The European Supervisory Authorities have published joint draft Regulatory Technical Standards amending the existing EU risk mitigation techniques for uncleared OTC derivatives, together with a joint statement on the introduction of fallbacks in OTC derivative contracts and the requirement to exchange collateral. The draft RTS amend existing bilateral margin requirements made under the European Market Infrastructure Regulation, in line with certain clarifications made to the related international framework by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions. The draft RTS were originally published on December 5, 2019, but have been republished with one additional amendment. The Final Report has been submitted to the European Commission for endorsement.
The ESAs have also published a joint statement on the interaction between new fallback reference rates that are being introduced into some OTC derivative contracts and the requirement to exchange collateral. The statement makes clear that amendments made to outstanding uncleared OTC derivative contracts to introduce fallbacks for existing reference rates should not create new obligations on such contracts, meaning margining requirements would not apply to these contracts if they did not do so prior to the introduction of the fallbacks.
In 2015, the implementation of the Basel Committee and IOSCO's framework for margin requirements for non-centrally cleared derivatives began. The framework was prompted by the perceived need for transparency in the OTC derivatives markets in the wake of the 2007-2008 financial crisis. A final framework establishing margin requirements for OTC derivatives was published in March 2015 and began to be phased in from September 2016. In March 2019, the Basel Committee and IOSCO published a joint statement revising certain aspects of their margin requirements, and in July 2019 agreed to extend the implementation period of certain of the margin requirements.
The ESAs' revised draft RTS take into account these recent statements and make the following proposed changes to EU margin requirements in order to incorporate each of the Basel Committee's and IOSCO's amendments:
- a one-year extension of the last phase of the implementation of the initial margin requirements, which applies to entities with an aggregate average notional amount of non-centrally cleared derivatives greater than €8 billion but below €50 billion, meaning the margin requirements will not apply to these entities until September 1, 2021;
- expanding the scope of margin requirements to cover physically settled foreign exchange forwards and swaps for the most "systemically important" parties; these expanded margin requirements will not apply where one of the counterparties is not a credit institution or investment firm as defined under the revised Capital Requirements Regulation, or an equivalent third country entity;
- a temporary extension of the exemption from margin requirements for single-stock equity options and index options, meaning the margin requirements will not apply to these entities until January 4, 2021;
- a temporary extension of the exemption from margin requirements for counterparties that have an aggregate average notional amount of non-centrally cleared OTC derivatives above €3,000 billion, meaning the margin requirements will not apply to these entities until December 21, 2020; and
- a temporary extension of the exemption from margin requirements for intragroup transactions with a third-country entity that does not benefit from an EMIR equivalence decision, meaning the margin requirements will not apply to these entities until at least December 21, 2020.
The Basel Committee and IOSCO also issued a clarification in March 2019 that firms that do not meet the €50 million initial margin threshold will not be required to establish the operational or legal arrangements required of those that do meet the threshold. However, as this clarification did not make any changes to the international framework, the ESAs' RTS do not incorporate any changes on this basis.