The European Commission intends to endorse Regulatory Technical Standards for new rules requiring swaps counterparties to post initial and variation margin on their non-cleared exposures, subject to a series of clarifications including a delay of up to one year for initial margin requirements and the removal of collateral concentration limits for pension schemes.
In a letter to European Supervisory Agencies, the Commission proposes a September 2017 deadline for the first wave of participants to begin posting initial margin, reiterating earlier concerns that the planned September 2016 implementation date is not viable.
That deadline could yet be brought forward as the Commission aims to adopt the RTS as soon as possible, with implementation scheduled for one month after entry into force. The RTS enters into force 20 days after publication in the EU’s Official Journal.
The threshold for the first wave of participants required to post initial margin has been reduced to €2.25trn of uncleared OTC exposures from a slated €3trn. The change reflects a condensed implementation timetable that now sees full implementation (covering all participants with over €8bn in uncleared swap exposures) staggered through four annual waves out to 2020 rather than five waves as initially planned.
The deadline for posting variation margin remains unchanged, with all participants subject to those requirements from March 2017. Variation margin requirements will apply to the largest participants one month after the RTS enters into force.
In response to concerns raised following submission from the draft RTS, the Commission also intends to remove collateral concentration requirements for pension schemes, which it said could present an excessive burden on the retirement income of future pensioners.
The draft RTS require that pension schemes posting more than €1bn of collateral with a single counterparty must diversify at least half of the collateral posted among different sovereign debt issuers. The Commission said that the requirements could force some schemes to enter into foreign currency transactions, introducing additional costs and currency mismatches.
“It would be disproportionate to apply the concentration limits in the same manner as other counterparties,” the Commission said in its letter to ESAs. “Therefore the Commission intends to remove the limits for pension scheme arrangement in order to prevent such costs as risks.”
To address ESA requirements for adequate management of concentration risk, the Commission proposes to replace concentration limits with specific risk management tools to monitor and address potential risks. It also plans a review of the measure after three years of implementation.
Other proposed changes include reasoning behind a delayed phase-in for equity options, clarification that cash initial margin may be held with equivalent third-country institutions and further detail around the planned implementation of the rules for foreign exchange derivatives, which will come into effect on application of MiFID II -planned for January 2018.
European supervisors have until September 15 to respond to the European Commission’s proposed changes. Once adopted, the RTS will be subject to scrutiny by the European Parliament and European Council.
US and Asian regulators have come under pressure from market participants to harmonise implementation with the extended European timetable, but have so far shown little appetite for a delay.
