The Joint Committee of the European Supervisory Authorities (ESAs) (the European Securities and Markets Authority, the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority) has published a second consultation paper on draft regulatory technical standards (RTS) on risk-mitigation techniques for over-the-counter (OTC) derivative contracts not cleared by a central counterparty under the European Market Infrastructure Regulation (EMIR).

The consultation covers only a narrow set of topics as most of the decisions have already been agreed following the first consultation held in April 2014.

For OTC derivative transactions that will not be subject to central clearing, the draft RTS prescribe the regulatory amount of initial and variation margin that counterparties should exchange as well as the methodologies for their calculations. In addition, the draft RTS outline the criteria for eligible collateral and establish the criteria to ensure that such collateral is sufficiently diversified and not subject to wrong-way risk. In addition, following the amendments of the standards issued by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions in March 2015, the draft RTS include a revised phase-in for initial margin requirements and a new phase-in for variation margin.

The Joint Committee notes that with respect to the first consultation, the ESAs have reviewed or clarified several aspects of the proposed rules. These include: the exchange of margins with third country entities and the treatment of non-financial counterparties; the treatment of covered bonds swaps; the timing of margin exchanges; concentration limits for sovereign debt securities; the requirements on trading documentation; minimum credit quality of collateral; initial margin models; haircuts for foreign exchange mismatch; the treatment of cash collateral for initial margin; and reviewed criteria on intragroup exemptions.

The deadline for responding to the consultation paper is 10 July 2015. A public hearing on the draft RTS will take place at the EBA’s premises in London on 18 June 2015.

View ESAs consult on margin requirements for non-centrally cleared derivatives, 10 June 2015