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Assogestioni

Question 1. What costs will the proposed collateral requirements create for small or medium-sized entities, particular types of counterparties and particular jurisdictions? Is it possible to quantify these costs? How could the costs be reduced without compromising the objective of sound risk management and keeping the proposal aligned with international standards?
The implementation of RTS is expected to be rather costly both in terms of administrative costs generated by the revision of existing contracts with counterparties and with outsourcers.

In addition, relevant IT costs will have to be incurred by all counterparties in order to be able to fully incorporate collateral management into their procedures. These costs are only in part proportional to the value of the derivatives used and hence affect disproportionally smaller entities.

In particular, as discussed above, the application of banking regulation to the collateral managements without regards to the specificities of other types of players and products and already existing regulation would be detrimental to an efficient and effective collateral management.

Limiting the scope of the obligations and allowing for an efficient and flexible management of collaterals will minimize costs without affecting the benefits in terms of risk reduction.
Question 2. Are there particular aspects, for instance of an operational nature, that are not addressed in an appropriate manner? If yes, please provide the rationale for the concerns and potential solutions.
In general, we believe that the regulation drafted here is better suited for the banking sector while the guidelines produced by ESMA regarding collateral management is better suited for UCITS. In particular a number of operational issues would make it inefficient and costly for UCITS to manage collateral without further lowering risk and increasing the pressure on cash at system level.

In particular, although we appreciate the possibility foreseen in the draft of using shares of UCITS as collateral, from a technical point of view it appears difficult to implement as a number of technical issues; in particular, as of today, an integrated European settlement circuits for UCITS does not exist and prompt transfer between counterparties located in different countries is practically impossible. In general we expect growing pressure on liquidity, due to increased demand for cash stemming from mandatory bilateral collateralization, mandatory clearing via CCP for standard derivatives, counterparties preference for collateral posted in cash.
Question 3. Does the proposal adequately address the risks and concerns of counterparties to derivatives in cover pools or should the requirements be further tightened? Are the requirements, such as the use of the CRR instead of a UCITS definition of covered bonds, necessary ones to address the risks adequately? Is the market-based solution as outlined in the cost-benefit analysis section, e.g. where a third party would post the collateral on behalf of the covered bond issuer/cover pool, an adequate and feasible alternative for covered bonds which do not meet the conditions mentioned in the proposed technical standards?
No observations.
Question 4. In respect of the use of a counterparty IRB model, are the counterparties confident that they will be able to access sufficient information to ensure appropriate transparency and to allow them to demonstrate an adequate understanding to their supervisory authority?
In our view, we expect the sharing of information and the monitoring of internal rating model to be of difficult implementation as it would mean - at least to a certain extent - requiring/granting the counterparty access to internal evaluation and methodology. We expect as the most likely scenario, the emergence of third parties models which can be adopted and agreed upon by both counterparties.
Question 5. How would the introduction of concentration limits impact the management of collateral (please provide if possible quantitative information)? Are there arguments for exempting specific securities from concentration limits and how could negative effects be mitigated? What are the pros and cons of exempting securities issued by the governments or central banks of the same jurisdiction? Should proportionality requirements be introduced, if yes, how should these be calibrated to prevent liquidation issues under stressed market conditions?
As already discussed, Assogestioni believes ESMA guidelines to be a more appropriate regulation since the regulation proposed in this current draft appear to be excessively detailed not allowing counterparties to assess what is needed to cover the risk. The current proposal focuses excessively on the quantity and the proportion of the various components of the guarantee while placing its quality and liquidity in second place: in fact, imposing the proposed concentration limits would mean to mechanically constrain the use of good quality collateral in favour of a diversification that would raise costs and complexity while not necessarily reducing risk. We strongly support the exemption of government and central bank bonds from the concentration limits as well as the introduction of a threshold for the margin below which concentration margin should not apply. Imposing diversification on relatively low amount i.e. margin just above the 50 mil € threshold, would require complex and unnecessary splitting of the collateral into excessively small subsets of assets.
Question 6. How will market participants be able to ensure the fulfilment of all the conditions for the reuse of initial margins as required in the BCBS-IOSCO framework? Can the respondents identify which companies in the EU would require reuse or re-hypothecation of collateral as an essential component of their business models?
We believe that the rules for reuse of initial margins identified in BCBS –IOSCO regulation offer sufficient guarantees for counterparties posting margin and we do not think that re-use and re-hypothecation should be banned altogether.
Contact name
Manuela Mazzoleni