1. Scope of application of the draft regulatory technical standards

In our Response we expressed our understanding that transactions of Financial Counterparties (FCs) and non-Financial Counterparties above the clearing threshold (NFC+s) entered into with non-Financial Counterparties below the clearing threshold (NFC-s) and entities to which Regulation (EU) No. 648/2012 (EMIR) does not apply in accordance with Article 1 paragraphs 4 and 5 of EMIR (Exempt Entities) do not fall within the scope of Article 11 (3) of EMIR and, consequently, the RTS in general. Consistent with this understanding, the ESAs clarified in Article 1 GEN of the previous draft RTS that FCs and NFC+s may agree with Exempt Entites not to exchange initial and variation margin.

However, as we pointed out in our Response, FCs and NFC+s should not only be free to agree with NFC-s and Exempt Entities whether they post to and/or collect from these counterparties collateral at all, but also, in case they do so, to which extent and which type of collateral is exchanged and under which arrangements. Therefore, if FCs or NFC+s enter into transactions with NFC-s or Exempt Entities and voluntarily agree on posting and/or collecting collateral, they should not be obliged to apply the requirements of the RTS in any respect, but should be free to agree on the terms of such collateralization as deemed appropriate from a risk management point of view (e.g. they may collect collateral for variation margin only but not for initial margin and/or may accept collateral other than eligible collateral as defined in the draft RTS).

Our Response suggested to address all the aspects described in the preceding paragraph and - to avoid any uncertainty and misinterpretation by FCs and NFC+s in their implementation process of the RTS with respect to transactions entered into with NFC-s and Exempt Entities– by including in Article 1 GEN of the previous draft RTS an unambiguous provision on the general inapplicability of the RTS to transactions with Exempt Entities, or alternatively to appropriately amend Article 2 GEN (4) of the previous draft RTS.

We now note that Article 2 GEN (4)(c) has been deleted in the current draft RTS and no reference to the treatment of transactions with Exempt Entities under the RTS is made anymore. Furthermore, recital (1) to the current draft RTS now explicitly states that counterparties which agree on collecting or posting collateral beyond the requirements of this Regulation may retain the right to have such collateral covered by the RTS. Without any further comment provided by the ESAs on the changes to Article 2 GEN of the draft RTS in the second consultation paper, we conclude that the ESAs have come to the conclusion that there is no need to clarify in the RTS that the RTS do not apply to transactions of FCs or NFC+s with Exempt Entites .

1 We note that ESMA’s answer to OTC Question 12 (i) of the ESMA EMIR FAQ is consistent with our understanding that Article 11 of EMIR and, consequently, the RTS subject to the consultation are not applicable in their entirety to transactions with Exempt Entities.
2. Do the requirements of this section concerning the concentration limits address the concerns expressed on the previous proposal? (Question 4)

In our Response we answered the question: “Application of concentration limits to securities issued by sovereigns, regional authorities and public sector entities (Question 5)” and pointed out that no concentration limits were actually proposed in the former draft RTS for debt securities issued by multilateral development banks and international organisations to which a zero risk-weighting is assigned (Article 1 LEC (1) (h) and (i), former draft RTS, respectively).

We suggested that securities issued by public sector entities to which a zero risk weighting can be assigned in accordance with Article116 (4) of Regulation (EU) 575/2013 should also be exempted from concentration limits for purposes of equal treatment.

While we appreciate that the current draft RTS now foresee an equal treatment in relation to concentration limits for securities of the asset classes referred to in Article 1 LEC (1) (c), (d), (e), (h) and (i), we still have the view that all these asset classes should not be subject to such concentration limits. This is justified by the extremely high liquidity and credit quality of these securities which is acknowledged in the relevant provisions of pertinent EU legislation, e.g. provisions with respect to the inapplicability of the limits of the large exposures regime (Article 400(1)(a) to (e) of Regulation (EU) No 575/2013), the diversification requirements under the liquidity coverage ratio (Article 417 (a) Regulation (EU) No 575/2013 in conjunction with Article 8(1) of Commission Delegated Regulation (EU) 2015/61) and the applicability of a zero risk factor for market risk concentration (Article 187(3) and (4) of Commission Delegated Regulation (EU) 2015/35).

Further, we note that key principle 4 of the final policy framework Margin requirements for non-centrally cleared derivatives of the Basel Committee on Banking Supervision (BCBS) and the Board of the International Organization of Securities Commissions (IOSCO) only requires that accepted collateral should be reasonably diversified and, accordingly, that entities covered by the requirements should ensure that the collateral collected is not overly concentrated in terms of an individual issuer, issuer type and asset type. Therefore, neither are specific quantitative concentration limits on the asset classes referred to in Article 1 LEC (c), (d), (e), (h) and (i) required by the BCBS/IOSCO policy framework nor would they be consistent with existing EU regulation with respect to diversification requirements in comparable regulatory contexts as outlined above.

In addition, it is not clear to us how an entity referred to in Article 7 LEC (2) of the current draft RTS will be in the position to continuously monitor whether the collateral collected by its counterparty exceeds the EUR 1 billion threshold set by Article 7 LEC (3)(c) of the draft RTS and, consequently, whether it needs to apply the concentration limits to the collateral collected from such counterparty. The entity needs to be in a position a) to rely on a representation by its counterparty that it has not exceeded the threshold and b) to have the time to implement the necessary contractual arrangements and operational processes with the counterparties which may exceed the threshold at some point in time. We are very concerned that the operational implications of the regime established by Article 7 LEC (2) to (4) of the current draft RTS will lead to a cost mark-up or a complete refusal to accept securities from the asset classes referred to in (c), (d), (e), (h) and (i) as collateral.

In light of the foregoing, we suggest that the concentration limits for central and regional governments, central banks, local authorities and public sector entities be restricted to debt securities issued by these entities that are not assigned a zero-risk weighting according to Part Three Title II Chapter 2 of Regulation (EU) 575/2013.

This result could be achieved by adding the following subparagraph to Article 7 LEC (4) of the draft RTS:

“The preceding subparagraph shall not apply to debt securities issued by central and regional governments, central banks, local authorities or public sector entities that are assigned a zero-risk weighting according to Part Three Title II Chapter 2 of Regulation (EU) 575/2013.”

As the securities of the asset classes referred to in Article 1 LEC (1) (h) and (i) are assigned a zero risk-weighting in Article 117 (2) and 118 of Regulation (EU) 575/2013, respectively, the references to these asset classes could be deleted in Article 7 LEC (4)(a), too.

Finally, we are also concerned about the operational implications of introducing concentration limits on securities as collateral on a per-counterparty basis in general. Concentration limits on collateral collected should from our point of view be imposed on the overall portfolio of collateral collected for the asset classes for which such restrictions are justified under liquidity and credit quality considerations. We deem concentration limits on the collateral collected from each individual counterparty far too restrictive from a risk management point of view and are concerned that the operational implications arising therefrom will ultimately result in higher costs charged to the counterparty posting securities as collateral or even to non-acceptance of securities as collateral.
Mark Weber