Response to joint Consultation on draft RTS on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP
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The explanatory notes suggest that the exemptions were introduced to ease the operational burden and ensure proportionate implementation of margining requirements. However, the requirement of a positive agreement (whether in writing or other equivalent electronic means) in order to benefit from exemptions seems to contradict with such objective. This will create administrative burden even for exempted counterparties, products, and implementation phases.
The benefit of phasing-in is watered down as long as it does not reduce the documentation burden. Therefore we ask ESAs to require counterparties to provide the appropriate documentation only as soon as they become subject to Initial Margin requirements.
Draft rules propose that in case of any other collateral than cash, concentration limits of collateral shall apply. The operation burden of collateral substitution due to concentration limits must be addressed more appropriately. This requirement would result in increased settlement risks and new functionality requirements in collateral management systems. In general it should be noted that in the current market situation, few asset classes move around the proposed diversification limits . Based on this evidence, it is likely that these currently proposed rules would add the operational burden for many participants.
As a solution, the concentration limits should allow for more flexibility. As an example, they should only apply when the limits have been exceeded for a certain amount of days. The level of the limits has to be reconsidered based on the margin surveys. For more comments on this issue, please see our response to Q5.
The current wording of the draft RTS may allow misunderstandings. According to art 2 GEN point 3, counterparties may agree not to exchange IM where the sum of the total IM calculation does not exceed EUR 50 million. Following this requirement we understand that they can also agree to post IM voluntarily in these cases, too.
From an operational perspective it will be simpler to only then run an IM calculation. Additional capital calculations should only be required if the counterparties choose to follow the threshold exemption set in 2.3 GEN.
It would be more appropriate that the counterparty which provides for the IRB is required to provide appropriate information for counterparties. This ensures that they are able to fulfil these requirements.
FFI urges ESAs to follow the flexibility provided in global rules and ensure a level playing field for European companies.
Several partially overlapping regulatory initiatives have led to an increased demand of collateral and rehypothecation is an important measure to fulfil these collateral requirements. ESAs need to ensure in their rules that the scarcity of collateral will not prevent new market entries or become too much of a burden for the smaller and medium-sized companies.
The requirements set out in BCBS-IOSCO framework are well suited to ensure high-level protection of the original collateral. Some requirements for rehypothecation of collateral are also provided for in other European regulations (for example Proposal for a regulation of the European parliament and of the Council on reporting and transparency of securities financing transactions (COM (2014) 40 final)). This proposal contains some pretty clearly drafted information requirements that may not fit perfectly for the actual proposal but could suit well for the purpose of risk-mitigation in this respect.
The new requirements regarding the segregation of initial margins and the ban on rehypothecation will require fundamental changes to established collateral management procedures and to the contractual documentation currently in use for margining. These changes will be extremely challenging and time consuming. It is expected that the timeline estimated for the implementation is unrealistic and will be met only with great difficulty. Less formalistic requirements would significantly reduce these time constraints. National regulatory authorities will also have difficulty committing to such a timeline given the potentially large volume of model approvals needed in expectation that the industry moves to a unified modelling approach.
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.
We are pleased with the level of thresholds set in the draft rules. These are a great tool to ensure proportionality. Still it must be kept in mind that even in the case where one of the counterparties does not overcome the proposed thresholds and a need to exchange margin does not exist, a number of agreements need to be entered into. Due to the limited resources many counterparties (both financial and non-financial) have, this will pose a significant operational burden. As an example, the compliance department of a small or medium sized securities dealing firm in Finland may consist of one to two lawyers and a legal secretary.The explanatory notes suggest that the exemptions were introduced to ease the operational burden and ensure proportionate implementation of margining requirements. However, the requirement of a positive agreement (whether in writing or other equivalent electronic means) in order to benefit from exemptions seems to contradict with such objective. This will create administrative burden even for exempted counterparties, products, and implementation phases.
The benefit of phasing-in is watered down as long as it does not reduce the documentation burden. Therefore we ask ESAs to require counterparties to provide the appropriate documentation only as soon as they become subject to Initial Margin requirements.
Draft rules propose that in case of any other collateral than cash, concentration limits of collateral shall apply. The operation burden of collateral substitution due to concentration limits must be addressed more appropriately. This requirement would result in increased settlement risks and new functionality requirements in collateral management systems. In general it should be noted that in the current market situation, few asset classes move around the proposed diversification limits . Based on this evidence, it is likely that these currently proposed rules would add the operational burden for many participants.
As a solution, the concentration limits should allow for more flexibility. As an example, they should only apply when the limits have been exceeded for a certain amount of days. The level of the limits has to be reconsidered based on the margin surveys. For more comments on this issue, please see our response to Q5.
The current wording of the draft RTS may allow misunderstandings. According to art 2 GEN point 3, counterparties may agree not to exchange IM where the sum of the total IM calculation does not exceed EUR 50 million. Following this requirement we understand that they can also agree to post IM voluntarily in these cases, too.
From an operational perspective it will be simpler to only then run an IM calculation. Additional capital calculations should only be required if the counterparties choose to follow the threshold exemption set in 2.3 GEN.
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?
No. The current IRB model may be hard to implement in practise as the counterparties may not be able to share sufficient information about the IRB model to be used.It would be more appropriate that the counterparty which provides for the IRB is required to provide appropriate information for counterparties. This ensures that they are able to fulfil these requirements.
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?
In European law-making regulators should always make sure that European companies retain their capability to create growth, and that it is not harmed with more stringent requirements. This is not the case with the current ESA proposal that would ban rehypothecation of collateral. A level playing field between different markets is crucial especially in derivatives markets which are global in nature.FFI urges ESAs to follow the flexibility provided in global rules and ensure a level playing field for European companies.
Several partially overlapping regulatory initiatives have led to an increased demand of collateral and rehypothecation is an important measure to fulfil these collateral requirements. ESAs need to ensure in their rules that the scarcity of collateral will not prevent new market entries or become too much of a burden for the smaller and medium-sized companies.
The requirements set out in BCBS-IOSCO framework are well suited to ensure high-level protection of the original collateral. Some requirements for rehypothecation of collateral are also provided for in other European regulations (for example Proposal for a regulation of the European parliament and of the Council on reporting and transparency of securities financing transactions (COM (2014) 40 final)). This proposal contains some pretty clearly drafted information requirements that may not fit perfectly for the actual proposal but could suit well for the purpose of risk-mitigation in this respect.
The new requirements regarding the segregation of initial margins and the ban on rehypothecation will require fundamental changes to established collateral management procedures and to the contractual documentation currently in use for margining. These changes will be extremely challenging and time consuming. It is expected that the timeline estimated for the implementation is unrealistic and will be met only with great difficulty. Less formalistic requirements would significantly reduce these time constraints. National regulatory authorities will also have difficulty committing to such a timeline given the potentially large volume of model approvals needed in expectation that the industry moves to a unified modelling approach.