Federcasse - Italian Federation of Co-operative Credit Banks
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.
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?
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).
As regards the independent legal review of segregation agreements of initial margins, set under article 1 SEG, paragraph 5, the concerns already raised above in our response to Question 5 apply correspondingly. We would like to raise the same proposals described in the answer above with respect to the frequency of the legal review and to the possibility to rely on legal opinions issued by national/international organisation (e.g. ISDA).
Andrea Pezzotta; Giuseppe Zaghini; Francesca Scacchi