EBA releases final draft standards for IM model validation
07 July 2023 EU
Image: AdobeStock/e: artjazz
The European Banking Authority has released its final draft regulatory technical standards on Initial Margin Model Validation (IMMV) under the European Markets Infrastructure Regulation (EMIR).
These draft regulatory technical standards (RTS) frame out the supervisory principles for validating initial margin models applied to guide the exchange of IM.
These will involve standard supervisory procedures applicable for validating the largest banking counterparties, along with a pragmatic and simplified approach applicable to smaller counterparts.
The final draft RTS envisages a phased adoption of these supervisory requirements, providing time for key stakeholders, and particularly smaller counterparties, to align with the new validation requirements.
Alongside this final draft RTS, the EBA has published an Opinion requesting that the European Commission and co-legislators consider the introduction of a centralised validation service at the EBA.
Providing further details on the final draft RTS, the EBA explains that these have been created in line EMIR requirements for risk mitigation for non-cleared OTC derivative contracts, in accordance with Article 11(15)aa of EMIR (Reg (EU) 648/20212).
The EBA has been creating these draft RTS in collaboration with the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA).
The first draft of the RTS was published in November 2021. Counterparties under EU Margin rules will have a requirement to validate and backtest the IM model used for the exchange of regulatory IM.
The validation requirements will be implemented through a phased approach, beginning with the largest firms based on the global aggregate average notional amount (AANA) calculation standards.
Firms with €750 billion gross notional of uncleared OTC derivatives (Phases 1-4) will be subject to the standard approach and will begin one year after the new regime comes into force.
Firms at or above €50 billion subject to the simplified approach will go live two years after entry into force, with all other firms between €49.9 billion and €8 billion going live three years after this date.
The EBA outlines standard and simplified approaches to the validation and backtesting requirements, including the ability to use third-party providers to ease the adoption of this new validation regime.
John Pucciarelli, head of industry and regulatory strategy at derivatives risk specialist Acadia, says: “We applaud the EBA for their efforts on the RTS to help bring much needed clarity and standards to the IM Model validation process.
“Acadia stands with our clients to inform, educate and offer scalable and cost-effective solutions to ensure a smooth transition to comply with these requirements. Our team of dedicated experts will continue to unpack the RTS and we will provide updates, guidance and clarity over the coming weeks and months.”
These draft regulatory technical standards (RTS) frame out the supervisory principles for validating initial margin models applied to guide the exchange of IM.
These will involve standard supervisory procedures applicable for validating the largest banking counterparties, along with a pragmatic and simplified approach applicable to smaller counterparts.
The final draft RTS envisages a phased adoption of these supervisory requirements, providing time for key stakeholders, and particularly smaller counterparties, to align with the new validation requirements.
Alongside this final draft RTS, the EBA has published an Opinion requesting that the European Commission and co-legislators consider the introduction of a centralised validation service at the EBA.
Providing further details on the final draft RTS, the EBA explains that these have been created in line EMIR requirements for risk mitigation for non-cleared OTC derivative contracts, in accordance with Article 11(15)aa of EMIR (Reg (EU) 648/20212).
The EBA has been creating these draft RTS in collaboration with the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA).
The first draft of the RTS was published in November 2021. Counterparties under EU Margin rules will have a requirement to validate and backtest the IM model used for the exchange of regulatory IM.
The validation requirements will be implemented through a phased approach, beginning with the largest firms based on the global aggregate average notional amount (AANA) calculation standards.
Firms with €750 billion gross notional of uncleared OTC derivatives (Phases 1-4) will be subject to the standard approach and will begin one year after the new regime comes into force.
Firms at or above €50 billion subject to the simplified approach will go live two years after entry into force, with all other firms between €49.9 billion and €8 billion going live three years after this date.
The EBA outlines standard and simplified approaches to the validation and backtesting requirements, including the ability to use third-party providers to ease the adoption of this new validation regime.
John Pucciarelli, head of industry and regulatory strategy at derivatives risk specialist Acadia, says: “We applaud the EBA for their efforts on the RTS to help bring much needed clarity and standards to the IM Model validation process.
“Acadia stands with our clients to inform, educate and offer scalable and cost-effective solutions to ensure a smooth transition to comply with these requirements. Our team of dedicated experts will continue to unpack the RTS and we will provide updates, guidance and clarity over the coming weeks and months.”
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