Response to joint Consultation on draft RTS on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP
Go back
Moreover, the RTS requires a written agreement between parties in case one or both want to make use of exemptions provided by the RTS. This opt-out approach is unnecessarily burdensome and not in line with the BCBS-IOSCO framework. It would require a repapering exercise with many counterparties and clients which would not be required to post any margin by the BCBS-IOSCO framework. An option to agree on bilateral margining voluntarily (an opt-in approach) would be more workable. In any event we feel the requirement not to apply the margining rules for these transactions should be the base rule. This would avoid any burdensome and costly repapering exercise with counterparties.
Furthermore, ING Bank strongly advocates not having the outstanding notional for intercompany transactions count against the aggregate notional size of non-centrally cleared derivatives that determines the timing of when the initial margin requirement becomes effective as (and in so far) they are exempt from exactly those requirements. Similarly, this should apply to other trades that are exempted from the initial margin requirements, i.e. physically-settled FX Forwards and trades with sovereigns, central banks, multilateral banks, BIS and PSE.
Besides the option for bilaterally agreeing the initial margin model (inputs) to be used, ING Bank is of the opinion that the RTS should promote the usage of industry models. By using the same model across a large group of market participants, the extra reconciliation and dispute management burden regarding the determination of the proper initial margin amount can substantially be reduced.
However, we do see difficulties in the use of an IRB model with regard to assessing individual securities internally and – as a consequence – we wonder whether the IRB-model will largely be opted for by market counterparties. Firstly, investments should be made in extending the current infrastructure to assess counterparties to the issuers of securities and individual issues. Secondly, the bilateral utilization of an IRB-model may introduce yet another source for disputes between the two entities party to the CSA (on the eligibility and the haircut of the collateral) and thereby a new level of complexity in the daily agreeing of collateral transfers.
We do, however, recognize certain complications in meeting the conditions as set by the BSBC/IOSCO. Collateral outside of the US typically moves by title transfer, under an English law Credit Support Agreement (under which the initial margin concept is being referred to as the “Independent Amount”). Prohibition on re-hypothecation (as well as the segregation requirement in the proposed RTS) is inconsistent with title transfer and presents a legal re-characterization risk). To ensure fulfilment of all the conditions for the re-use of initial margins under the proposed framework therefore, credit support documentation would necessarily have to take the form of a security interest documented under an English law Credit Support Deed. (The New York law CSA already operates in a similar way). This would require a costly and time-consuming revisit of existing credit support documentation which institutions have in place with their counterparties. Security arrangements can take several weeks if not months to (re)negotiate and the associated costs are high. (There would inevitably need to be an industry consensus around certain forms and structures.) A further complicating factor is the number of jurisdictions that can potentially be involved in any one security arrangement: in such cases it would not always be clear which jurisdiction’s rules need to be complied with and what happens if there is a conflict of laws. The consequence of all these factors is that it can be burdensome to try to take cross-border security and the end result can often be less clear-cut than is desirable. In Europe, while the Financial Collateral Directive was intended to simplify and provide more certainty (and a level playing field) in respect of the process of taking financial collateral across the EU, differences in its implementation and interpretation across the EU, as well as a lack of clarity as to the meaning of some of its key terms, means that difficulties are often encountered in practice when attempting to benefit from its provisions.
Question 2. Are there particular aspects, for instance of an operational nature, that are not addressed in an appropriate manner? If yes, please provide the rationale for the concerns and potential solutions.
ING Bank firmly considers the administrative procedure that is required to have intercompany transactions not be subject to initial margin requirements to be overly burdensome. Therefore, we would advocate to include a general exemption for intragroup entities to not be required to exchange initial margin, but variation margin only (at least for banks within a single supervisory environment e.g. the Eurozone going forward).Moreover, the RTS requires a written agreement between parties in case one or both want to make use of exemptions provided by the RTS. This opt-out approach is unnecessarily burdensome and not in line with the BCBS-IOSCO framework. It would require a repapering exercise with many counterparties and clients which would not be required to post any margin by the BCBS-IOSCO framework. An option to agree on bilateral margining voluntarily (an opt-in approach) would be more workable. In any event we feel the requirement not to apply the margining rules for these transactions should be the base rule. This would avoid any burdensome and costly repapering exercise with counterparties.
Furthermore, ING Bank strongly advocates not having the outstanding notional for intercompany transactions count against the aggregate notional size of non-centrally cleared derivatives that determines the timing of when the initial margin requirement becomes effective as (and in so far) they are exempt from exactly those requirements. Similarly, this should apply to other trades that are exempted from the initial margin requirements, i.e. physically-settled FX Forwards and trades with sovereigns, central banks, multilateral banks, BIS and PSE.
Besides the option for bilaterally agreeing the initial margin model (inputs) to be used, ING Bank is of the opinion that the RTS should promote the usage of industry models. By using the same model across a large group of market participants, the extra reconciliation and dispute management burden regarding the determination of the proper initial margin amount can substantially be reduced.
Question 4. In respect of the use of a counterparty IRB model, are the counterparties confident that they will be able to access sufficient information to ensure appropriate transparency and to allow them to demonstrate an adequate understanding to their supervisory authority?
In principle, ING Bank has no strong objections against allowing for internal rating based qualification of collateral, when external rating-based qualification remains an option as well.However, we do see difficulties in the use of an IRB model with regard to assessing individual securities internally and – as a consequence – we wonder whether the IRB-model will largely be opted for by market counterparties. Firstly, investments should be made in extending the current infrastructure to assess counterparties to the issuers of securities and individual issues. Secondly, the bilateral utilization of an IRB-model may introduce yet another source for disputes between the two entities party to the CSA (on the eligibility and the haircut of the collateral) and thereby a new level of complexity in the daily agreeing of collateral transfers.
Question 6. How will market participants be able to ensure the fulfilment of all the conditions for the reuse of initial margins as required in the BCBS-IOSCO framework? Can the respondents identify which companies in the EU would require reuse or re-hypothecation of collateral as an essential component of their business models?
The ability to re-hypothecate / re-use the collateral received is at the heart of the banking business model. Trapping liquidity in segregated accounts is counterproductive towards banks’ core function which is to provide credit. Therefore, ING strongly supports to have possibility to re-hypothecate / re-use collateral received as initial margin.We do, however, recognize certain complications in meeting the conditions as set by the BSBC/IOSCO. Collateral outside of the US typically moves by title transfer, under an English law Credit Support Agreement (under which the initial margin concept is being referred to as the “Independent Amount”). Prohibition on re-hypothecation (as well as the segregation requirement in the proposed RTS) is inconsistent with title transfer and presents a legal re-characterization risk). To ensure fulfilment of all the conditions for the re-use of initial margins under the proposed framework therefore, credit support documentation would necessarily have to take the form of a security interest documented under an English law Credit Support Deed. (The New York law CSA already operates in a similar way). This would require a costly and time-consuming revisit of existing credit support documentation which institutions have in place with their counterparties. Security arrangements can take several weeks if not months to (re)negotiate and the associated costs are high. (There would inevitably need to be an industry consensus around certain forms and structures.) A further complicating factor is the number of jurisdictions that can potentially be involved in any one security arrangement: in such cases it would not always be clear which jurisdiction’s rules need to be complied with and what happens if there is a conflict of laws. The consequence of all these factors is that it can be burdensome to try to take cross-border security and the end result can often be less clear-cut than is desirable. In Europe, while the Financial Collateral Directive was intended to simplify and provide more certainty (and a level playing field) in respect of the process of taking financial collateral across the EU, differences in its implementation and interpretation across the EU, as well as a lack of clarity as to the meaning of some of its key terms, means that difficulties are often encountered in practice when attempting to benefit from its provisions.