EU non-cleared fog begins to clear

On 28 July 2016 the EC published a letter to the Joint Committee of the European Supervisory Authorities (ESAs), stating that it will endorse a revised text [1] of the RTS on risk mitigation techniques for non-cleared OTC derivatives Article 11(15) of EMIR. The market has been on tenterhooks since 9 June 2016 when the Commission announced that it would be unable to endorse the RTS by the September commencement deadline, fracturing the global timeline for the implementation of non-cleared margin rules. The Commission proposes the following timeline:

VM Category 1 (>EUR 3trn.)- one month after entry into force of the Regulation

VM Category 2 (all other entities)- the latest of 1 March 2017 or the Category 1 date

IM Category 1 (>EUR 3trn.) – abolished

IM Category 2- (>EUR 2.25trn.)- 1 September 2017

IM Category 3- (>EUR 1.5trn.)- 1 September 2018

IM Category 4- (>EUR 750bn.)- 1 September 2019

IM Category 5- (>EUR 8bn.)- 1 September 2020

The ESAs now have six weeks to amend the draft RTS and resubmit them to the Commission as a formal opinion. Assuming the ESAs accept the latest amendments, the RTS is then passed to the Parliament and the Council who have three months to approve. Factoring in mandated legislative holiday downtime, this equates to an earliest likely VM Category  1 start date at end of February 2017. Given the ever-present potential for EU delay, there is a strong possibility that both VM categories will begin on 1 March 2017 together, or the timeline may be subject to further revision. IM Category 1 is effectively merged with Category 2, delaying its implementation by one year.

The Commission’s letter also explains the following clarifications and amendments in the RTS:

• The introduction of a recital containing reasoning for the delayed phase-in of the requirements for equity options
• Clarification that EU counterparties intending to rely on the intragroup exemption may submit their application after the RTS’ entry into force
• Clarification that cash initial margin may be held with equivalent third country institutions (as well as with authorised EU credit institutions)
• Clarification that requirements relating to FX contracts will start to apply from the date of application of the relevant Delegated Act under the MiFID II framework, rather than the date of entry of this RTS
• The exemption of pension schemes from concentration limits

While far from final, the EU non-cleared margin rules timeline now has its own timeline for completion. Switzerland’s FINMA has confirmed that it will delay implementation of its own rules in accord with the EU. Despite pressure from industry bodies, it seems unlikely that the US and Japan will slow their march to implementation to match the EU’s stumble. Although the likely 5 month delay for VM is too small to create structural regulatory arbitrage, the one year delay for IM is more significant. The disparity creates an uneven playing field, greater geographical liquidity fragmentation and disruption to cross-border trading will be the inevitable legacy of the EU’s laggardly legislative approach.

[1] Update 3 August 2016 : DG FISMA published an addendum to the revised text. See EU non-cleared margin rules “clarification” confusion cleared-up for “error-corrected” IM timeline

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