EUROPEAN UNION: Commission adopts delegated regulation on margin requirements for uncleared derivatives

Tuesday October 4 2016

The EU introduced legislation for the regulation of over-the-counter (OTC) derivatives in 2012, known as the European Market Infrastructure Regulation (EMIR). EMIR required certain derivatives to be centrally cleared to reduce risks. The first clearing obligations came into operation this year.

For those derivatives not centrally cleared EMIR requires bilateral exchange of collateral to mitigate risks. The European Commission has now adopted a new set of rules, which sets out the levels and types of collateral that OTC derivatives counterparties must exchange bilaterally if the transaction is not cleared through a Central Clearing Counterparty (CCP).

This delegated regulation covers three main areas:

(a) the risk-management procedures, including the levels and type of collateral and segregation arrangements;

(b) the procedures for the counterparties and the relevant competent authorities to be followed when applying exemptions for intragroup OTC derivative contracts; and

(c) the applicable criteria on what should be considered as a practical or legal impediment to the prompt transfer of own funds and repayment of liabilities arising from OTC derivative contracts between the counterparties belonging to the same group.

Should one counterparty to the transaction default, the margin collected will protect the non-defaulting counterparty against resulting losses.

The draft regulatory technical standards (RTS) under EMIR were submitted jointly by the three European Supervisory Agencies (ESAs). The Commission decided to endorse these standards with certain amendments, in particular concerning the concentration limits for pension scheme arrangements and the timeline for implementation.

The Delegated Regulation is now subject to an objection period by the European Parliament and the Council after which it will be published in the Official Journal. The implementation of the rules will begin one month after the entry into force of the Delegated Regulation.

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