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 Friday 20 December 2019

Proposed updates to EMIR Margin Regulatory Technical Standards

In December 2019, the European Supervisory Authorities (“ESAs”) published a final report on proposed amendments to the bilateral margin requirements under the European Market Infrastructure Regulation (“EMIR Margin RTS”).

This final report addresses a number of points that have been raised by the industry since the original EMIR Margin RTS were published in December 2016 as well as considering updated guidance provided by the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO).

The final report has been sent to the European Commission for endorsement.  Assuming this is received, it is then subject to non-objection by the European Parliament and the European Council.  The updated Regulation will enter into force one day after it is published in the EU’s Official Journal.

Five key points are covered in this report with changes to the EMIR Margin RTS being proposed for the last 4 points:-

  1. Clarification on requirements when trading of products that are in-scope for regulatory initial margin remains below the EUR 50 million IM Threshold:  The ESAs confirmed that no updates are required to the EMIR Margin RTS to reflect the BCBS/IOSCO’s statement in March 2019 that documentation as well as custodial and operational arrangements are not necessarily required if trading does not exceed the group IM Threshold. 
  1. Revisions to the initial margin phase-in dates: The aggregate month-end average notional amount (“AMEANA” or “AANA”) used to determine if group entities are in-scope for regulatory initial margin on 1 September 2020 has been increased from EUR 8 billion to EUR 50 billion and a new phase has been introduced with a compliance date of 1 September 2021 for entities above EUR 8 billion.
  1. Updates to requirements for exchanging variation margin for deliverable FX forwards and swaps: If an entity is not captured by the definition of “institution” under the EU Capital Requirements Regulation (EU) No. 575/2013 (broadly speaking credit institutions (e.g. a bank) or investment firms acting on their own behalf rather than as an agent for a non-institution entity) then it would not be required to collect variation margin for physically settled FX forwards or swaps. This was previously addressed under EMIR Refit (Recital 21) where the exchange of variation margin was only required between the “most systemic counterparties” but a clear definition has now been included and the exemption has been extended to include deliverable FX swaps as well as forwards.
  1. Extension to temporary exemption for intragroup transactions with a third country entity: This exemption was due to expire on 4 January 2020 but has been extended 21 December 2020.  This is to align the date with the equivalent temporary exemption from clearing obligations for OTC derivatives.
  1. Extension to temporary exemption for single stock equity options and equity index options:  This exemption was also due to expire on 4 January 2020 but has been extended by one year to 4 January 2021.  This is to allow the continuation of monitoring by the EU on how other jurisdictions are implementing the margin requirements with respect to these products in order to avoid possible regulatory arbitrage.

While these proposed updates are welcome, it should be noted that the ESAs cannot disapply EU law, the changes have not yet come into force and are unlikely to be implemented completely before certain temporary exemptions expire.  The ESAs recommend that competent authorities apply a risk based approach when considering how to enforce EMIR in the interim period.

UPDATE: On 4 May 2020, the ESAs published an updated final report (replacing the December 2019 version).  The key change is to point 2 listed above.  It is proposed that the initial margin phase-in dates are extended by one year. The implementation date for Phase 5 (AANA greater than EUR 50 billion) would be 1 September 2021 and the implementation date for Phase 6 (AANA greater than EUR 8 billion) would be 1 September 2022.  This is in line with the BCBS/IOSCO recommendation published in April 2020.

Posted by Abigail Harding

Category: ISDA negotiation

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