status: Adopted and published on the Official Journal
The European Supervisory Authorities (ESAs) published today two joint draft Regulatory Technical Standards (RTS) to amend the RTS on the clearing obligation and risk mitigation techniques for non-cleared OTC derivatives. These standards provide a specific treatment for simple, transparent and standardised (STS) securitisation to ensure a level playing field with covered bonds. They are required for the proper implementation of the European Market Infrastructure Regulation (EMIR) and will amend the current regulation on the clearing obligation and risk mitigation techniques on OTC derivatives not cleared by central counterparties (CCPs).
In particular, the draft RTS on risk mitigation techniques amend the existing RTS by extending the special treatment currently associated with covered bonds to STS securitisations. The treatment, which allows no exchange of initial margin and only collection of variation margin, is applicable only where a STS securitisation structure meets a specific set of conditions equivalent to the ones required for covered bonds issuers to be able to benefit from that same treatment.
The ESAs developed these two RTS 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, one on the clearing obligation and one on risk mitigation techniques for non-cleared OTC derivatives.
Article 42 of Regulation (EU) 2017/2402 (Securitisation Regulation) amended Regulation (EU)
No 648/2012 (EMIR) in order to provide a specific treatment for STS Securitisation within the clearing obligation and on risk mitigation techniques on non-cleared OTC derivatives frameworks.
The European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA), together the European Supervisory Authorities (ESA), have today published a final report with draft regulatory technical standards (RTS) proposing to amend the Commission Delegated Regulation on the risk mitigation techniques for OTC derivatives not cleared by a CCP (bilateral margin requirements) under the European Market Infrastructure Regulation (EMIR). The draft RTS propose, in the context of the United Kingdom's (UK) withdrawal from the European Union (EU), to introduce a limited exemption in order to facilitate the novation of certain OTC derivative contracts to EU counterparties during a specific time-window. The amendments would only apply if the UK leaves the EU without the conclusion of a withdrawal agreement – a no deal scenario. The draft RTS complement the similar proposal published by ESMA on 8 November 1 with respect to the clearing obligation.
In the context of the on-going withdrawal negotiations between the EU and the UK, and to address the situation where a UK counterparty may no longer be able to provide certain services across the EU, counterparties in the EU may want to novate their OTC derivative contracts by replacing the UK counterparty with an EU counterparty. However, by doing this, they may trigger the clearing obligation or the bilateral margin requirements for these contracts, therefore facing costs that were not accounted for when the contract was originally entered into.
The draft RTS allows UK counterparties to be replaced with EU ones without triggering the new procedures defined in the bilateral margin RTS. This limited exemption would ensure a level playing field between EU counterparties and the preservation of the regulatory and economic conditions under which the contracts where originally entered into. Its scope, time and intent are aligned with the draft RTS regarding the clearing obligation that ESMA published on 8 November.
The window for the novation of OTC derivative contracts which fall under the scope of this amending regulation and the one published by ESMA would be open for twelve months following the withdrawal of the UK from the EU. Counterparties can however start repapering their contracts ahead of the application date, making the novation conditional upon a no-deal Brexit, given the conditional application date of these two amending regulations.
The ESAs and other EU authorities and institutions have been clear on the importance for market participants to be prepared for Brexit, including the possibility of a no-deal scenario. These draft RTS provide regulatory solutions to support counterparties' Brexit preparations and to maintain a level playing field between EU counterparties, while addressing potential risks to orderly markets and financial stability.
As regards non-centrally cleared OTC derivative contracts, these two measures will be the only regulatory measures the ESAs intend to propose to help address the legal uncertainty raised by the withdrawal of the UK from the EU and to ensure a level-playing field between EU counterparties.
Counterparties should start negotiating as soon as possible the novations of their transactions which are in the scope of these amending regulations, given the twelve month timeframe to benefit from it.
The draft RTS have been submitted to the European Commission for endorsement, and they are subject to the scrutiny of the European Parliament and of the Council.
1 ESMA's publication regarding the clearing obligation is available at the following address: https://www.esma.europa.eu/press-news/esma-news/esma-proposes-regulatory-change-support-brexit-preparations-counterparties
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.
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.
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.
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.
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.
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.
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.