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EU FFX – fiasco saga

On 24 November the European Supervisory Authorities (ESAs) released their long (in context) awaited forbearance announcement with respect to the margining or not of forward foreign exchange. A short summary follows:

  • Everyone else agreed to this but didn’t follow on
  • Our hands are tied and we will need to change EU law
  • Likely changes will exclude buy-side entities probably
  • Meantime the EU will leave it to national regulators to sort out

The announcement adds clarity insofar as it confirms that a change to the EU regulations will eventually be on the way. No breath-holding necessary; this will require at a minimum- proposal to amend RTS, amendment of RTS, trilogue process to amend EMIR as part of the EMIR REFIT, final adjustment to Level 1 EMIR text- circa 2019.

The EU compromise confines the FFX margin obligation to “credit institutions” and “investment firms” as defined by the CRR Regulation (EU) No. 575/2013. Credit institutions are (uncontroversially) banks-

“Credit Institution” means an undertaking the business of which is to take deposits or other repayable funds from the public and to grant credit for its own account.

“Investment firm” relies on the MiFID (I) definition[1] which effectively includes everyone except corporates and private equity. While the argument may be made that the inclusion of these firms confers an undue cash/HQLA raising burden in return for negligible impact on systemic risk reduction, the same argument applies to FFX margining as a whole. The market has (anecdotally) already seen widespread novation/migration to lighter-regulated New York. The EU announcement represents a strange instance of (slightly) opening the door after the horse has bolted. The announce is not short on prevarication-

“In particular, this would most likely imply that the scope should cover transactions between institutions (credit institutions and investment firms)”

“Most likely” is not a phrase conducive to clarity, certainty or imbuing confidence. Perhaps the more interesting aspect of the announcement is the final paragraph-

“Accordingly, as regards difficulties that in particular certain end-users are facing, the ESAs expect competent authorities to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in a proportionate manner.”

We are yet to hear any official announcement from the PRA. In the pre-Brexit context, it would not be surprising if the UK Regulator were to indicate a more forbearing approach, in an attempt to reassure what elements of the FFX market still remain in London.

ISDA has commissioned a broadly-drafted amendment that may be used to disavow any previous intention to exchange VM for FFX, including those CSAs that contained “springing” language self-activating on 3 January 2018. Meantime, banks are continuing to amend their documents faute de mieux- perhaps with less sense of urgency.


[1] “Investment Firm” means a person as defined in point (1) of Article 4(1) of Directive 2004/39/EC, which is subject to the requirements imposed by that Directive, excluding the following:

(a)                   Credit Institutions;

(b)                   Local Firms meaning a firm dealing for its own account on markets in financial futures or options or other derivatives and on cash markets for the sole purpose of hedging positions on derivatives markets, or dealing for the accounts of other members of those markets and being guaranteed by clearing members of the same markets, where responsibility for ensuring the performance of contracts entered into by such a firm is assumed by clearing members of the same markets

(c)                   firms which are not authorised to provide the ancillary service referred to in point (1) of Section B of Annex I to Directive 2004/39/EC, which provide only one or more of the investment services and activities listed in points 1, 2, 4 and 5 of Section A of Annex I to that Directive, and which are not permitted to hold money or securities belonging to their clients and which for that reason may not at any time place themselves in debt with those clients

“Investment Firm” as defined in point (1) of Article 4(1) of Directive 2004/39/EC means  any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis;

ANNEX I to Directive 2004/39/EC

Section A

Investment services and activities

(1)           Reception and transmission of orders in relation to one or more financial instruments.

(2)           Execution of orders on behalf of clients.

(4)           Foreign exchange services where these are connected to the provision of investment services.

(5)           Investment research and financial analysis or other forms of general recommendation relating to transactions in financial instruments.

Section B

Ancillary services

(1)           Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management.




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