United Kingdom (and EU regulation)

PRA and FCA consult on bilateral margin requirements for uncleared derivatives

By Hannah Meakin (UK) on March 9, 2021 Posted in Clearing and settlement, United Kingdom

On 9 March 2021, the PRA and FCA issued a joint consultation paper setting out proposals to establish or extend exemptions for some products subject to bilateral margining requirements, and to align implementation phases and thresholds to the Basel Committee on Banking Supervision and the International Organization of Securities Commissions standards. If implemented the proposals would result in changes to the UK version of Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing the European Market Infrastructure Regulation (EMIR) (Binding Technical Standards (BTS) 2016/2251).

The PRA and FCA are proposing to amend BTS 2016/2251 using the making and amendment powers under Article 11(15) of EMIR and under Section 138P of the Financial Services and Markets Act 2000. These proposed changes would be effective on publication of the final technical standards instrument, which is planned for 1 July 2021. Consistent with the respective mandates under EMIR, the PRA is proposing amendments with respect to PRA-regulated firms, and the FCA is proposing amendments to all other firms covered by the requirements. For this joint consultation, the proposals are identical.

Specifically, the joint consultation paper proposes to amend the UK bilateral margining requirements in the onshored BTS 2016/2251 by:

Changing the implementation dates and thresholds for the phase-in of initial margin (IM) requirements.
Requiring the exchange of variation margin (VM) for physically settled foreign exchange (FX) forwards and swaps to specified counterparties only.
Extending the temporary exemption for single-stock equity options and index options until 4 January 2024.

In terms of the changes to the implementation dates and thresholds for the phase in of IM requirements, the PRA and FCA propose:

Removing the Tuesday 1 September 2020 phase, thereby providing firms with operational relief to assist with mitigating the effects of COVID-19 disruption.
Introducing a Wednesday 1 September 2021 phase to capture those firms with over €50 billion in aggregate average notional amount of non-centrally cleared derivatives.
Introducing a Thursday 1 September 2022 phase to capture those firms with over €8 billion aggregate average notional amount of non-centrally cleared derivatives.

In terms of the exchange of VM for physically settled FX forwards and swaps to specified counterparties only, the PRA and FCA propose:

The requirement to exchange VM will only apply to firms that are ‘institutions’ as defined in Article 4(1)(3) of Capital Requirements Regulation (or for third country firms, that meet the definition of ‘institution’ if established in the UK).
The proposal will apply to both forwards and swaps to ensure consistent treatment of the similar risks, regardless of legal form.

The PRA and FCA propose to extend the temporary exemption for single-stock equity and index options until 4 January 2024. The PRA and FCA state that this proposal aligns the treatment of single-stock equity options and index options for UK firms with that of other jurisdictions, maintaining a level playing field.

The deadline for comments on the joint consultation paper is 19 May 2021.