Following the publication of Commission Delegated Regulation (EU) 2021/236 (the Margin Amendment RTS) and Commission Delegated Regulation (EU) 2021/237 (the Clearing Amendment RTS) in the Official Journal yesterday, certain aspects of derivatives margin and clearing are changing from today.
The key changes in the Margin Amendment RTS and Clearing Amendment RTS include:
- formal extension of the initial margin phase-in deadlines to 1 September 2021 for phase-five and to 1 September 2022 for phase-six;
- formalised exemption from variation margin requirements for physically settled FX forwards where one of the counterparties is not (i) a “credit institution” (as defined in article 4(1)(1) of MiFID), (ii) an “investment firm” (as defined in article 4(1)(2) of MiFID), or (iii) a third country equivalent of (i) or (ii), and a new exemption on the same lines for physically settled FX swaps;
- extension of the temporary exemption from margin requirements for single-stock equity options and index options until 4 January 2024;
- extension of the temporary exemption from margin requirements for intragroup transactions between EEA and non-EEA counterparties (where no equivalence decision has been adopted) until 30 June 2022;
- grandfathered margining requirements for certain trades novated from UK counterparties to EEA counterparties between 1 January 2021 and the later of (i) the application of the relevant margin requirements, or (ii) 1 January 2022;
- extension of the temporary exemption from the clearing obligation for certain intragroup transactions between EEA and non-EEA counterparties (where no equivalence decision has been adopted) until 30 June 2022; and
- grandfathered clearing obligation for trades novated from UK counterparties to EEA counterparties until 18 February 2022.
Please see our note on these changes for further guidance.
In respect of UK law, as these changes came into force after the end of the Brexit transition period, they do not form part of retained law in the UK. However, in particular in respect of points 2 and 3, above, the Bank of England noted on pages 19-20 of PRA Policy Statement PS27/20 that the Prudential Regulation Authority and the Financial Conduct Authority are considering making similar changes to UK law and, in the meantime, will exercise forbearance given the differences between EU and UK law.
Please speak to your usual Macfarlanes contact if you have any questions.
Many counterparties enter into physically settled foreign exchange forward and physically settled foreign exchange swap contracts to hedge their risks associated with their currency risk exposures. In view of the specific risk profile of these contracts and the need for international regulatory convergence, it is appropriate to restrict the mandatory exchange of variation margin for those contracts between the most systemic counterparties.