Oct 21, 2016 - The text confirms that FX Forwards and Swaps (FX and currency swaps) will .... Luxembourg provides audit,
PwC Flash News
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The European Commission adopts the new rules on Collateral Exchange under EMIR 21 October 2016
In brief The European Commission (EC) has endorsed the Regulatory Technical Standards (RTS) on Collateral Exchange on 4 October 2016. The exchange of initial and variation margins is phased-in over several years with an expected start in January 2017. The largest players will be the first to feel the impacts. The text confirms that FX Forwards and Swaps (FX and currency swaps) will not require to post initial margin and proposes a delay for variation margins for FX Forwards until January 2018. The rules clarify what conditions groups have to fulfil to apply for intragroup exemptions. The EC also confirms that all non-centrally cleared OTC Equity Options on single stock or Options on Index of equities will only be concerned three years after the date of entry into force of this Regulation. The text is now subject to a three-month objection period by the European Parliament and the Council, with the EC pushing for an adoption as early as possible.
In detail 1.
Exchange of initial and variation margins Counterparties to OTC derivatives transactions need to protect themselves against counterparty exposure by collecting margins. The Regulation lays out standards for the timely and accurate exchange of collateral, as well as a proper segregation of initial margin.
Two types of collateralisation are necessary to properly manage the risks to which counterparties are exposed:
Initial margin (IM) – which protects counterparties against current and potential future exposure from a default of the counterparty; Variation margin (VM) – which protects counterparties against exposures related to the daily mark-to-market / mark-to-model value of their OTC derivatives contracts.
Threshold calculation The collateral exchange obligation (IM & VM) will start to be applicable to counterparties following phase-in periods. Counterparties will need to assess which deadline is applicable to them by calculating an “Aggregate Average Notional Amount” (AANA) recorded each year on the last business day of March, April and May. The calculation of AANA has to respect several conditions, one of them being that it needs to be calculated at group level, including intragroup transactions. Special treatment for UCITS and AIF authorised under AIFMD Where investment funds are distinct pools of assets and considered as relatively risk remote from the rest of the group, they’re treated as a separate entity in the calculation (i.e. at sub-fund level).
PwC Flash News Implementation timeline The exchange of margin is implemented following phase-in periods, expected to start in January 2017 (please refer to section 3 of this document). Today Oct. 2016
March 2017 Jan. 2017* Sept. 2017
Sept. 2018
Sept. 2019
Sept. 2020
Variation Margin §§§European Commission adopts Regulatory Technical Standards
> EUR 3 Tln
< EUR 3 Tln
Initial Margin > EUR 3 Tln
> EUR 2.25 Tln
> EUR 1.5 Tln
> EUR 750 Bln
> EUR 8 Bln
*Expected
Example: Where both counterparties have or belong to groups, each of which has an AANA that is above EUR 3 trillion, they’ll need to start exchanging margins (VM & IM) together as from January 2017 (expected), with the exception of certain FX contracts (please refer to section 2 of this document). The exchange of initial margin will not be applicable to counterparties that are below the EUR 8 billion threshold. Minimum transfer amount (IM & VM) The risk management procedures may provide that no collateral has to be collected from a single counterparty where the total amount due is equal to or lower than an agreed amount. Variation margin due
Exemptions (IM)
Initial margin due
Agreed amount Up to EUR 500,000
If two counterparties are entering in transactions and are subject to collateral exchange, the RM procedures may agree that no initial margin is exchanged: Up to an amount of EUR 50 million, calculated at group level, or; Up to an amount of EUR 10 million, calculated at intragroup level. Collateral management & segregation Initial margin collected as cash collateral needs to be maintained at central banks or at a third party custodian. With the exception of cash collateral, the collateral received as initial margin can’t be reused, re pledged nor re hypothecated by the collecting counterparty. The restriction doesn’t apply to the collateral collected as variation margin. 2. Focus on foreign exchange contracts
The risk management procedures may provide that no initial margin is exchanged for: FX forwards; FX swaps; Currency swaps1. 1
The interest rate component of currency swaps should be covered by initial margin.
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PwC Flash News Due to a long period of unclear common EU definition of FX forwards, the phase-in period for the exchange of variation margin for these instruments is applicable as from the earlier of (i) 31 December 2018, or (ii) the date of entry into application of the Commission Delegated Regulation developed under MiFID further defining FX forwards. Due to the MiFID II formalised delay, the latter date has been postponed to 3 January 2018, which therefore corresponds to the starting date for the exchange of VM. 3. Next steps
This Regulation is now subject to a 3-months objection period by the European Parliament and the Council. The European Commission is insisting to receive confirmation from the European Parliament that it doesn’t object to the Delegated Regulation as early as possible, to make sure the EU follows the international timeline. The Regulation will then be published in the EU’s Official Journal. The phase-in periods for the exchange of initial margin and variation margin will be applicable starting one month after the entry into force of the Regulation, expected in January 2017.
How we can help Our combined team of qualified professionals in operational and regulatory matters can support you: 1. In assessing the impacts of the collateral exchange obligation; 2. In identifying the gaps and recommending solutions; 3. Enhancing your efforts in the implementation of these requirements both for compliance with regulatory requirements and the enhancement of service level (i.e. collateral management).
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