The current RTS envisages the Standardised Method as well as approved internal initial margin models.
• Implementation issues and timelines. We expect broker-dealers to have a preference for using their internal models. By applying more favourable pricing they may effectively push end users towards using these internal models. This may lead to a wide variety of initial margin models in the market. Counterparties will have to agree bilaterally on the use of initial margin models. In the absence of adequate market standards this will make the implementation process burdensome and costly. It will be difficult for counterparties to implement a variety of initial margin models in their systems. With respect to EMIR reporting we have seen that the absence of market standards (f.e. on the generation of unique trade identifiers (UTIs)), caused significant delays and additional costs. We foresee similar problems when negotiating initial margin models. We therefore urge ESMA to incentivise the use of market standard models.
• Accuracy check, public disclosure and disputes. End users need to be able to check the accurateness of margin calls and also have to be able to dispute (incorrect) margin calls. We acknowledge that Article 1(4) MRM includes an obligation to explain the initial margin model ‘in a way that a knowledgeable third party would be able to replicate the calculation’. We would like to see this clarified so that, like the standardised model, there is full and public disclosure of the approved initial margin model including a calculation tool in a standardised format.
Concentration limits for collateral should not apply to certain instruments widely used by pension funds, such as corporate and government bonds, for which liquidity is lower in distressed market conditions. We are concerned about the pro cyclical effects of these concentration limits and believe it is an unnecessary requirement, also given the extremely low default risk of pension funds. The proposed threshold does not appreciate the fact that this risk applies to bigger pension funds as well.
Where the collateral pool is small (which is likely to be the case) achieving the prescribed diversification is impractical and unnecessary. Therefore, the proposed prescriptive concentration limits would cause operational issues with no added value.
We are pleased to see that ESMA recognises the effect that obtaining legal opinions may lead to an excessively burdensome process. We also recognize the fact that there needs to be sufficient legal assurance regarding the effectiveness and enforceability of the segregation structures. The only way to truly tackle the abovementioned items is to use standardised documentation and to have generic legal opinions published with respect to the relevant countries and custodians/(I)CSDs. In practice most custodians/(I)CSDs provide standard (triparty) documentation. It would be beneficial for the market if these custodians/(I)CSDs publish standardised opinions regarding their documentation. On top of that industry bodies could publish additional opinions with respect to the various countries.
We do not agree with the approach taken on rehypothecation. Although we understand the underlying reasons, we see it as an important liquidity tool, particularly now the collateral demand on pension funds has increased substantially. As such, we consider it as a much needed instrument, particularly where multiple pension funds use a dedicated treasury center for netting benefits and we believe that rehypothecation should be allowed for transactions between pension scheme arrangements as defined under EMIR. When properly managed and controlled it can offer benefits to the financial system, now the collateral demand in aggregate is so substantially increased.
The rehypothecation provisions should only apply if opted for by the client after being informed about the rehypothecation, which is also the approach under the proposed Regulation on securities financing transactions.