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FFX Margin- all that is solid melts into air

A brief spotlight through the fog swirling around the upcoming obligation to exchange margin on forward foreign exchange. There was a widespread, if only whispered, expectation that a 7/8 November ESMA Board of Supervisors meeting would result in an official announcement of forbearance. While the EU has no equivalent mechanism to the CFTC’s enthusiastic use of no action letters, ESMA has the ability to signal its disinclination to enforce a regulation pending re-legislation. With no such announcement forthcoming, the only public and official information is buried at page 30 in yesterday’s Presidential Compromise Proposal-

“c) The following paragraph 16 is added: “16. Physically settled foreign exchanged forwards shall not be subject to initial margins exchanges and shall only be subject to exchange of variation margins for transactions concluded between credit institutions authorised in accordance with Directive 2006/48/EC.””

Although this selective exemption would be welcomed by non-banks and retail participants, it fails to substantively address the global regulatory anomaly. However, for those in-house negotiators hoping to spend the holiday season with their families, help is at hand in the shape of the PRA who have been the sotto voce bearer of good tidings. We understand the regulator has been selectively making it unofficially clear that the obligation will not be enforced in a UK context. Given the regulation’s likely severely-limited post-Brexit lifespan in a UK-dominated FX market, this intervention is entirely appropriate and welcome. It will however be of little comfort to those institutions who have already spent significant money and time planning compliance and upgrading systems. Pending the detail of the EU official exemption, the possibility also exists that widespread amendment will be required to carve out FFX from those VM CSAs concluded by 1 March- 1 September 2017  delayed deadline.

Since the early days of EMIR’s first drafts, market participants have made vociferous appeals to the EU to exempt FFX margining in line with other jurisdictions. In a regulatory context, certainty is a sine qua non- last minute, poorly communicated major revisions to long-planned legislation are less than ideal. Farcical may be a better description.

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