Response to joint Consultation on draft RTS on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP

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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.

The issues addressed under Question 1, in particular the proposed contractual-opt out requirements and the rigid requirements concerning the assessment of the effectiveness of netting and segrega-tion agreements have an operational dimension which affects both financial and non-financial coun-terparties alike, we therefore refer to our response to Question 1 above.

Proposed Alternative:

See alternatives proposed in the response to Question 1 above.

In addition, the following aspects of a primary operational nature should be reviewed in order to pre-vent unreasonable effects or minimise the operational burdens:

1. New Minimum Transfer Amount Concept (cross-margin type):

Art. 2 GEN (4) (a) and (6) demands that minimum transfer amount (MTA) is calculated as the total amount of all initial margins and variation margins to be posted, that is, without differentiating be-tween variation and initial margin. This concept of the MTA differs significantly from the under-standing of the MTA and the function it performs in current practice.

The operational implementation of this new MTA concept would be very challenging since it would require the implementation of new allocation and monitoring systems permitting the calculation of the MTA across initial and variation margin.

These challenges are acerbated by the requirement to exchange the total collateral amount owed once the MTA-threshold is exceeded, regardless of the amounts involved and without any operational de minimis transfer amount. In effect this means that, as of this point, the MTA effec-tively turns into a zero threshold. As a consequence, the number of margin calls between coun-terparties will increase significantly.

Electronic processing can reduce these challenges only to a limited degree and, is in any event, not an option in relation to those counterparties, which have no access to such electronic pro-cessing (in particular smaller and medium sized counterparties where the introduction of elec-tronic processing systems is commercially not justified). In this context, it should be taken into account that the risk exposure of credit institutions would be limited, and in any way, be ad-dressed by existing capital requirements under the CRR.

The above described negative effects could be minimised by introducing

 two separate total MTAs, one for variation margins and another for initial margins and
 an additional operational de minimis threshold (to be agreed between the parties but not ex-ceeding a maximum amount of 50,000 €) which would apply once the MTA-threshold of 500,000 € has been exceeded for the first time, thereby triggering the first exchange of col-lateral.
The MTA and this additional de minims threshold would, in practice, operate as follows:

Where the amount of collateral calculated exceeds the MTA of 500,000 € for the first time, the full amount of collateral as calculated would need to be exchanged. If, subsequently, the absolute difference of already exchanged collateral and the new total collateral amount does not exceed the de-minimis threshold (that is, an additional collateral amount of less than 50,000 € in the event the parties agreed on a de minimis threshold of 50,000 €), no additional collateral would need to be exchanged. If, however, the new total collateral amount calculated should exceed the previous total collateral amount by the agreed de minimis amount (or more), the new total amount of collateral as calculated would need to be posted.

In any event, the exact function and understanding of the MTA (and any de-minimis threshold to be introduced) will need to be defined as clearly as possible to avoid any misconception and mis-understandings between counterparties.


Proposed Alternative:

 Introduction of two separate total MTAs, one for variation margins and another for initial margins.
 Introduction of an additional operational de minimis threshold for any subsequent margin call, to be agreed between the counterparties but not exceeding an amount of 50,000 €).


2. Concentration limits

The provisions on concentration limits as currently designed would also result in considerable and unnecessary operational burdens. As this issue is, however, addressed in more detail in our re-sponse to Question 5 below, we refer to our response to this question.


3. Overlap with/duplication of CRR requirements:

A further issue of an operational nature specifically affecting credit institutions is the relationship of certain obligations under the draft RTS which are very similar if not identical to obligations ex-isting under Regulation No. 575/2013 (capital requirements regulation – CRR). Cases in point are the requirements under

 Art. 6 MRM (2) (corresponding provisions: Art. 295 and 296 CRR),
 Art. 1 SEG (5) (corresponding provisions: Art. 194 CRR),
 Art 3 IGT (corresponding provisions: Art. 113 (6) and (7) CRR).

Conflicting or unnecessary duplications of largely similar procedures should clearly be avoided. This could be ensured by either clarifying that the relevant obligations are to be understood and implemented as under the CRR or, alternatively, by replacing the relevant provisions setting out the requirements by references to the corresponding CRR provisions.

Proposed Alternative:

Clarification that the relevant obligations are to be understood and implemented as under the CRR or, alternatively, inclusion of references to the corresponding CRR provisions.

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?

We believe that the introduction of a uniform internal model, developed by the industry, will address these issues. This, however, presupposes that such standard model is accepted uniformly by all relevant regulatory authorities.

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 terms re-hypothecation, re-pledge and re-use are undefined terms which are sometimes used interchangeably and sometimes used to describe very different legal concepts with very different legal risks. In particular the term re-hypothecation is a term originating in US law and thus difficult to transpose into continental law.

The Recommendations adopted by the Financial Stability Board addressing risk associated with securi-ties lending and repo transactions (Policy Framework for Addressing Shadow Banking Risks in Securi-ties Lending and Repos – 29th August 2013) clearly distinguish between re-hypothecation on the one hand and re-use on the other. Re-hypothecation is understood by the FSB to mean the re-use of cli-ent assets (that is assets which up to the point in time where the re-use occurs, are still owned by the client).

Re-hypothecation also needs to be clearly distinguished from full-title transfer transactions where the collateral provider expressly relinquishes title for the purpose of providing collateral (full title transfer being the standard/most prevalent form in which collateral is currently provided for margining pur-poses, specifically variation margin). Where the receiving party obtains full title any further “use” of the assets acquired should clearly be unrestricted (as this is the central purpose of acquiring full title). In particular, there cannot be any restrictions which, in any way, could affect the legal rights of any third party subsequently acquiring title to these assets (otherwise the whole concept of transfer of title would be put into question).

Furthermore, a clear distinction will presumably have to be made between cash collateral and securi-ties since certain restrictions on re-use only make sense in respect of securities and cannot be im-plemented in the same manner in relation to cash collateral.

A further issue in this context is the need for consistency and coordination with parallel regulatory developments: The issue of re-use/re-hypothecation/re-pledge of collateral or protection of client assets against re-use is currently being addressed in the context of at least two other parallel legisla-tive initiatives on European level (SFT-Regulation and also MiFID). The scope of practices to be cov-ered by these initiatives varies or is sometimes not yet clearly defined. Against this background, we see a need to define the scope of practices to be covered by a prohibition of re-use (including re-hypothecation and re-pledge) as clearly as possible and to coordinate the various initiatives in order to prevent conflicts or inconsistencies.

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German Banking Industry Committee - Deutsche Kreditwirtschaft