On October 4, 2016, the European Commission adopted Regulatory Technical Standards on risk mitigation techniques for uncleared OTC derivatives. The European Market Infrastructure Regulation requires counterparties to uncleared OTC derivative transactions to implement risk mitigation techniques to reduce counterparty credit risk. These RTS prescribe the regulatory margin amounts to be posted and collected and the methodologies by which the minimum amount of initial margin and variation margin should be calculated as well as outlining a broad list of securities eligible as collateral for the exchange of margins, such as sovereign securities, covered bonds, specific securitizations, corporate bonds, gold and equities.
The Joint Committee of the European Supervisory Authorities submitted final draft RTS to the Commission on March 8, 2016. The Joint Committee is made up of the EBA, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority. On July 28, 2016, the European Commission requested the ESAs to amend the final draft RTS and submit a modified version for approval. The ESAs rejected many of the proposed amendments in an Opinion published on September 8, 2016, including certain amendments relating to concentration limits on initial margin for pensions scheme arrangements, the proposed amendments to the calculation of the threshold against non-netting jurisdictions, amendments relating to the treatment of covered bonds and the treatment of bilateral derivative contracts where a counterparty is a CCP, transactions with third country counterparties and the process for regulators on the exemption of intragroup derivative contracts.
Implementation of the EU rules on margin for uncleared derivatives was originally intended to align with the international timeline which would have seen the EU rules apply from 1 September 2016. Implementation dates will now depend on whether the European Parliament or Council of the European Union object to the RTS as adopted by the European Commission. Both of those bodies have until January 4, 2017 to consider whether to object to the adopted RTS. Either of them may extend that period for a further three-month period. However, if both the European Parliament and the Council inform the Commission before January 4, 2017 that they do not object to the adopted RTS, then the requirements will enter into force earlier. The RTS must be published in the Official Journal of the European Union before they can enter into force.
The adopted RTS provide for the largest counterparties to begin providing and collecting margin one month after the RTS enter into force. The requirements relating to variation margin will apply from one month after the RTS enter into force where both counterparties have, or belong to groups each of which has, an aggregate average notional amount of uncleared OTC derivatives above EUR 3 000 billion. For all other counterparties, the variation margin requirements will apply from the latest of 1 March 2017 or one month after the RTS enter into force.
The requirements relating initial margin will be phased in according to the following timetable:
- from one month after the RTS enter into force where both counterparties have, or belong to groups each of which has, an aggregate average notional amount of uncleared OTC derivatives above EUR 3 000 billion;
- from 1 September 2017 where both counterparties have, or belong to groups each of which has, an aggregate average notional amount of uncleared OTC derivatives above EUR 2 250 billion;
- from 1 September 2018 where both counterparties have, or belong to groups each of which has, an aggregate average notional amount of uncleared OTC derivatives above EUR 1 500 billion;
- from 1 September 2019 where both counterparties have, or belong to groups each of which has, an aggregate average notional amount of uncleared OTC derivatives above EUR 750 billion;
- from 1 September 2020 where both counterparties have, or belong to groups each of which has, an aggregate average notional amount of uncleared OTC derivatives above EUR 8 billion.
The adopted RTS on margin for uncleared derivatives is available at: http://ec.europa.eu/transparency/regdoc/rep/3/2016/EN/3-2016-6329-EN-F1-1.PDF.
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