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FFX Margin- the far off sound of a fat lady singing

The will they-won’t they soap opera of European FFX margin regulation is likely drawing to a close. As promised in their 24 November announcement, the three European Supervisory Authorities (ESMA, EBA and EIOPA) published a draft amendment to the EMIR Margin RTS. The amendment does clarify matters by excising the announcement’s “most likely”, confirming that the mandatory exchange of VM in respect of physically-delivered FX Forwards will be confined to “Institutions” under the CRR ie “credit institutions” and investment firms”[1].

The accompanying press release makes reference to the “challenges certain end-user counterparties are facing” and in the international context “a more limited scope of application”. They assert that the amended RTS will “apply the international standards with a more comparable scope to that of other key jurisdictions”. This is quite remarkable, no other jurisdiction in the world includes physically settled FFX for VM margin[2]. Absolute lack of application is hardly cognate with “limited”. The amendment effectively excludes: proprietary traders, non-fund corporates and private equity. Everyone else will be dusting off their international FX contacts. The ESAs should be congratulated on at least providing some certainty prior to the 3 Jan MiFID 2 Big Bang; however, the lady referred to in the title might well be singing a requiem for EU FFX liquidity.

The European Commission has 3 months to adopt the amended RTS unchanged or to make its own amendments. If the RTS is adopted without amendments, the Parliament and the Council will have 1 month to adopt, 3 months if amendments have been made.

[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.



[2] Canada (CSA) recommendations do include (IM excluded), but remain in draft form. Excluded in Canada (OSFI)

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