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Collateral Managers Weep, Lawyers Rejoice: EU Consults on non-cleared OTC derivatives

On 14 April 2014, the Joint Committee of the European Supervisory Authorities (ESAs)[1] published a consultation paper on draft regulatory technical standards (RTS) on risk-mitigation techniques for OTC derivative contracts not cleared by a CCP under Article 11(15) of EMIR.  The consultation paper represents the beginning of the EU’s legislative process to implement the Basel Committee’s “Margin requirements for non-centrally cleared derivatives” published on 2 September 2013 (see this blog post for more detail).  The consultation remains open until 14 July 2014 and the plan is to finalise the RTS by the end of 2014.

A summary of the consultation paper’s main proposals and a comparison to the BCBS position is provided below.

Initial Margin

Variation Margin

EU

BCBS

EU

BCBS

Application Non-financial non-systemically important firms exempt Non-financial non-systemically important firms exempt
Margin exchange required? Yes, phased-in Yes, phased-in Yes, from 1 Dec 2015 Yes, from 1 Dec 2015
Requirement in relation to new trades only? Yes Yes Yes Yes
Gross exchange required? Yes Yes No No
Trade types exempt? Physical FX Physical FX None None
Threshold (consolidated) EUR 50 million EUR 50 million Zero Zero
Minimum Transfer Amount (consolidated) EUR 500k EUR 500k EUR 500k EUR 500k
Posting frequency After recalculation After recalculation Daily Daily
Recalculation frequency Every 10 BD Not specified Daily Daily
Posting commencement T+1 Not specified T+1 Not specified
Segregation Required Required Not required Not required
Rehypothecation Not allowed One-off rehypo allowed for hedging (subject to conditions) Allowed Allowed
IM Margin model confidence level 99% 99% N/A N/A
IM Model risk horizon 10 days 10 days N/A N/A
IM Model backtesting period 3 years Up to 5 years N/A N/A
IM Model to include stressed data? Yes – min of 25% Yes N/A N/A
Eligible collateral
Cash Yes Yes Yes Yes
Debt Securities Yes Yes Yes Yes
Equities Yes Yes Yes Yes
Convertible Bonds Yes Yes Yes Yes
Gold Yes Yes Yes Yes
Senior tranche securitisations Yes Not specified but list not exhaustive Yes Not specified but list not exhaustive
UCITS Yes Not specified but list not exhaustive Yes Not specified but list not exhaustive
Eligibility criteria applies?
Liquidity Yes Yes Yes Yes
Diversification Yes Yes Yes Yes
No wrong-way risk Yes Yes Yes Yes
Concentration limits? Yes Not specified Yes Not specified
Haircut for FX risk? Yes Yes Yes Yes

[1] Comprising the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA)

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