Article 11 of Regulation (EU) No 648/2012 (EMIR) requires the use of risk-mitigation techniques for transactions that are not centrally cleared and, in paragraph 15, mandates the European Supervisory Authorities (ESAs) to develop regulatory technical standards (RTS) on three main topics:
- the risk-management procedures for the timely, accurate and appropriately segregated exchange of collateral;
- the procedures concerning intragroup exemptions; and
- the criteria for the identification of practical or legal impediment to the prompt transfer of funds between counterparties belonging to the same group.
The ESAs consulted twice on the set of RTS, in 2014 and 2015.
The ESAs have now jointly published final draft RTS which:
- prescribe the regulatory amount of initial and variation margins to be posted and collected and the methodologies by which that minimum amount should be calculated. Under both approaches, variation margins are to be collected to cover the mark-to-market exposure of the over-the-counter (OTC) derivatives contracts. Initial margin covers the potential future exposure, and counterparties can choose between a standard pre-defined approach based on the notional value of the contracts and an internal modelling approach, where the initial margin is determined based on the modelling of the exposures;
- outline the collateral eligible for the exchange of margins. The list of eligible collateral covers a broad set of securities, such as sovereign securities, covered bonds, specific securitisations, corporate bonds, gold and equities;
- establish criteria to ensure that collateral is sufficiently diversified and not subject to wrong-way risk;
- prescribe methods for determining appropriate collateral haircuts;
- provide for the option of applying an operational minimum transfer amount of up EUR 500,000 when exchanging collateral;
- establish a procedure for the granting of intragroup exemptions under EMIR; and
- acknowledge that a specific treatment of certain products may be appropriate. This includes, for instance, physically settled FX swaps, which may not be subject to initial margin requirements.
To allow counterparties time to phase in the requirements, the RTS will be applied in a proportionate manner. The requirements for the initial margin will, at the outset, apply only to the largest counterparties until all counterparties with notional amounts of non-centrally cleared derivatives in excess of EUR 8 billion are subject to the rules, as from 2020. The scope of application for counterparties subject to initial margin requirements is clearly specified. Further discussion of the phase-in of the requirements can be found on pages 12 to 14 of the ESAs’ document.