The European Market Infrastructure Regulation (EMIR) contains provisions that are aimed at increasing the safety and transparency of the over-the-counter (OTC) derivatives markets. Among other requirements, it establishes a legal obligation to clear certain types of OTC derivatives through central counterparties (CCPs). However, not all OTC derivative transactions will be subject to the clearing obligation or would meet the conditions to be centrally cleared. In the absence of clearing by a CCP, it is essential that counterparties apply robust risk mitigation techniques to their bilateral relationships to reduce counterparty credit risk.
Article 11 EMIR requires the use of risk mitigation techniques for transactions that are not centrally cleared and, in paragraph 15, mandates the European Supervisory Authorities (the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority) (ESAs) to develop regulatory technical standards (RTS) on three key topics:
- risk management procedures for the timely, accurate and appropriately segregated exchange of collateral;
- procedures concerning intragroup exemptions; and
- the criteria for the identification of practical or legal impediment to the prompt transfer of funds between counterparties.
The ESAs have now published a joint Consultation Paper concerning draft RTS for OTC derivatives contracts not cleared by a CCP under article 11(15) EMIR. The Consultation Paper is divided into three main parts: introductory remarks, a draft of the RTS and accompanying material, including a cost-benefits analysis. The draft RTS document is further split into five chapters:
- counterparties’ risk management procedures;
- margin methods;
- eligibility and treatment of collateral;
- operational procedures; and
- procedures concerning intragroup derivative contracts.
The deadline for comments on the Consultation Paper is 14 July 2014. Based on the responses to the Consultation Paper, the ESAs will prepare the final draft RTS and intend to submit these to the European Commission before the end of 2014.
