The U.K. Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) recently launched a joint consultation on proposed amendments to the margin requirements for non-centrally cleared derivatives.1
The proposals would amend the Binding Technical Standards (BTS) on margin requirements for non-centrally cleared derivatives (i.e., the U.K. version of Commission Delegated Regulation (EU) 2016/2251). The BTS supplement the U.K.'s European Market Infrastructure Regulation as onshored for Brexit, which requires counterparties to uncleared OTC derivative transactions to implement risk mitigation techniques to reduce counterparty credit risk. These EMIR and the BTS provisions implement the BCBS-IOSCO standard on margin requirements for non-centrally cleared derivatives (the BCBS-IOSCO standard).
We discuss the proposals below. The consultation closes on June 27, 2025. The regulators are expected to publish their final rule amendments in H2 2025, and it is proposed that the changes would take effect on publication by the regulators of the revised BTS.
Proposal 1: indefinite exemption for single-stock equity options and index options
The U.K. regulators are proposing to make indefinite the current temporary exemption from the variation margin and initial margin (IM) requirements for single-stock equity options and index options. The temporary exemption, which is set to expire on January 4, 2026, was implemented at the end of 2023 with the aim of giving the regulators time to assess whether global implementation of the BCBS-IOSCO standard regarding these products remains fragmented. The industry has highlighted to the regulators the potential risks if the exemption expires, including that non-U.K. clients may cease to trade with U.K. dealers and smaller U.K. counterparties may reduce/cease trading of equity options due to the increase in costs.2
According to the regulators, if the exemption were to expire, margin on the products would substantially increase and trades in single-stock equity options and index options would be likely to move to jurisdictions where mandatory margin requirements do not apply. In addition, the regulators also consider that existing capital requirements for firms are already adequately mitigating the prudential risks arising from the contracts.
The EU had the same temporary exemption until December 24, 2024, when the latest revisions to the European Market Infrastructure Regulation, known as EMIR 3, made the exemption permanent by inserting a new derogation from the requirement to exchange collateral for single-stock options and equity index options.
Both the U.K. and EU provide a mechanism for their exemptions to be changed if in future other jurisdictions implement margin requirements for these products. In the U.K., any such change would be by way of the regulators amending their rules following consultation. In the EU, the European Commission is empowered to revoke the derogation if it considers (based on a report prepared by the European Securities and Markets Authority) that there is a risk to the financial stability of the EU or one of its member states. The granting to the Commission of a power to amend a level 1 provision is new under the EU's EMIR and may result in the EU being able to adapt its legislation in a more efficient manner than the traditional process allows.
We discuss this change and others in our client bulletin, "EMIR 3 - Impact on uncleared OTC derivatives markets".
Proposal 2: no IM for outstanding legacy contracts when counterparties fall below the AANA threshold
It is proposed that counterparties would not need to exchange IM on outstanding legacy contracts where a firm subsequently falls out of scope of the IM requirements (and thus ceases to be systemically important as defined by the relevant thresholds). Currently, firms become subject to the requirement to exchange IM for all new non-centrally cleared OTC derivative contracts entered into within a calendar year when their (and their counterparty's) average aggregate notional amount (AANA) of non-centrally cleared OTC derivatives reaches a threshold of EUR8 billion (calculated on a group basis and by reference to the months March, April and May of the preceding year). The view of the regulators is that, where a firm subsequently falls below the threshold, the BTS requires the firm to continue to exchange IM on their legacy contracts for the life of those trades. Although, interestingly, the PRA notes in its cost benefit analysis that, "Firms would...be able to enter into an identical but new contract with the same counterparty and not have to exchange margin", and the FCA notes that, "Firms...have an incentive to enter into new contracts and cancel existing ones". To ease the burden on firms having to maintain, for the life of the contract, IM calculation and exchange, and custodial relationships, the regulators are, therefore, proposing to remove the IM requirement for legacy contracts. This would align with the adopted approach in a number of other key financial services jurisdictions.
Proposal 3: amendments to allow firms to align IM calculation periods and dates with those in other jurisdictions
Finally, it is proposed to allow U.K. firms, when transacting with a counterparty subject to IM requirements in another jurisdiction, to use the third-country jurisdiction's threshold assessment calculation periods and dates and entry into scope dates to determine whether a transaction is subject to IM requirements. A number of key financial services jurisdictions have implemented the BCBS-IOSCO standard with different annual calculation and implementation dates. This means, among other things, that transactions may be briefly in scope of the IM requirements in one jurisdiction but out of scope under the other jurisdiction's regime. The regulators state that this measure is intended to remove the current operational burdens and a disincentive to trade with international counterparties operating close to the thresholds that use different threshold assessment calculation periods and dates.
Footnotes
1. Joint consultation, CP5/25 – Margin requirements for non-centrally cleared derivatives: Amendments to BTS 2016/2251, March 27, 2025
2. ISDA, AIMA, The Investment Association, Letter to the Prudential Regulation Authority, March 3, 2023.
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