Under the European Market Infrastructure Regulation (Regulation 648/2012/EC) ("EMIR"), the two-way exchange of variation margin for physically settled forward foreign exchange contracts ("FX Forwards") traded between "Financial Counterparties" was due to come into effect on 3 January 2018. 

As highlighted in our previous update, legislative changes have been proposed to EMIR to limit the scope of this variation margin requirement to credit institutions and investment firms (i.e. excluding UCITS and AIFs).

However, these changes are still being finalised and are not going to be in place on 3 January 2018.

Variation Margin Challenges

To date, industry had been increasingly concerned with the implications of introducing variation margin requirements for FX Forwards. In a funds context, this was particularly the case for hedged share classes (where the class typically does not represent a separate pool of assets, thus presenting distinct operational and risk challenges for the posting of collateral).

On 3 October 2017 EFAMA wrote to the European authorities highlighting its concerns around the requirement for funds to post variation margin for FX Forwards. The letter requested a deferral of the introduction of these requirements and a reconsideration of their scope.

Key Changes to EMIR

The European Supervisory Authorities1  (the "ESAs") issued draft regulatory technical standards ("RTS") on 19 December 2017, amending EMIR to limit the scope of the requirement to exchange variation margin for FX forwards to transactions concluded between credit institutions and investment firms (thus excluding UCITS and AIFs using FX forwards).

Regulatory Forbearance

Prior to this, the ESAs also issued a statement acknowledging the challenges for certain counterparties to satisfy the variation margin requirement by 3 January 2018. The ESAs stated that they expected competent authorities (including the Central Bank of Ireland (the "CBI")) to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in a proportionate manner.

Consistent with similar releases by the competent authorities in other EU Member States including the UK, France and Germany, the CBI has now issued a statement outlining its position, aligned with the ESA's expectations, confirming that it will apply its risk-based supervisory powers in the day-to-day enforcement of applicable legislation in a proportionate manner.


EMIR imposes a legal obligation to exchange variation margin in respect of FX Forwards from 3 January 2018. However, in light of the statements of the ESA, the CBI and other EU Member State competent authorities, UCITS and AIFs with authorised or recognised AIFMs may consider not complying, on the grounds of proportionality, for the period pending the RTS being finalised and entering into force.

However, in any case, the other risk mitigation requirements in Article 11 of EMIR (listed below) will still apply:

1. Obtain timely electronic confirmations of the terms of OTC derivative contracts;

2. Put in place a formal risk management process for such OTC derivative contracts;

3. Have an agreed dispute resolution process with counterparties; and

4. Value all OTC derivative contracts daily on a mark-to-market basis (unless market conditions require marking to model).


1 The European Securities and Markets Authority, the European Banking Authority and the European Insurance and Occupational Pensions Authority.

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