The changes in treatment of third country NFC-s are welcomed. However, we would like to address the issue concerning ‘netting unfriendly’ jurisdictions. As a bank with a sizable financial markets division we enter into derivative transactions with counterparties on all continents. A large number of countries has not enacted netting legislation and consequently we have not granted netting (and collateral) benefits to counterparties in these jurisdictions. The current draft RTS sets out, in addition to the obligation to collect collateral, also an obligation to post collateral. This could be undesirable when facing counterparties in netting unfriendly jurisdictions. For example, EU banks deal with financial counterparties in Saudi Arabia on a ‘gross exposure’ basis, exposure may not be accounted on a net basis under Capital Requirements Regulation. Typically for derivative counterparties in these jurisdiction EU banks do not use collateral agreements for risk mitigation because of the risk of ‘cherry-picking’ from posted collateral. We request that EU counterparties should not be required to post margin (IM or VM) to counterparties in jurisdictions lacking netting legislation (and enforceability).
In general, we do want to express our concerns regarding the non-level playing field issues that arise between the draft requirements across regulatory zones. These may disrupt or dislodge derivatives markets. Whereas in the draft regulation under Dodd-Frank and in Japan, (deliverable) FX Forwards are not to be covered with variation margin, under EMIR they are. Furthermore, under Dodd-Frank variation margin can only be provided in cash whereas under EMIR a broad range of eligible collateral is allowed.
On the point of cash collateral vs non-cash collateral, where institutions will have the possibility to exchange non-cash collateral, this type of collateral will have a large impact on the leverage ratio. This will lead to strong valuation differences between cash and non-cash CSAs. This may impact hedge activity and market liquidity.
In light of the time zone differences and the time it takes to settle different eligible asset types, the extra slack provided in collecting initial and variation margin calls is welcomed.
We do however want to raise that it is not sufficiently clear what is meant with ‘calculation date’. Is this the day that the margin call is being issued or the day that the margin call is based upon (which is one business day earlier)? We would suggest that the day that the margin call is issued should be taken as the day from which the clock starts ticking.
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.
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. The reasoning behind this is that the trade population which is used to determine a firm’s materiality level and related phase-in requirement should be 100% in sync with which trade population is going to be subject to the initial margin requirements.
If intercompany trades should be included, their notional value should only be counted once instead of twice (as the risks for two entities within one group are typically offsetting).
A typical banking group (or financial group in general) would have its treasury activities concentrated in one entity, where all the clearing and platform memberships are set. Affiliates in the group would make use of that central treasury entity for its clearing and trading activities, as an access point to the financial markets. Cleared transactions are exempted, however it is not clear from the RTS that client clearing transactions (client –clearing broker trades) are also excluded. In the ESMA Q&A it was made clear in general answer (2) that cleared ‘affiliate trades’ should be treated differently than regular OTC trades, but this needs however to be expressly set out in the RTS to provide legal certainty to market participants.
We are welcoming the decrease in operational burden that this second draft RTS proposes vis-à-vis the first draft (though for systemically important institutions like ING the decreased burden is limited).
For counterparties which we do not have large exposure to on an individual name basis, monitoring concentration limits expressed in percentages of the total collateral we receive from that counterparty is in our view not sufficiently risk-based yet. We therefore would propose to include a minimum absolute level above which the percentages apply. We suggest to set the minimum absolute level at EUR 100 mln.
A general remark is that if institutions from a risk perspective are uncomfortable with exchanging a wider set of collateral than cash and government bonds, the high quality collateral market may be squeezed.
ING suggests to amend Art. 2 OPD (2) (p48) regarding the annual independent legal review requirement and align it with the existing legal opinion review requirements in the Capital Requirement Regulation under Article 296. The legal opinion requirement should be applicable for all FCs and NFC+s.
In addition, with respect to the combination of article 2.1. OPD(page 47) and article 1.2. FP (page 52). Additional documentation requirements for all parties (FC, NFC+, NFC, EEA/non-EEA, intragroup and for all products) which lead to the necessity to sign ISDA documentation (or equivalent master agreement documentation) in all cases. This is understandable, however we highlight that the timing is burdensome. Master agreement negotiations may take a long time in some cases. We suggest to bring the documentation requirements in line with the VM timeline.
Regarding Article 1 SEG (p 48.): The requirement to protect IM from the default or insolvency of the third party holder or custodian is not realistic when the IM is posted in cash because in none of the EU jurisdiction cash enjoy a legal /regulatory protection from the insolvency of the custodian, not even in the UK under client money rules. The consequence of this RTS requirement would be that cash will not be exchanged as IM by market participants as the EU jurisdiction lack segregation/protection structures.
We are welcoming the possibility to re-invest the cash received. However, we do not understand the requirement that the re-investment should have as a purpose to protect the collateral poster. We would alternatively propose to allow for being able to re-use the cash received under those conditions that are agreed between collateral poster and receiver.
For determining the FX mismatch for variation margin purposes, it is unclear what the definition of the ‘transfer currency’ is. We suggest this should be defined as the currency in which the actual collateral received/posted is denominated. We also propose to consider equal treatment of FX haircutting for initial margin (so against the termination currency) and the (future) SA-CCR method.