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ESAs Propose Amendments to EMIR Uncleared Margin Rules
Draft Regulatory Technical Standards
On 5 December 2019 the European Supervisory Authorities (ESMA, EIOPA and the EBA, the “ESAs”) published a final report and draft Regulatory Technical Standards (“RTS”) on various amendments to the European Commission’s Delegated Regulation (EU) No 2016/2251 on risk mitigation techniques for non-cleared OTC derivatives (the “Uncleared Margin Rules” or “UMR”). The ESAs developed the RTS under Article 11(15) of the European Market Infrastructures Regulation (“EMIR”). The proposed RTS would amend the UMR to take account of the international framework for margin rules agreed by the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO).
The Proposed Amendments
In line with previous clarifications, the report notes that counterparties are not required to establish operational and legal initial margin arrangements prior to exceeding the €50 million credit support threshold below which non-affiliated counterparties are not obliged to exchange initial margin. The ESAs therefore consider that there is no need to amend the UMR to make this explicit.
The UMR currently provide that from 1 September 2020 in-scope entities with an aggregate average notional amount (“AANA”) of non-centrally cleared derivatives greater than €8 billion (so-called “Phase 5” entities) will be subject to the initial margin exchange requirements. The RTS would bi-furcate Phase 5 by increasing the Phase 5 AANA threshold to €50 billion, and introducing a new “Phase 6” whereby counterparties with an AANA above €8 billion but below €50 billion will be subject to the initial margin requirements from 1 September 2021.
The RTS would also amend the UMR to clarify that counterparties other than credit institutions or investment firms may provide in their risk management procedures that variation margin is not required to be posted or collected for either physically settled foreign exchange forward contracts or physically settled foreign exchange swap contracts. This is in line with previous proposed amendments to the EMIR regime, and Recital 21 of EMIR Refit.
To align with the exemption from the EMIR clearing obligation, application of the bilateral margin requirements relating to intragroup transactions with a third country entity in the absence of an equivalence decision will be extended from 4 January 2020 until 21 December 2020.
Finally the RTS would extend the temporary exemption from the UMR for single-stock equity options or index options from 4 January 2020 until 4 January 2021.
The ESAs have submitted the draft RTS to the European Commission for endorsement in the form of a Commission Delegated Regulation. Following the endorsement, the RTS will be sent to the European Parliament and the European Council for their review.
The report notes that the ESAs cannot disapply EU law, and therefore the UMR remain in force for the duration of the RTS’s legislative process. However, the report notes that the ESAs expect competent authorities to apply the EU framework in a risk-based and proportionate manner until the RTS enter into force.