Flashnews: Uncleared derivatives: Yet another new text proposal

Risk mitigation techniques for uncleared OTC derivative contracts were declined in 2016, in Delegated Regulation 2016/2251 and since then have been the subject of regular proposals for amendment by European regulators (ESMA, EBA and EIOPA: ESAs), proposals they submit to the European Commission.

After a first attempt in December 2017 on FX Forwards, then a second one at the end of 2019 in order to align with international standards, followed, in May 2020, by a new version integrating the impact of the pandemic, all remaining pending adoption by the Commission, the ESAs are publishing a new version of their proposal to revise the delegated regulation.

It includes the topics already discussed earlier, but, because it was news, Brexit enters this draft published on November 23, 2020:

• Initial margin exchanges: the text is based on the May 2020 version and therefore the schedule agreed by the Basel Committee and IOSCO (i.e. the next phases in September 2021 and September 2022)
• FX Forwards physically settled: ESAs reiterates their proposal for easing the requirement to exchange variable margins and extending this measure to FX Swaps
• Temporary exemption of initial and variable margins for individual equity options and index options: the proposal has been reviewed; the exemption would be valid until January 4, 2024, 3 years longer than in the 2019 version
• Temporary exemption of initial and variable margins for intra-group transactions involving a third country entity where no equivalence has been recognised between the European Union and the third country; the proposal has been reviewed; the exemption would be valid until June 30, 2022 (instead of December 21, 2020 in the 2019 version).
• Transfer into the Union of contracts originally concluded between a party of the Union of 27 and one in the UK: ESAs propose a legislative mechanism that will allow new contracts (the relocated ones) to benefit from the same exemptions as the original contracts under EMIR (for example, the exemption of bilateral exchanges of initial margin).

Let us hope this time will be the right one, finally putting an end to the uncertainties and questions facing the industry. Aware of the situation, the ESAs recalled that they expected national regulators to apply the EU framework in a risk-based and proportionate manner.