The Joint Committee on the European Supervisory Authorities (ESAs) has issued a statement concerning variation margin exchange for physically-settled foreign exchange (FX) forwards under the European Market Infrastructure Regulation (EMIR).

The ESAs have made this statement having been made aware of challenges for certain counterparties to exchange variation margin for physically-settled FX forwards by 3 January 2018. The Boards of the ESAs are currently undertaking a review of the regulatory technical standards (RTS) on risk mitigation techniques for over-the-counter derivatives not cleared by central counterparties and developing draft amendments to those RTS that align the treatment of variation margin for physically-settled FX forwards with the supervisory guidance applicable in other key jurisdictions.

Specifically, the amendment of the RTS reiterates the ESAs commitment to apply the international standards, and require the exchange of variation margin for physically-settled FX forwards in a risk based and proportionate manner. In particular, this would most likely imply that the scope should cover transactions between institutions (credit institutions and investment firms). Also, for some institution-to-non-institution transactions the competent authorities should consider the actual risk that the exchange of variation margins would mitigate and whether non-institutions might face additional risks related to the daily exchange of variation margin.

Once the Boards of ESAs have finalised the review, and assuming a solution is reached, then the draft amendments will be submitted to the European Commission.

View ESAs announce review of variation margin requirements under EMIR, 24 November 2017