Response to joint Consultation on draft RTS on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP
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We would like to stress the importance to align the interpretation of CRR with EMIR. Therefore, transactions within a group and, based on Article 113 (7) CRR, within institutional protection schemes should automatically benefit from the relevant intragroup exemptions of the EMIR regulation.
2. Legal impediments/non-reliance on the intragroup exemptions:
Article 3 IGT (1) (a) and (b) mention the legal impediments to the prompt transfer of own funds which would result in the non-reliance on the intragroup exemptions. Many regulatory regimes and all insolvency, resolution or similar other regimes, by their nature, contain provisions which can affect the ability of the regulated or insolvent party or the party under resolution to effect payments or transfer assets.
We believe that regulatory restrictions" should only be a valid legal impediment from the moment institutions do not comply with regulatory restrictions any more. Art. 1 IGT (1) (b) should mean that such impediment is only deemed to exist upon initiation of such
proceedings but not before.
The relevant requirement would effectively invalidate the effects of the exemption for intragroup transactions in the Regulation, which forms the legal basis of the RTS. This cannot and must not be the intention of the supervising authorities. The intragroup exemption is essential to minimize any adverse effects of and challenges posed by the application of mandatory margining to transactions between members of the same group or institutional protection scheme.
3. Implementation of collateral transfer made of units or shares of UCITS
We welcome the ability for the counterparties to use units or shares in UCITS as eligible collateral as it supports the need for liquidity in the markets and even if it does not benefit directly to the funds.
However, we must highlight some specific points:
- As Directive 2011/61/EU has introduced Alternative Investment Funds (AIF) as a newly regulated category of investment funds which comprises all funds but UCITS, a lot of AIF are comparable to UCITS which explains that they are often referred to as “UCITS-type” AIF. Examples in this respect are Austrian and German „Spezialfonds“ which can be held by only one investor. However such AIF will not be eligible as collateral, although they stick in principle to the same rules and requirements as UCITS. Consequently, we would appreciate if such “UCITS-type” AIF will also be considered eligible as collateral (Art 1 (1) (r) (LEC).
- Article 2 (1) (d) LEC - Collateral Management, and Article 1 (1) (i) OPE - Operational process for the exchange of collateral should take due account of the principle of proportionality. Small banks primarily access the markets through another central institution. We believe that relevant collateral management procedures should apply the principle of proportionality. EBA also recommended that smaller banks which access markets through another institution will not have to be active in several advanced money and capital markets. Thus, we support to redraft the provisions regarding collateral management procedures of the draft RTS. Similarly, the periodical verification of the liquidity of the eligible collateral (Art. 1 (1) (i) OPE) should be in the responsibility of the institution through which smaller banks access markets, but not the small institutions themselves.
- We are questioning if the exemption of exchange of collateral according to Art 2 (4) and (6) GEN comprises both initial margins and variation margins. If yes, this has not been mentioned in the chapter 3. backround and rationale.
4. Forex financial instruments:
We consider that foreign exchange transactions with a commercial purpose and which are physically settled should be granted the possibility to be excluded from the collection of the variation margin along with the initial one.
Regarding the variation margin: the requirements should be relevant for FX-swaps and FX-forwards, but only for deals with a settlement period beyond 3 months (below the 3 months, the counterparty risks can be considered as low, and the mitigation of the settlement risk has already been addressed by the payment-versus-payment settlement system (CLS).
Foreign exchange transactions with central banks should be exempted from EMIR requirements. Their purpose and low risk for the counterparty differ from the other Forex instruments and should be regarded as such.
5. Post capital or hold assets
According to Recital 3, a counterparty shall have the choice either to post / collect (initial) margins or holding own capital if the amount of initial margin is below the threshold.
Investment funds are subject to the so-called cover rule (cf. Art. 51 para. 3 of Directive 2009/65/EC as well as CESR consultation 10-108). This means, they are only allowed to enter into investments in derivatives. The obligations of such investments have to be met with the assets of the investment fund.
In order to avoid any misinterpretation, the ESAs should clarify in Recital 3 that in case of investment funds, complying with the cover rule is an equivalent to holding own capital."
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.
1. Exemption for intragroup transactionsWe would like to stress the importance to align the interpretation of CRR with EMIR. Therefore, transactions within a group and, based on Article 113 (7) CRR, within institutional protection schemes should automatically benefit from the relevant intragroup exemptions of the EMIR regulation.
2. Legal impediments/non-reliance on the intragroup exemptions:
Article 3 IGT (1) (a) and (b) mention the legal impediments to the prompt transfer of own funds which would result in the non-reliance on the intragroup exemptions. Many regulatory regimes and all insolvency, resolution or similar other regimes, by their nature, contain provisions which can affect the ability of the regulated or insolvent party or the party under resolution to effect payments or transfer assets.
We believe that regulatory restrictions" should only be a valid legal impediment from the moment institutions do not comply with regulatory restrictions any more. Art. 1 IGT (1) (b) should mean that such impediment is only deemed to exist upon initiation of such
proceedings but not before.
The relevant requirement would effectively invalidate the effects of the exemption for intragroup transactions in the Regulation, which forms the legal basis of the RTS. This cannot and must not be the intention of the supervising authorities. The intragroup exemption is essential to minimize any adverse effects of and challenges posed by the application of mandatory margining to transactions between members of the same group or institutional protection scheme.
3. Implementation of collateral transfer made of units or shares of UCITS
We welcome the ability for the counterparties to use units or shares in UCITS as eligible collateral as it supports the need for liquidity in the markets and even if it does not benefit directly to the funds.
However, we must highlight some specific points:
- As Directive 2011/61/EU has introduced Alternative Investment Funds (AIF) as a newly regulated category of investment funds which comprises all funds but UCITS, a lot of AIF are comparable to UCITS which explains that they are often referred to as “UCITS-type” AIF. Examples in this respect are Austrian and German „Spezialfonds“ which can be held by only one investor. However such AIF will not be eligible as collateral, although they stick in principle to the same rules and requirements as UCITS. Consequently, we would appreciate if such “UCITS-type” AIF will also be considered eligible as collateral (Art 1 (1) (r) (LEC).
- Article 2 (1) (d) LEC - Collateral Management, and Article 1 (1) (i) OPE - Operational process for the exchange of collateral should take due account of the principle of proportionality. Small banks primarily access the markets through another central institution. We believe that relevant collateral management procedures should apply the principle of proportionality. EBA also recommended that smaller banks which access markets through another institution will not have to be active in several advanced money and capital markets. Thus, we support to redraft the provisions regarding collateral management procedures of the draft RTS. Similarly, the periodical verification of the liquidity of the eligible collateral (Art. 1 (1) (i) OPE) should be in the responsibility of the institution through which smaller banks access markets, but not the small institutions themselves.
- We are questioning if the exemption of exchange of collateral according to Art 2 (4) and (6) GEN comprises both initial margins and variation margins. If yes, this has not been mentioned in the chapter 3. backround and rationale.
4. Forex financial instruments:
We consider that foreign exchange transactions with a commercial purpose and which are physically settled should be granted the possibility to be excluded from the collection of the variation margin along with the initial one.
Regarding the variation margin: the requirements should be relevant for FX-swaps and FX-forwards, but only for deals with a settlement period beyond 3 months (below the 3 months, the counterparty risks can be considered as low, and the mitigation of the settlement risk has already been addressed by the payment-versus-payment settlement system (CLS).
Foreign exchange transactions with central banks should be exempted from EMIR requirements. Their purpose and low risk for the counterparty differ from the other Forex instruments and should be regarded as such.
5. Post capital or hold assets
According to Recital 3, a counterparty shall have the choice either to post / collect (initial) margins or holding own capital if the amount of initial margin is below the threshold.
Investment funds are subject to the so-called cover rule (cf. Art. 51 para. 3 of Directive 2009/65/EC as well as CESR consultation 10-108). This means, they are only allowed to enter into investments in derivatives. The obligations of such investments have to be met with the assets of the investment fund.
In order to avoid any misinterpretation, the ESAs should clarify in Recital 3 that in case of investment funds, complying with the cover rule is an equivalent to holding own capital."
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?
n.a.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 re-use of collateral should be allowed not only for transactions cleared with CCPs but also for non-centrally cleared transactions provided that it is limited to certain type of instruments.Upload files
ST_EMIR ESMA Consulation_14072014.docx
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