ISDA Urges End to Option Extension Exemptions
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On the 3rd of March 2023, a follow-up letter was sent from the ISDA, the Alternative Investment Management Association (AIMA) and the Investment Association to the PRA and the BoE. This letter set out the proposal to make permanent UK EMIR temporary exemptions for certain equity options by removing initial margin and variation margin.
Unsurprisingly the trade associations made reference to the importance and significance of single-stock equity options and index equity options. These products are used for multiple purposes aside from speculation, such as hedging exposure to the purchase price in the context of mergers and acquisitions or share buybacks by companies. The members of ISDA, the AIMA and the Investment Association believe that the rationale for the original temporary exemption remains valid. These products are exempted from margin requirements under US legislation, and the usual arguments regarding disruptions to cross-border business and regulatory arbitrage apply. In terms of deadlines, the associations have requested that UK authorities communicate their intentions as quickly as they can.
Given that the EMIR exemption continues till the 4th of January 2024 and will, in all likelihood be further extended it seems almost certain that UK Regulators will act to permanently remove these products from margining requirements. However, the exact timeline remains uncertain.
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