Proposed updates to the margin regulatory technical standards

The European Supervisory Authorities (ESAs) have published a final report on the draft regulatory technical standards (RTS) for the risk mitigation obligations under EMIR (the margin RTS).

The key updates made by the final report are:

• Initial margin – confirmation of phase 5 relief. An extension to the last phase of the implementation of the initial margin requirements, aligning deadlines with the revised timetable published by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) in July 2019. The ESAs propose that the phase 5 deadline of 1 September 2020 would apply to entities with an aggregate average notional amount of uncleared swaps (an AANA) greater than €50bn, and the phase 6 deadline of 1 September 2021 would apply to entities with an AANA greater than €8bn. See our earlier blog post on the BCBS/IOSCO statement.
• Exemption for physically-settled FX forwards and swaps. A formal confirmation of the exemption from the mandatory exchange of variation margin in respect of physically-settled FX forwards and swaps between institutions and end-users where at least one of the counterparties is not a credit institution or a MiFID investment firm (or any third country equivalent).
• Exemption for single-stock equity or index options. An extension to the temporary exemption from margin requirements for single-stock equity options and index options, until 4 January 2021. The ESAs state that this is in order to mitigate counterparty credit risk whilst avoiding scope for regulatory arbitrage.
• Exemption for intragroup OTC derivatives. A temporary exemption from margin requirements for intragroup transactions, until 21 December 2020. The ESAs state that this deferral is necessary to ensure that such intragroup OTC derivative contracts are not subject to the EMIR clearing or bilateral margin requirements before the adoption of the relevant equivalence decisions.

The proposals are now subject to acceptance by the European Commission, European Parliament and the Council. There is not enough time for the proposals to be approved by these bodies prior to the expiration of the temporary exemptions in January 2020, and there will therefore be a period of regulatory forbearance until the proposals are approved.

The ESAs expect competent authorities to apply the EU framework in a risk-based and proportionate manner until the amended RTS enter into force.