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

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