Collateralising Uncleared Derivatives Trades under EMIR – Draft Regulatory Technical Standards

On April 14, 2014, the European Supervisory Authorities (“ESAs”) published the anticipated first draft regulatory technical standards (“RTS”) on risk-mitigation techniques for over the counter (“OTC”) derivatives contracts that are not cleared by a central clearing counterparty (“CCP”) under Article 11(15) of the European Market Infrastructure Regulation (“EMIR”). Article 11(15) requires that technical standards be developed by the ESAs in respect of risk management procedures that will ensure timely, accurate and appropriately segregated exchange of collateral. This requirement is a component of EMIR’s broader aim of improving the safety and transparency of OTC derivatives markets as a whole. However, given the recent results of the International Swaps and Derivatives Association 2014 Margin Survey, which stated that “90% of non-cleared OTC derivatives trades were subject to collateral agreements at the end of 2013”, it remains to be seen how much of an impact the new rules will actually have on the OTC derivatives market.

In order to restrict possibilities for international arbitrage and to ensure that there is consistency at an international level, the ESAs have made efforts to try and ensure, where possible, that the RTS are consistent with international standards on margin requirements for non-centrally cleared trades, as represented by the September 2013 paper from the Basel Committee for Banking Supervision (“BSCS”) and the International Organisation of Securities Commissions (“IOSCO”) (the “BSCS/IOSCO Standards”).

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