Response to second Joint Consultation on draft RTS on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP
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However, according to paragraph 5 “For all netting sets where no initial margin is required, because of the potential exceptions of Section 1, Chapter 1 of this Regulation, the collection shall not exceed one business day.” We propose a reconsideration of this requirement on the following basis:
1. It will mean entities will have to manage different collection times depending on whether potential exceptions are applicable. The text states that if initial margin is not required because the counterparty is below the OTC position at consolidated level threshold (3 trillion €), or because the initial margin for that netting set does not exceed the threshold agreed in the corresponding agreement, then T+1 would still be applicable and difficult to comply with.
With the aim to be more practical and consistent, we propose a unique T+3 deadline regardless of whether the company is subject to I.M. requirements, V.M. requirements or both.
2. In line with point 1, if we were to apply different requirements for each netting set, the reconciliation process would become more complex. The amount to be exchange in terms of collateral in T could be related to transactions with date T-1, T-2 or T-3 which would complicate reconciliation tasks. Moreover if we consider the reporting reconciliation process that includes I.M and V.M data.
3. Furthermore, I.M requirements will not apply when one of the counterparties is not very active in OTC derivatives and thus does not exceed the relevant thresholds. In this case, it will presumably be a smaller entity with less systemic importance in the market. In this sense, it seems reasonable to allow them a more relaxed timing for exchanging collateral.
The pre-agreement should contemplate all the exemptions allowed in the Regulation (being NFC-, not reaching the corresponding consolidated threshold in OTC for each period, not reaching the new threshold of 8 billion€ in consolidated OTC position for each period), so that the counterparties should not have to re-negotiate their agreement every time their position in OTC derivatives change.
It would help if counterparties´ classification in terms I.M thresholds were published by local regulators or ISDA (instrumented like the NFC+/NFC- representation protocol, for example) so companies would be able to consult it easily, not having to contact all of their counterparties.
Respondents are invited to comment on the proposal in this section concerning the timing of calculation, call and delivery of initial and variation margins.
The extension of the timing of exchange the collateral is welcome as there are business constraints; in terms of time zone differences, interrelations between different systems in the company and the need of coordinate different business units participating in the process (collateral and derivative position valuation, reconciliation, calculation of margins, settlement, etc.); that make it very difficult to meet the T+1 deadline.However, according to paragraph 5 “For all netting sets where no initial margin is required, because of the potential exceptions of Section 1, Chapter 1 of this Regulation, the collection shall not exceed one business day.” We propose a reconsideration of this requirement on the following basis:
1. It will mean entities will have to manage different collection times depending on whether potential exceptions are applicable. The text states that if initial margin is not required because the counterparty is below the OTC position at consolidated level threshold (3 trillion €), or because the initial margin for that netting set does not exceed the threshold agreed in the corresponding agreement, then T+1 would still be applicable and difficult to comply with.
With the aim to be more practical and consistent, we propose a unique T+3 deadline regardless of whether the company is subject to I.M. requirements, V.M. requirements or both.
2. In line with point 1, if we were to apply different requirements for each netting set, the reconciliation process would become more complex. The amount to be exchange in terms of collateral in T could be related to transactions with date T-1, T-2 or T-3 which would complicate reconciliation tasks. Moreover if we consider the reporting reconciliation process that includes I.M and V.M data.
3. Furthermore, I.M requirements will not apply when one of the counterparties is not very active in OTC derivatives and thus does not exceed the relevant thresholds. In this case, it will presumably be a smaller entity with less systemic importance in the market. In this sense, it seems reasonable to allow them a more relaxed timing for exchanging collateral.
Respondent are invited to provide comments on whether the draft RTS might produce unintended consequence concerning the design or the implementation of initial margin models.
We are not considering the implementation of Initial margin models.Respondents are invited to comment on whether the requirements of this section concerning the concentration limits address the concerns expressed on the previous proposal.
NA.Respondent to this consultation are invited to highlight their concerns on the requirements on trading relationship documentation.
We agree in making broadening the requirements that written agreements with counterparties should cover, furthermore it would help if a General Standard Agreement was defined contemplating all regulatory requirements.The pre-agreement should contemplate all the exemptions allowed in the Regulation (being NFC-, not reaching the corresponding consolidated threshold in OTC for each period, not reaching the new threshold of 8 billion€ in consolidated OTC position for each period), so that the counterparties should not have to re-negotiate their agreement every time their position in OTC derivatives change.
It would help if counterparties´ classification in terms I.M thresholds were published by local regulators or ISDA (instrumented like the NFC+/NFC- representation protocol, for example) so companies would be able to consult it easily, not having to contact all of their counterparties.
Respondents are invited to comment on the requirements of this section concerning the legal basis for the compliance.
NA.Does this approach address the concerns on the use of cash for initial margin?
NA.Respondents are invited to comment on the requirements of this section concerning treatment of FX mismatch between collateral and OTC derivatives.
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