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EU finally confirms intent to IM mitigate

In the Regulatory equivalent of a pair of socks- necessary, entirely expected, but still welcome; the ESAs have today delivered an early Christmas present to Heads of Compliance in a draft Revised RTS echoing the July 2019 BCBS/IOSCO IM mitigation.

Initial Margin         

A revised article 36(1) instantiates the BCBS/IOSCO recommended bifurcation into two remaining IM phases, IM applies to those with an AANA> €50bn from 1 September 2020, a new Phase 6 will apply the previous > €8bn AANA threshold a year later. The ESAs make no formal amendment to incorporate the BCBS/IOSCO March 2019 “clarification” that in-scope entities do not need to put IM arrangements in place until the €50m exposure threshold is breached, as they regard this as already included in the Delegated Regulation. They also note that “no further extension of the phase-in and no change of the thresholds, in particular the 8 billion threshold, are envisaged.” (MRDA likely.)

VM FX Exemption

The revised RTS formally confirms the exemption of physically-settled FX Forwards and Swaps from the VM requirements, bringing the EU into line with other global regulators. As with the earlier forebearance, the exemption onoly applies when one of the counterparties is not a credit institution or an investment firm (as defined under article 4(1) (3) CRR.

Derogation Extensions

The RTS also extends existing derogations. A revised article 36(2) extends the Intragroup derogation until the 20 December 2020. Regulation. A revised article 38 paragraph 1 extends the Equity Options derogation until the 4 January 2021.

As has become standard when joining the Phase 6 club, ESMA also issued an accompanying statement, couched in their typically veiled forbearance language, that a carve-out will be applied in respect of amendments to legacy contracts made for the purpose of Benchmark transition.

“the ESAs do not expect competent authorities to prioritise their supervisory actions towards margining requirements (and thus the clearing obligation as well) arising as a result of the introduction of fall-backs in legacy uncleared OTC derivative contracts, and to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner.’

The draft revised RTS is now subject to adoption by the Commission and scrutiny by the European Council and Parliament, it is likely to have an untroubled passage.

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