Following recent changes to EU law regarding derivatives margin and clearing and indications by the UK’s Prudential Regulation Authority (the PRA) that it intends to align aspects of UK law with these changes, the PRA and the UK’s Financial Conduct Authority (the FCA) have published a consultation paper proposing the following changes to the UK’s derivatives margin rules:

  • changing the implementation dates and thresholds for the phase-in of initial margin (IM) requirements. In line with the recent changes to EU law and the revised BCBS and IOSCO timeline, IM phase-five would be delayed to 1 September 2021 and IM phase-6 would be delayed to 1 September 2022;
  • limiting the required exchange of variation margin (VM) for physically settled foreign exchange forwards and swaps to specified counterparties only. The requirement to exchange VM would only apply as between firms that are “institutions” as defined in Article 4(1)(3) of the Capital Requirements Regulation (as it forms part of UK retained law) (or, for third-country firms, would meet the definition of “institution” if established in the UK); and
  • extending the temporary exemption for single-stock equity options and index options until 4 January 2024. In particular, the PRA and FCA note that “while there are good reasons for such contracts to be subject to margin, on balance, in light of the international position, at this stage the PRA and FCA consider that a further extension to the temporary exemption is warranted.”

In addition, the consultation paper highlights that it should be read alongside:

  • the FCA’s transitional regime for intragroup exemptions from margin. Under Part 5 of the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019, the FCA has implemented a temporary regime for intragroup exemptions, which provides a transitional period of up to three years from Friday 1 January 2021 for intragroup transactions between UK firms and their third-country group entities where no equivalence determination has been made; and
  • the BCBS and IOSCO statement on documentation requirements for counterparties below the €50m IM threshold.

Next steps and timing

The consultation closes on Wednesday 19 May 2021 and the PRA and FCA have invited feedback on the proposals. PRA-regulated firms should address any comments or enquiries to CP6_21@bankofengland.co.uk. FCA solo-regulated firms should address any comments or enquiries to cp21-07@fca.org.uk. Other respondents should submit responses to both authorities.

The proposed changes would be effective on publication of the final technical standards instrument, which is planned for Thursday 1 July 2021.

Please speak to your usual Macfarlanes contact if you have any questions.