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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Moreover and in the light of the above considerations, it should be clarified that under paragraph 4(a) the reference to the 50% threshold of the collateral collected should be interpreted as:
- the other 50% can be represented by cash and/or other asset class (i.e. gold); or
- that percentage should be referred to securities issued by single issuer or by issuers domiciled in the same country whereas the remaining 50% could be represented by securities of issuers domiciled in different countries.
In other terms, according to the first interpretation a counterparty could post initial margin in securities to the maximum extent of 50% of the collateral to be collected while in second case a counterparty can totally post margin in securities provided that no more of the 50% of the securities is issued by a single issuer or by issuers domiciled in the same countries.
In order to qualify if a security should be included in the above percentage, we have to consider the country of the Issuer’s registered office or, in case of Bonds issued under a EMTN Programme, the choice of the Origin Member State of the Issuer?
Furthermore, it should be clarified that it would be advisable qualify as “independent” the legal opinions issued by well recognized national/international organisation (e.g. ISDA).
Respondent are invited to provide comments on whether the draft RTS might produce unintended consequence concerning the design or the implementation of initial margin models.
Concerning the calculation of the initial margin, we believe that it should be based on the single asset class. In this regard we proposed to introduce a threshold for each asset class above which the obligation to exchange initial margin comes into force. That threshold should take in account the riskiness of the financial instrument and so it should be linked to the duration, volatility and notional of the OTC derivative, akin to the futures market.Respondents are invited to comment on whether the requirements of this section concerning the concentration limits address the concerns expressed on the previous proposal.
With regard to the risk management procedures, we think some clarification are needed. Provided that both counterparties of the derivate contracts have to belong at least to one of the categories in paragraph 3, it should be specified if the calculation of the 1 billion threshold should be performed at the origination of the derivate transaction or even subsequently and, in the latter case, the related frequency.Moreover and in the light of the above considerations, it should be clarified that under paragraph 4(a) the reference to the 50% threshold of the collateral collected should be interpreted as:
- the other 50% can be represented by cash and/or other asset class (i.e. gold); or
- that percentage should be referred to securities issued by single issuer or by issuers domiciled in the same country whereas the remaining 50% could be represented by securities of issuers domiciled in different countries.
In other terms, according to the first interpretation a counterparty could post initial margin in securities to the maximum extent of 50% of the collateral to be collected while in second case a counterparty can totally post margin in securities provided that no more of the 50% of the securities is issued by a single issuer or by issuers domiciled in the same countries.
In order to qualify if a security should be included in the above percentage, we have to consider the country of the Issuer’s registered office or, in case of Bonds issued under a EMTN Programme, the choice of the Origin Member State of the Issuer?
Respondent to this consultation are invited to highlight their concerns on the requirements on trading relationship documentation.
With regard to the independent legal review of bilateral netting agreements, set under article 2 OPD, paragraph 2, we would like to point out that the requirement to conduct the review annually is still cumbersome and the operational and cost implications for an external independent opinion therefore significant. Hence, we would suggest that the legal review is necessary only when occur material changes in the bilateral netting agreements and/or in the relevant law.Furthermore, it should be clarified that it would be advisable qualify as “independent” the legal opinions issued by well recognized national/international organisation (e.g. ISDA).