Regulatory Technical Standards (RTS) on risk mitigation techniques for OTC derivatives not cleared by a central counterparty (CCP)

Status: Adopted and published in the Official Journal

These Regulatory Technical Standards (RTS) are to be developed by the Joint Committee of the European Supervisory Authorities (ESAs) will define the risk mitigation techniques to be put in place for OTC derivatives not cleared by a central counterparty (CCP). In particular, it will elaborate on the level of capital and collateral counterparties to derivatives transactions need to maintain, the type of collateral and segregation arrangements as well as on the procedures to apply an intragroup exemption.

Consultation on draft RTS amending Delegated Regulation (EU) 2016 2251 on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP (JC-2018-15)

Summary
04/05/2018

The European Supervisory Authorities Authority (ESAs) launched today two joint consultation to amend Regulatory Technical Standards (RTS) on the clearing obligation and risk mitigation techniques for OTC derivatives not cleared. These standards, which implement the European Market Infrastructure Regulation (EMIR), aim to amend the current regulation on the clearing obligation and risk mitigation techniques on OTC derivatives not cleared by a central counterparties (CCPs) in order to provide a specific treatment for simple, transparent and standardised (STS) securitisation and ensure a level playing field with covered bonds. The consultations run until 15 June 2018.
 
The Securitisation Regulation and the amended EMIR provide a specific treatment for STS Securitisation in relation to the  clearing obligation and on risk mitigation techniques on non-cleared OTC derivatives frameworks. 
 
The consultation on the draft RTS on the clearing obligation clarify which arrangements under covered bonds or securitisations adequately mitigate counterparty risk and thus may benefit from an exemption from the clearing obligation. 
 
The consultation on the draft RTS on risk mitigation techniques aims at extending the type of special treatment currently associated with covered bonds to STS securitisations. The proposed treatment, i.e. no exchange of initial margins and collection only of variation margins, is applicable only where a STS securitisation structure meets a specific set of conditions equivalent to the ones required to covered bonds issuers to be able to benefit of that same treatment.

Consultation process

Comments to the consultations can be sent to EBA and ESMA respectively, online by clicking on the "send your comments" button on the consultation pages. All contributions received will be published following the close of the consultation, unless requested otherwise. Please note that the deadline for the submission of comments is 15 June 2018.
 
A public hearing will take place at the EBA premises on 31 May 2018, from 15.00 to 16.00 UK time. 
 

Legal basis

The ESAs have developed these two CPs in accordance with Articles 4 and 11 of EMIR as amended under Article 42 of the Securitisation Regulation, which contains two mandates for the ESAs on the clearing obligation and on risk mitigation techniques for OTC derivatives not cleared. 
 
Second Joint Consultation on draft RTS on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP (EBA/JC/CP/2015/002)

Summary
10/06/2015

The European Supervisory Authorities (ESAs) launched today a second consultation on draft Regulatory Technical Standards (RTS) outlining the framework of the European Market Infrastructure Regulation (EMIR). This second consultation document is the result of an intense engagement with other authorities and the industry stakeholders in order to identify all the operation issues that may arise from the implementation of such framework. Therefore, the consultation focuses only on a narrow set of topics as most of the decisions have already been agreed following the first consultation held in April 2014. The consultation runs until 10 July 2015.

For those over-the-counter (OTC) derivative transactions that will not be subject to central clearing, these draft RTS prescribe the regulatory amount of initial and variation margin that counterparties should exchange as well as the methodologies for their calculations. In addition, these draft RTS outline the criteria for the eligible collateral and establish the criteria to ensure that such collateral is sufficiently diversified and not subject to wrong-way risk.

With respect to the first consultation paper, the ESAs reviewed or clarified several aspects of the proposed rules. These include: the exchange of margins with third countries entities and the treatment of non-financial counterparties; the treatment of covered bonds swaps; the timing of margin exchanges; concentration limits for sovereign debt securities; the requirements on trading documentation; minimum credit quality of collateral; initial margin models; haircuts for foreign exchange (FX) mismatch; the treatment of cash collateral for initial margin; reviewed criteria on intragroup exemptions.

Furthermore, following the amendments of the standards issued by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) in March 2015, these RTS include a revised phase-in for initial margin requirements and a new phase-in for variation margin.

All the responses to the first consultation paper were considered when developing this new version of the standards. A comprehensive feedback statement including industry stakeholders’ comments to the first and the second consultation paper will accompany the final draft RTS.

Legal framework

These draft RTS on risk-mitigation techniques for OTC derivative contracts not cleared by a CCP are developed on the basis of Article 11(15) of Regulation (EU) No 648/2012 (EMIR), which establishes provisions aimed at increasing the safety and transparency of the over-the-counter (OTC) derivatives markets in the EU.

Consultation process

Comments to this consultation can be sent clicking on the "send your comments" button. Please note that the deadline for the submission of comments is 10 July 2015.

All contributions received will be published following the close of the consultation, unless requested otherwise.

The ESAs will hold a public hearing on the draft RTS, which will take place at the EBA premises in London on 18 June 2015 from 12:00 to 14:30 UK time.

Note to the editors

In order to address risks related to the derivative markets, the European Parliament and the Council have adopted the European Market Infrastructure Regulation (EMIR) –  formally known as Regulation EU No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (EMIR) as amended by Regulation (EU) No 575/2013 of the European Parliament and of The Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (CRR).

The EMIR establishes provisions aimed at increasing the safety and transparency of the OTC derivatives markets and requires OTC derivative contracts to be cleared, derivative transactions to be reported to trade repositories and sets a framework to enhance the safety of central counterparties (CCP).

The EMIR was published on 4 July 2012 and entered into force on 16 August 2012. It is directly applicable in all EU Member States.

Joint Consultation on draft RTS on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP (JC/CP/2014/03)

Summary
14/04/2014

The European Supervisory Authorities (ESAs) launched today a consultation on draft Regulatory Technical Standards (‘RTS’) outlining the framework of the European Market Infrastructure Regulation (EMIR). These RTS cover the risk management procedures for counterparties in non-centrally cleared OTC derivatives, the criteria concerning intragroup exemptions and the definitions of practical and legal impediments. The consultation will allow gathering public views on how to ensure a proportionate implementation of the requirements, as well as any other specific aspects that need discussion. The consultation runs until 14 July 2014.

For those over-the-counter (OTC) derivative transactions that will not be subject to central clearing, these draft RTS prescribe that counterparties apply robust risk mitigation techniques to their bilateral relationships, which will include mandatory exchange of initial and variation margins. This will reduce counterparty credit risk, mitigate any potential systemic risk and ensure alignment with international standards. These draft RTS elaborate on the risk-management procedures for the exchange of collateral and on the procedures concerning intragroup exemptions including the criteria that identify practical and legal impediments to the prompt transfer of funds.

These draft RTS lay down the methodologies for the determination of the appropriate level of margins, the criteria that define liquid high-quality collateral, the list of eligible asset classes, collateral haircuts and concentration limits.

Given the substantial effort required for the operational implementation of this framework, the public consultation aims at ensuring that margin requirements are implemented in a proportionate fashion. Therefore, the consultation focuses on specific points such as the impact on small or medium-sized entities or entities from specific sectors, operational capabilities, the special treatment for covered bonds swaps, the use of internal models and concentration limits. In addition, the ESAs are proposing not to allow re-hypothecation of collateral collected for initial margins.  

Legal framework

These draft RTS on risk-mitigation techniques for OTC derivative contracts not cleared by a CCP are developed on the basis of Article 11(15) of Regulation (EU) No 648/2012 (EMIR), which establishes provisions aimed at increasing the safety and transparency of the over-the-counter (OTC) derivatives markets in the EU.

Consultation process

Comments to this consultation can be sent clicking on the "send your comments" button. Please note that the deadline for the submission of comments is 14 July 2014.

All contributions received will be published following the close of the consultation, unless requested otherwise.

The ESAs will hold a public hearing on the draft RTSs, which will take place at the EBA premises in London on 2 June 2014.

Note to the editors

In order to address risks related to the derivative markets, the European Parliament and the Council have adopted the European Market Infrastructure Regulation (EMIR) –  formally known as Regulation EU No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (EMIR) as amended by Regulation (EU) No 575/2013 of the European Parliament and of The Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (CRR).

The EMIR establishes provisions aimed at increasing the safety and transparency of the OTC derivatives markets and requires OTC derivative contracts to be cleared, derivative transactions to be reported to trade repositories and sets a framework to enhance the safety of central counterparties (CCP).

The EMIR was published on 4 July 2012 and entered into force on 16 August 2012. It is directly applicable in all EU Member States.

Responses