The ESAs originally proposed amended RTS on bilateral margining requirements in December 2019 to reflect new international requirements (proposed by the Basel Committee on Banking Standards and the International Organization of Securities Commissions). The ESAs subsequently amended those RTS in May 2020 following the BCBS/IOSCO decision to defer the implementation of the requirements for one year due to COVID-19. The extended deadlines are now approaching and material progress in implementation of these requirements has not been made. The latest version of the draft RTS (which replaces the May 2020 version) will therefore further extend the temporary exemptions from bilateral margining requirements for the following products and transactions:
- For single-stock or index equity options, a further three-year extension will be introduced, meaning that relevant requirements will not apply until January 4, 2024; and
- For intra-group transactions with a third-country entity (in the absence of an equivalence decision), a further 18 month extension will be introduced, meaning that relevant requirements will not apply until June 30, 2022.
The draft RTS also contain a permanent exemption (in the same form as set out in the May 2020 RTS) from bilateral margining requirements for physically settled foreign exchange forward and swap contracts, when entered into between institutions and end-users.
ESMA has separately proposed draft amending RTS on the clearing obligation under EMIR:
- For intra-group derivatives transactions conducted with a third-country entity, the exemption from the clearing obligation will be extended until June 30, 2022 (in line with the exemption for bilateral margining requirements); and
- Minimum remaining maturities' requirements under relevant Commission Delegated Regulations will be removed in alignment with the removal of the frontloading requirement under EMIR Refit.
The ESAs' and ESMA's draft RTS also anticipate that U.K. counterparties may elect to novate their derivatives contracts to EU entities after Brexit. The draft RTS would permit Brexit-related novations of contracts to occur without triggering bilateral margin and clearing obligations that have come into force since those contracts were originally entered into, provided the novations occur within 12 months of the application of the proposed RTS. The ESAs have stated that they do not consider a general grandfathering of legacy OTC derivative contracts between U.K. and EU counterparties to be appropriate, despite requests from stakeholders to this effect.
Both of the final draft RTS are subject to endorsement by the European Commission and non-objection by the European Parliament and Council. The ESAs expect EU national regulators to apply the existing rules in a risk-based and proportionate manner pending the entry into force of the amended RTS.