[co-author: Philippa List]

Earlier this month, the ESAs¹ published a final report² on proposed updates to the existing EMIR margin rules³ (the “Margin RTS Updates”).

Although not yet final, the absence of a public consultation and fast approaching deadlines mean progress through the European legislative process is expected to be swift. Once in effect the updates will bring welcome clarity to the operation of the European regulatory margin rules.

What do they do?

The following changes are proposed:

• FX. No regulatory variation margin (VM) required for physically-settled FX forwards and swaps. The only exception to this is trades between two systemically important entities. This will clarify a subject which has been uncertain for some time⁴.
• Initial Margin (IM). The IM “Phase 5” (1 September 2020) AANA⁵ threshold will be raised to €50 billion and a new “Phase 6” (1 September 2021) introduced with an AANA threshold of €8 billion⁶.
• Options. One year extension to 4 January 2021 of the temporary IM and VM exemption for single-stock equity options and index options.
• Intra-Group Transactions. One year extension to 21 December 2020 of the deferred margin rules for intra-group transactions with a third-country entity.

On the same day the ESAs made a separate announcement clarifiying that amendments to trades for the sole purpose of incorporating benchmark fall-back language will not trigger the exchange of mandatory EMIR VM, or the EMIR clearing requirement⁷.

Who is affected?

• FX. Any counterparty subject to the EMIR IM and VM requirements except relevant FX between two “institutions” (defined as credit institutions, investment firms and third country equivalents).
• IM. Those counterparties in-scope for EMIR IM⁸.
• Options. Parties engaging in single-stock equity options or index options.
• Intra-Group Transactions. Intra-group transactions with a third-country entity in respect of which there has been no equivalence decision.

Why?

Put simply, international harmonisation. In particular the VM exemption for physically-settled FX forwards and swaps will harmonise the scope of EU VM requirements with the more flexible regimes of other jurisdictions. This is of particular note for those in scope of the U.S. rules.

When?

A number of procedural steps remain before the Margin RTS Updates are finalised. Since the current exemptions will almost certainly expire before the new rules are finalised, the ESAs have stated that in the meantime they expect competent authorities to apply the EU framework in a risk-based and proportionate manner.

What Next?

European Commission endorsement. Once endorsed, there will be a period of non-objection from the European Parliament and the Council before the Margin RTS Updates are published in the Official Journal and come into force.

With momentum building on benchmark reform, the go-live of SFTR⁹ reporting and the implementation of the changes to the EMIR reporting requirements next June¹⁰, together with expected progress on Brexit, 2020 promises to be a busy year for European derivatives. At the time of publication the new Master Regulatory Reporting Agreement covering delegated reporting pursuant to both EMIR and SFTR had just been released¹¹. More on this from us early in the new-year.

Footnotes