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EMIR Update: Regulatory Margin and the Introduction of Benchmark Fall-backs in OTC Derivative Contracts

The European Supervisory Authorities (the “ESAs”) have published joint draft Regulatory Technical Standards (“RTS”) to amend Commission Delegated Regulation 2016/2251 (the “CDR”) on the risk mitigation techniques for non-cleared OTC derivatives including in respect of the phase-in of the regulatory initial margin requirements.

As the deadlines and expiry of derogations the subject of the proposed amendments are fast approaching, and RTS need to go through various steps before being finalised and entering into force (endorsement by the European Commission and scrutiny and non-objection by the European Parliament and the Council), the ESAs have stated that they “expect competent authorities to apply the EU framework in a risk-based and proportionate manner until the amended RTS enter into force”.

The ESAs have also published a joint statement on the introduction of benchmark fall-backs in legacy OTC derivative contracts and the requirement to exchange collateral, (the “Statement”) explaining that in their view, the inclusion of such fall-backs should not trigger the margining or clearing requirement.

Both the RTS and the Statement were developed to facilitate further international consistency in the implementation of the global framework for margin requirements (the “BCBS/IOSCO Framework”) agreed by the Basel Committee on Banking Supervision (“BCBS”) and the International Organisation of Securities Commissions (“IOSCO”).


The CDR specifies, among others, the risk-management procedures that in scope entities are required to implement regarding margining uncleared OTC derivative contracts.

The CDR’s margin requirements are subject to phase-in, including various deferred dates of application for certain contracts or counterparties, in keeping with the BCBS/IOSCO Framework.

Since the CDR was published, the BCBS/IOSCO Framework has been amended. In addition, certain other jurisdictions have not, in implementing the BCBS/IOSCO Framework, applied their margin requirements to certain uncleared OTC derivative contracts that are in scope for the CDR requirements (subject to applicable time-limited derogations). Consequently, the RTS propose to amend the CDR in order to better reflect the amended BCBS/IOSCO Framework and to ensure a level playing field across jurisdictions implementing the BCBS/IOSCO Framework.

Specifically, the RTS provide for a permanent exemption from the mandatory exchange of variation margin for physically settled foreign exchange (“FX”) contracts and physically settled FX swap contracts when entered into with “non-institutions” (eg, an entity that is not an EU, or third country equivalent, credit institution or an investment firm). This reflects the approach taken in other jurisdictions, implements the terms of Recital 21 to EMIR Refit (see here) and will provide legislative support for the position regarding physically settled FX forward transactions that currently applies as a result of regulatory forbearance (see here) and extend it to encompass physically settled FX swaps. The RTS also extend a phase-in deadline for the implementation of the initial margin requirement and the expiry date of certain product-specific derogations from the margin requirements more generally as follows:

  • initial margin phase-in: the proposed RTS amendments track the 23 July 2019 amendments to the BCBS/IOSCO Framework (see here), providing that Phase 5 (1 September 2020) now applies only to firms not already in scope which have an aggregate average notional amount of non-centrally cleared derivatives calculated on a group basis (“AANA”) exceeding €50 billion for a specified Phase 5 observation period (those with AANA exceeding €750 billion with respect to the Phase 4 observation period will already be in scope) and introducing a new Phase 6 (1 September 2021) applicable to firms not already in scope which have AANA exceeding €8 billion for the specified Phase 6 observation period;
  • intragroup derogation for transactions with third country entities: the proposed RTS amendments extend this time-limited derogation to 20 December 2020 (aligning it with an equivalent time-limited derogation from the clearing requirement); and
  • equity options derogation: the proposed RTS amendments extend this time-limited derogation to 4 January 2021.

As regards the BCBS and IOSCO 5 March 2019 statement (see here) that the BCBS/IOSCO Framework does not specify documentation, custodial or operational requirements if the bilateral initial margin amount does not exceed their margin framework's €50 million initial margin threshold, the ESAs have expressed the view that this clarification can already be taken into account when applying the CDR requirements. Consequently, the ESAs considered it to be unnecessary to amend the CDR to specify that there is no requirement for counterparties below the €50 million initial margin exchange threshold to have in place all relevant operational and legal arrangements for the exchange of initial margin.

The Statement

Fall-back provisions are provisions in a contract that set out the actions that the parties would take in the event that a benchmark (eg LIBOR) used in these contracts materially changes or ceases to be provided. In their Statement, the ESAs express their view that amendments made to outstanding uncleared OTC derivative contracts (legacy contracts) for the sole purpose of introducing such fall-backs should not trigger margining (or clearing) requirements where those legacy contracts were not subject to those requirements before the introduction of the fall-backs.

The ESAs also state that while further legal certainty is expected on this via a legislative change, the ESAs do not expect competent authorities to prioritise their supervisory actions towards margining requirements (and thus the clearing obligation as well) arising as a result of the introduction of fall-backs in legacy uncleared OTC derivative contracts, and to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner.

The reference to legislative change may be a reference to the Finnish Presidency compromise text on the proposal for a CCP Recovery and Resolution Regulation (see here), which appears designed to provide relief from the margining and clearing requirements for amendments effected to incorporate in legacy uncleared OTC derivative contracts fall-backs for interest rate benchmarks. Importantly, the ESAs’ statement does not limit the ambit of the benchmarks to interest rate benchmarks; if this indicates that the ESAs support a broader relief than that which would be afforded by the Finnish Presidency compromise text it would be very welcome.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

Judith is an expert in OTC and exchange-traded derivatives (across asset classes), repos, securities lending, related collateral arrangements and the regulatory environment within which they are transacted. She advises a wide range of buy-side and sell-side clients including banks, dealers, corporates, investment funds, insurance companies and pension funds. More generally, Judith has broad experience in financial and treasury services and structured finance, advising on related transactional and regulatory issues.

Adrian has a broad finance practice, which includes corporate borrowing, structured finance, debt capital markets, real estate finance and debt on debt financings for NPL transactions. In the area of corporate debt, he acts for borrowers and lenders on investment grade and leveraged finance transactions and on corporate debt restructuring. His structured finance and debt capital markets experience includes domestic and cross-border ABS transactions, loan sale transactions, repackaging deals, covered bonds, receivables financing and bank and non-financial corporate note programmes.

Dr Imelda Higgins is a Senior Associate in McCann FitzGerald’s Finance Practice, specialising in financial services regulation, with a particular focus on compliance and enforcement. Imelda is also part of the firm’s Investigations Group. Her clients include banks, investment firms, e-money institutions, payment institutions, credit servicing firms as well as a number of unregulated entities.

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