Response to consultation on Guidelines on the authorisation of initial margin models
Q1. Do you have any comments on the proposed Guidelines? If you identify an issue, please describe it an suggest how to address it.
EFAMA welcomes the EBA's efforts to incorporate proportionality considerations throughout the draft Guidelines, particularly in relation to entities that would fall within the 'other counterparties' (OCP) category.
From the buy-side perspective, however, the new requirement under Article 11(3) EMIR for counterparties to obtain authorisation before using, or adopting a change to, an initial margin model (IMM) represents a significant new compliance obligation. Asset managers rarely develop proprietary IMMs and, in the vast majority of cases, rely on pro forma models such as ISDA SIMM, which represent reliable industry standards.
In this sense, we regret that there is this additional layer of administrative burden introduced to counterparties intending to make use of a standardised IMM model, as we expect this will prove onerous for buy side firms and result in duplication between the model-level validation function of the EBA and counterparty-level authorisation by the NCA.
Nevertheless, EFAMA recognises that the authorisation requirement has been introduced through the Level 1 framework and therefore falls outside the scope of these Guidelines. Our comments below are therefore focused on ensuring that the implementation of Article 11(3) of EMIR, including how the relevant counterparty categories are reflected in the implementation timeline, is as proportionate and operationally efficient as possible for OCPs that rely on validated pro forma models.
Therefore, we would like to share the following commentary regarding the different chapters addressed in the draft guidelines:
- Minimum procedural requirements for authorisation requests
a. Minimum content of the application
We would like to propose the following targeted adjustments to the minimum requirements for the initial application as specified in the draft guidelines:
- Par. 48(d). Counterparties should be permitted to demonstrate whether they are above or below the EUR 750 billion AANA threshold by referring to the most recent calculation already performed in accordance with Article 39 of Delegated Regulation (EU) 2016/2251. The draft Guidelines currently require counterparties to determine their status by ‘considering data for the last business days of the three full months preceding the date of application instead of the dates specified in that article’. While this may provide a more up-to-date assessment, EFAMA believes that reliance on this alternative reference period should be optional rather than mandatory. Requiring counterparties to perform a separate AANA calculation solely for the purposes of the authorisation application would create unnecessary operational burden and duplicate an exercise already performed under the existing margin framework. Given that the vast majority of investment fund managers are expected to fall below the EUR 750 billion threshold, allowing reliance on the most recent Article 39 calculation would represent a proportionate simplification without affecting supervisory outcomes.
- Par. 50 (e). To minimise unnecessary administrative burden, we believe that this requirement should be satisfied through a simple 'yes/no' attestation by the counterparty, without the need to submit supporting documentation as part of the initial application. Competent authorities would remain able to request additional evidence where necessary, including through the documentation maintained by OCPs under Section 8.4 of the Guidelines.
- Paragraphs 54. We note that paragraphs 54 allows competent authorities to specify additional information to be included in authorisation applications. While we recognise the need for competent authorities to request supplementary information in specific cases, this discretion should be exercised in a consistent and proportionate manner. Excessive reliance on additional information requests could lead to divergent supervisory practices across Member States, undermining the harmonisation objectives of the Guidelines and increasing the compliance burden for OCPs. EFAMA therefore encourages the EBA to promote a high degree of convergence in the information required by competent authorities, ensuring that the minimum information set specified in the Guidelines remains the primary basis for authorisation applications. This would help avoid unnecessary fragmentation and facilitate compliance for cross-border asset managers operating across multiple jurisdictions.
b. Minimum information to be provided in the application for authorisation of changes to a previously authorised IM model
Depending on how broadly the concept of a change requiring authorisation is interpreted, these requirements could become one of the most burdensome aspects of the new framework, as counterparties may be required to repeatedly submit information relating to a model that has already been subject to an initial authorisation process.
This consideration is especially relevant for buy-side firms, which in the vast majority of cases rely on pro forma IMMs. As such, the burden associated with re-authorisation requests will ultimately depend on the threshold established for determining which changes are sufficiently material to require a new authorisation (Section 8.2 of the draft Guidelines, 'Changes as triggers for an authorisation'). EFAMA provides further comments on this issue in the following section. Nevertheless, we would like to highlight below a number of areas where the information requirements applicable to changes to an already authorised model could be further simplified or clarified in order to ensure a proportionate and operationally efficient framework.
- Paragraph 50 (e). EFAMA considers that no proof should be required that the model has been internally validated/approved, only ‘yes/no’ attestation that appropriate arrangements are in place to allow the use of an IM model and that the use of the model has been appropriately permissioned. Moreover, EFAMA considers that indicating the date of internal approval is superfluous.
Paragraph 56. EFAMA welcomes the specific treatment afforded to counterparties using pro forma models, particularly paragraph 56(b), which allows counterparties to rely on documentation prepared by the model developer regarding changes and updates to the pro forma model itself. This is an important simplification that appropriately recognises the role of counterparties as users, rather than developers, of such models.
EFAMA believes that this principle could be extended further. In particular, where a change originates exclusively from the developer of a validated pro forma model, counterparties should be permitted, to the greatest extent possible, to rely on documentation prepared by the model developer when complying with the information requirements set out in paragraph 55. This is especially relevant for paragraph 55(f) regarding the quantitative impact of the change, as model developers are generally best placed to assess and document the impact of methodological updates to the model. Allowing counterparties to rely on such documentation would avoid duplication of effort and reduce unnecessary administrative burden without diminishing the information available to competent authorities.
- Paragraph 58. EFAMA refers to its comments in the previous section on paragraph 54, concerning the risk of supervisory divergence arising from the ability of competent authorities to request additional information beyond the minimum information requirements specified in the Guidelines. The EBA should promote a high degree of supervisory convergence to ensure that the information set prescribed in the Guidelines remains the primary basis for authorisation applications.
- Changes as triggers for an authorisation
EFAMA considers this chapter to be of particular importance, as the threshold established for determining what constitutes a change requiring authorisation will directly influence the frequency with which counterparties must submit applications for re-authorisation. Ensuring a clear and proportionate distinction between changes requiring authorisation and routine updates is therefore essential to avoid unnecessary operational burden.
EFAMA considers it is crucial to allow greater reliance on documentation prepared by the pro forma model developer. Along the same lines, pro forma model users do not have visibility over which updates would constitute a model change requiring a re-authorisations application. However, the process in the Guidelines does not explain how counterparties are expected to manage this point. In practice, they cannot reasonably apply to NCAs for each update on the assumption that it might constitute a model change. The Guidelines should therefore clearly provide for a coordination with the EBA pro forma model validation process, so that counterparties are informed whenever a model change has been identified and validated by the EBA (and that a re-authorisation by their NCA is required). Ideally, the re-authorisation should be automatically initiated and granted by NCAs, upon confirmation by counterparty that it will implement the model change as approved by the EBA.
- Paragraph 55 (a) and (c) : these requirements should be set aside readily as not relevant to pro forma model users, which in practice do not make unilateral changes to the IM model.
Paragraph 55 (e). As already mentioned, the confirmation that the change of the IM model has been audited and internally validated and date of internal approval are not relevant for pro forma model users: no proof should be required that the model has been internally validated/approved, only yes/no attestation that the change has been properly authorised should be sufficient.
If this validation/audit requirement is retained, the Guidelines should clarify that it is to be conducted annually, not prior to the implementation of each model change.
Paragraph 59 (a) and (b). We note that the situations described in these paragraphs relate to fundamental changes to the methodology, structural design, risk capture, assumptions, or asset and risk coverage of the model itself. For counterparties relying on a pro forma model such as ISDA SIMM, these aspects are generally determined by the model developer rather than the counterparty. Asset managers typically do not develop or modify the model's methodology, but rather implement and use the model within their risk management framework.
Against this background, EFAMA welcomes the clarification in paragraph 60, which states that competent authorities should follow the EBA's assessment regarding updates made by the developer of a pro forma model. However, we would welcome further clarification regarding the boundary between a pro forma model and a proprietary model. In particular, it is unclear at what point a modification made by a counterparty to the implementation or operation of a pro forma model would cease to constitute the use of that pro forma model and instead constitute an own model.
Paragraph 59 (c). EFAMA agrees that only fundamental changes to a counterparty's governance arrangements for the development, maintenance or use of an IM model should constitute a trigger for re-authorisation. However, we consider that some of the examples provided in paragraph 59(c) may be interpreted too broadly and could result in counterparties being required to submit new authorisation applications for changes that are not sufficiently material to justify reopening the authorisation process.
In this regard, EFAMA would welcome clarification that only changes that materially impair the effectiveness, independence or robustness of the governance arrangements applicable to the IM model should be considered changes requiring re-authorisation.
In particular, we note that it is common practice for buy-side firms to outsource elements of the maintenance and operation of IM models used for the exchange of initial margin. Asset managers are already subject to robust outsourcing and third-party risk management requirements under the UCITS Directive, AIFMD and DORA. The mere outsourcing of functions should therefore not automatically trigger a re-authorisation requirement. Instead, the assessment should focus on whether a change to the outsourcing arrangement weakens the governance, oversight, validation or control framework surrounding the use of the model. EFAMA therefore proposes clarifying that the outsourcing of important or critical functions should only constitute a trigger for re-authorisation where such outsourcing materially affects the governance, oversight, validation or control framework applicable to the IM model. For example, changes in service providers, vendors or technological infrastructure should not automatically trigger a re-authorisation requirement where the underlying governance and control framework remains unchanged.
Moreover, the reference to situations in which responsibility for internal validation or audit is shifted to ‘staff previously not involved in those processes’ would benefit from greater clarity. Staff turnover, internal promotions, team restructuring and transfers of responsibilities within an independent control function are common features of day-to-day business operations and should not, in themselves, trigger a re-authorisation process. EFAMA therefore suggests clarifying that only transfers of responsibility that materially affect the independence, expertise or effectiveness of the validation or audit function should constitute a change requiring re-authorisation.
- Minimum documentation requirements for OCPs
EFAMA considers that the proposed information and documentation requirements should be substantially streamlined for counterparties using a pro forma model. Such models are market-developed, standardised and subject to a separate EBA validation process. Requiring extensive model-related documentation from users of these models appears disproportionate and risks undermining the benefits of relying on a common industry model, including reduced compliance costs and greater consistency across market participants.
EFAMA considers that the proposed requirements may not be operationally workable when the use and governance of the IM model are carried out by an investment manager on behalf of the counterparty. In such cases, the counterparty may not have direct access to all of the documentation and governance evidence maintained by the investment manager. The Guidelines should therefore allow counterparties to provide evidence that the investment manager has been authorised to use the IM model on their behalf, rather than requiring them to reproduce documentation maintained by the investment manager.
- Implementation of the draft Guidelines
As a targeted drafting point, EFAMA suggests aligning the explanatory text in the ‘Implementation’ section with paragraph 45 of the same section, by specifying that Phase 5- and Phase 6-counterparties are those with an AANA above EUR 8 billion and below or equal to EUR 750 billion.
This would avoid any unintended impression that counterparties below the EUR 8 billion AANA threshold are covered by Phases 5 and 6, consistent with the EMIR bilateral margin framework, under which such counterparties are not subject to the regulatory initial margin exchange obligation.
EFAMA therefore suggests the following targeted amendment to the relevant bullet point in the explanatory text:
‘(…) to Phase 5- and Phase 6-counterparties (AANA > EUR 8 bn and AANA <= EUR 750 bn) 12 months later (i.e. from 1 January 2029)’.
Q2. Do you deem the authorisation process described in these Guidelines to be sufficiently simple and proportionate, in particular regarding the authorisation of OCPs? If not, please suggest how to enhance the proportionality or simplify the authorisation process.
We believe that requiring firms to undergo this authorisation process in each instance will prove quite onerous. This additional layer of authorisation could significantly delay firms’ ability to use such models, and the timeline for the authorisation proceedings and validation (ranging from 3 to 6 months) also imposes an undue delay on counterparties that will otherwise not be able to use the model as soon as available.
Moreover, our members have concerns regarding the EBA’s new authorisation role over investment managers. Our firms generally have limited direct interaction with the EBA, which makes it less than ideal for the EBA to serve as the central authority for validating pro forma IMMs. ESMA would appear to be a more appropriate supervisory authority for investment managers than the EBA, whose supervisory focus is traditionally centred on credit institutions and investment firms.