Types of transaction

Clearing transactions

What categories of equity derivatives transactions must be centrally cleared and what rules govern clearing?

Unless an exemption or exclusion applies, the Regulation on OTC derivatives, central counterparties and trade repositories (648/2012) (EMIR) (as amended by the EMIR Refit Regulation) applies to all OTC derivative transactions (including equity derivatives) and imposes requirements for such transactions to be reported to regulators and either cleared or, if the clearing obligation does not apply to a particular class of derivative transaction, subject to other risk mitigation techniques (including, trade confirmation, portfolio reconciliation, daily marking-to-market, exchanging initial or variation margin and capital requirements for financial counterparties).

Currently, OTC equity derivatives are not a class of derivative to which the clearing obligation applies.

Exchange-trading

What categories of equity derivatives must be exchange-traded and what rules govern trading?

In the UK, equity derivatives are not currently required to be traded on an exchange. In line with the clearing obligation under EMIR, the Markets in Financial Instruments Directive (2014/65/EU)/Markets in Financial Instruments Regulation (600/2014) introduced a mandatory trading obligation for certain derivatives transactions. The mandatory trading obligation applies under similar circumstances to the clearing obligation and does not currently apply to equity derivatives.

Collateral arrangements

Describe common collateral arrangements for listed, cleared and uncleared equity derivatives transactions.

In respect of listed and cleared equity derivatives transactions, the parties will usually post both initial and variation margin.

Unless an exemption or exclusion applies, EMIR (as amended by the EMIR Refit Regulation) applies to all OTC derivative transactions (including equity derivatives) and imposes requirements for such transactions to be reported to regulators and either cleared or, if the clearing obligation does not apply to a particular class of derivative transaction, subject to other risk mitigation techniques (including, trade confirmation, portfolio reconciliation, daily marking-to-market, exchanging initial or variation margin and capital requirements for financial counterparties).

ISDA has published standard collateral documentation governing the provision of initial margin and variation margin, which are customarily used by market participants. Initial margin is provided by way of the grant of a security interest over securities held in custody in the name of the grantor, whereas variation margin is provided by way of title transfer collateral arrangement from one party to the other.

Exchanging collateral

Must counterparties exchange collateral for some categories of equity derivatives transactions?

In respect of listed and cleared equity derivatives transactions, the parties will usually post both initial and variation margin.

Unless an exemption or exclusion applies, EMIR (as amended by the EMIR Refit Regulation) applies to all OTC derivative transactions (including equity derivatives) and imposes requirements for such transactions to be reported to regulators and either cleared or, if the clearing obligation does not apply to a particular class of derivative transaction, subject to other risk mitigation techniques (including, trade confirmation, portfolio reconciliation, daily marking-to-market, exchanging initial or variation margin and capital requirements for financial counterparties).

ISDA has published standard collateral documentation governing the provision of initial margin and variation margin, which are customarily used by market participants. Initial margin is provided by way of the grant of a security interest over securities held in custody in the name of the grantor, whereas variation margin is provided by way of title transfer collateral arrangement from one party to the other.