ESA proposes new variation margin requirements for non-cleared OTC derivatives
25 August 2021 France
Image: Anton
The European Supervisory Authorities (ESA) have published draft regulatory technical standards (RTS) which amend variation margin requirements for physically-settled FX forwards under the European Market Infrastructure Regulation (EMIR) framework.
These new draft Regulatory Technical Standards (RTS) revise the current framework to bring requirements for exchange of variation margin (VM) for over-the-counter derivatives trades into line with BCBS-IOSCO standards applicable in many other key jurisdictions.
The current framework is based on RTS established by the ESA on 8 March 2016 and adopted as a delegated regulation by the European Commission on 4 October 2016. This requires exchange of VM for physically-settled FX forwards from 3 January 2018 for all trading counterparties falling under the scope of EMIR.
The industry has notified the ESAs that the application of these VM requirements in many leading global markets, in accordance with international standards under the Basel Committee on Banking Standards and International Organisation of Securities Commissions framework, is more limited in scope than that required by the ESA.
In response, the ESA has conducted a review and amended RTS to align with the regulatory guidance in place in other key jurisdictions.
Specifically, this will narrow the requirement to exchange VM for physically-settled FX forwards to apply only to transactions between financial institutions, specifically credit institutions and investment firms.
The ESA refers to three European supervisory authorities, notably the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority.
These new draft Regulatory Technical Standards (RTS) revise the current framework to bring requirements for exchange of variation margin (VM) for over-the-counter derivatives trades into line with BCBS-IOSCO standards applicable in many other key jurisdictions.
The current framework is based on RTS established by the ESA on 8 March 2016 and adopted as a delegated regulation by the European Commission on 4 October 2016. This requires exchange of VM for physically-settled FX forwards from 3 January 2018 for all trading counterparties falling under the scope of EMIR.
The industry has notified the ESAs that the application of these VM requirements in many leading global markets, in accordance with international standards under the Basel Committee on Banking Standards and International Organisation of Securities Commissions framework, is more limited in scope than that required by the ESA.
In response, the ESA has conducted a review and amended RTS to align with the regulatory guidance in place in other key jurisdictions.
Specifically, this will narrow the requirement to exchange VM for physically-settled FX forwards to apply only to transactions between financial institutions, specifically credit institutions and investment firms.
The ESA refers to three European supervisory authorities, notably the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority.
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