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December 19, 2017

ESAs (EBA, EIOPA, and ESMA) published the jointly developed draft regulatory technical standards amending the framework of the European Market Infrastructure Regulation (EMIR) with regard to physically settled foreign-exchange (FX) forwards. These amendments aim to align the treatment of variation margin for physically settled FX forwards with the supervisory guidance applicable in other key jurisdictions. This regulation shall enter into force on the day following that of its publication in the Official Journal of the European Union.

The draft regulatory technical standards amend the risk-mitigation techniques related to the exchange of collateral to cover exposures arising from non-centrally cleared over-the-counter (OTC) derivatives, with respect to physically settled FX forwards. The current framework is based on the ESAs' regulatory technical standards that were published on March 08, 2016, adopted by EC as a Delegated Regulation on October 04, 2016, which entered into force on January 04, 2017. The Delegated Regulation would require, from January 03, 2018 onward, the mandatory exchange of variation margin for physically-settled FX forwards for all the counterparties within the scope of EMIR. 

However, ESAs have been made aware of the challenges certain end-user counterparties are facing to exchange variation margin for physically settled FX forwards. In particular, the adoption of the international standards (that is, the framework developed by BCBS and IOSCO) in other jurisdictions through supervisory guidance has led to a more limited scope of application than the one proposed by the ESAs. In the light of this, ESAs have undertaken a review of the regulatory technical standards and amended them to align the treatment of variation margin for physically- settled FX forwards with the supervisory guidance applicable in other key jurisdictions.

 

Related Link: Press Release

Keywords: Europe, EU, Banking, Insurance, Securities, Regulatory Technical Standards, EMIR, Margin Requirements, OTC Derivatives, ESAs

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