Response to second Joint Consultation on draft RTS on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP
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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.
Respondents are invited to comment on the proposal in this section concerning the timing of calculation, call and delivery of initial and variation margins.
NARespondent are invited to provide comments on whether the draft RTS might produce unintended consequence concerning the design or the implementation of initial margin models.
NARespondents are invited to comment on whether the requirements of this section concerning the concentration limits address the concerns expressed on the previous proposal.
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.