ESAs propose further deferral of EMIR bilateral margin and clearing requirements has been saved
ESAs propose further deferral of EMIR bilateral margin and clearing requirements
25 November 2020
Regulatory News Alert
Based on the continuing clarifications and amendments of the international framework led by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO), the European Supervisory Authorities (ESAs) have already reviewed the bilateral margin framework twice and submitted the final reports to the European Commission on 5 December 2019 and 4 May 2020.
However, given the current context, the ESAs have discussed with the European Commission the need to replace already submitted amendments of the Commission Delegated Regulation (EU) No 2016/2251 that set out the detailed bilateral margin requirements (RTS), so that additional deferrals can be included.
In the draft RTS, the ESAs propose to:
- Integrate an already announced extension of the phase-in of the implementation of the initial margin requirements: the final implementation phase will take place on 1 September 2022, when covered entities with an aggregate average notional amount (AANA) of non-centrally cleared derivatives greater than EUR8 billion will be subject to the requirements. As an intermediate step, from 1 September 2021, covered entities with an AANA of non-centrally cleared derivatives greater than EUR50 billion will be subject to the requirements.
- Apply the limitation of margin requirements to transactions between the most systemic counterparties to a broader scope of contracts: i.e., not only physically settled FX forwards but both physically settled FX forwards and swaps, with the same exemption for both.
- Extend the temporary exemption for equity options by three more years.
- Extend the temporary exemption for intragroup transactions to 30 June 2022. (It should be noted that ESMA is considering a similar amendment in parallel regarding the temporary exemption from the clearing obligation for over-the-counter (OTC) derivative intragroup transactions.)
The ESAs have confirmed that there is no need to amend the RTS so that counterparties below the EUR50 million initial margin exchange threshold are not required to have all the relevant operational and legal arrangements in place. Therefore, no amendment related to this point has been included in the draft RTS.
Novation of contracts in the context of Brexit
Bilateral non-centrally cleared OTC derivative contracts are currently benefitting from the grandfathering arrangements under Regulation (EU) No 648/2012 (EMIR). These are parties that did or do not have to apply the new procedures on the exchange of collateral (bilateral margins), either because the relevant dates set out in the RTS on bilateral margining had not yet applied, or because the contracts have not been novated after those dates (“legacy contracts”).
However, the novation of these contracts to replace UK counterparties with EU counterparties may trigger the bilateral margin requirements (if this novation occurs after the relevant dates of application specified for that type of contract). As a result, the parties will have to apply these requirements.
The ESAs consider that it is relevant to maintain a level playing field and are proposing amendments to the RTS that would allow counterparties to novate their contracts to EU counterparties without triggering the EMIR margining requirements.
Nonetheless, this exemption will apply for a limited period of 12 months from the date of application of the amending RTS. Therefore, counterparties should begin negotiating the novation of their transactions that are in the scope of these amendments as soon as possible.
The ESAs have now submitted this new version of the draft RTS on bilateral margining to the European Commission for endorsement in the form of a Commission Delegated Regulation, i.e., a legally binding instrument that applies to all Member States of the European Union. It would replace the version submitted and published on 4 May 2020.
At the same time, ESMA also submitted to the European Commission the draft RTS on the clearing obligation, also seeking endorsement in the form of a Commission Delegated Regulation.
Following the endorsement of these drafts, they are then subject to non-objection by the European Parliament and the Council.
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