What Changed

The European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and European Securities and Markets Authority (ESMA) have published a final report setting out draft Regulatory Technical Standards (RTS) that propose to simplify the bilateral margin requirements applied to uncleared over-the-counter (OTC) derivative contracts.

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EU Regulators Propose Easing Margin Rules for Small Firms

Under the framework currently in force, counterparties that fall below a set threshold are exempt from exchanging initial margin on new uncleared OTC derivative contracts, but that exemption does not extend to contracts they already hold.

The proposed amendments would change that: below-threshold counterparties would no longer be required to exchange initial margin on either new or existing contracts. The stated intent behind the change is to facilitate the phase-out of initial margin requirements for these below-threshold counterparties altogether.

Highlights

  • EBA, EIOPA and ESMA published a final report on draft Regulatory Technical Standards proposing to simplify bilateral margin requirements.
  • Under the current framework, below-threshold counterparties are exempt from exchanging initial margin on new uncleared OTC derivative contracts but not on existing ones.
  • The proposed amendments would remove the initial margin requirement for below-threshold counterparties on both new and existing contracts.
  • The final report and draft RTS have been submitted to the European Commission for endorsement.
  • The draft RTS must still pass scrutiny by the European Parliament and the Council before publication in the Official Journal of the European Union.

Who Is Affected

The proposal is targeted at counterparties whose activity falls below the threshold that currently triggers initial margin exchange on uncleared OTC derivative contracts, and it would apply to both new and pre-existing positions those counterparties hold.

The regulators say the amendments respond to requests from market participants and are intended to support broader simplification and burden-reduction objectives.

What To Watch Next

The final report, together with the draft RTS, has been submitted to the European Commission for endorsement.

Before the draft RTS can take effect, it remains subject to scrutiny by the European Parliament and the Council, followed by publication in the Official Journal of the European Union.