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Third (final) ESA report- brief Brexit novation window

On 23 November 2020, the Joint Committee of the European Supervisory Authorities (ESAs) published a third “final” version of its draft RTS making various amendments to EMIR margining requirements. The draft (re)introduces the following amendments:

  • Levelling the international playing field:
  • An extension of a further three years for the “temporary” exemption from margining requirements for single-stock equity options or index options
    • An extension of the temporary exemption for intragroup transactions with a third country entity to 30 June 2022
  • The permanent exemption for both physically settled FX forwards and swaps where one of the counterparties is not an “institution” or third-country equivalent [1]

[1] “Institution” is defined in point (3) of Article 4(1) of the Capital Requirements Regulation (EU) No 575/2013. Essentially- banks and investment managers.

  • Brexit
  • A 12 month period during which UK  entities may novate legacy contracts to the EU without triggering bilateral margin requirements

The exemption extensions were expected and necessary to conform the EU regime to the rest of the world. In the Brexit context, the ESAs acknowledge that having to apply for (potentially) 27 sets of post-Brexit licences to perform cross border lifecycle events, may prove bothersome. Unsurprisingly, they see UK > EU novation as the answer, and have recommended a 12 month window during which novated legacy contracts will not be subject to margining requirements.

 A lot of this work has been done already, but a lot remains. Against the background of 2021 challenges- IM Phase 5, IBOR transition, CSDR et al- 12 months is best described as short.

As usual, the ESAs have submitted the draft RTS to the Commission. Following their endorsement, they are then subject to non-objection by the Parliament and the Council.

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