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    PRA and FCA Consult on Bilateral Margin Requirements for Derivatives

    March 09, 2021

    PRA and FCA launched a joint consultation (CP6/21) to amend the onshored EU technical standards on margin requirements for non-centrally cleared derivatives. The aim is to introduce or extend exemptions for some products subject to bilateral margin requirements and to align implementation phases and thresholds of the initial margin requirements to international standards from BCBS and IOSCO. The proposal addresses amendments to the initial margin phase-in deadlines and thresholds and the application of variation margin requirements for physically settled foreign-exchange forwards and swaps; the proposal also extends the temporary exemption for single-stock equity and index options until January 04, 2024. This consultation ends on May 19, 2021, with the proposed changes expected to become effective on the planned publication date of the final technical standards instrument—that is, July 01, 2021.

    The proposals in this CP6/21 would result in changes to the UK version of Commission Delegated Regulation 2016/2251 (hereafter Binding Technical Standards, or BTS, 2016/2251), and technical standards under Article 11(15) of the European Market Infrastructure Regulation (EMIR). PRA and FCA propose to implement amendments to the initial margin phase-in deadlines and thresholds by:

    • Removing the September 01, 2020 phase, thereby providing firms with operational relief to assist with mitigating the effects of COVID-19 disruption
    • Introducing a September 01, 2021 phase to capture those firms with over EUR 50 billion in aggregate average notional amount of non-centrally cleared derivatives
    • Introducing a September 01, 2022 phase to capture those firms with over EUR 8 billion aggregate average notional amount of non-centrally cleared derivatives

    With respect to the proposal to amend the application of the variation margin requirements for physically settled foreign-exchange forwards and swaps, the requirement to exchange variation margin would only apply to firms that are "institutions" as defined in Article 4(1)(3) of Capital Requirements Regulation (CRR). The proposal would apply to both forwards and swaps to ensure consistent treatment of the similar risks, regardless of legal form. This consultation paper should be read alongside the transitional regime of FCA for intragroup exemptions from margin as well as the BCBS and IOSCO statement on documentation requirements for counterparties below the EUR 50 million initial margin threshold. Following consideration of any responses, PRA and FCA will submit the updated BTS 2016/2251 to HM Treasury for approval. Assuming HM Treasury provides approval, PRA and FCA will publish the amended technical standards for the respective authorized firms. 

     

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    Comment Due Date: May 19, 2021

    Effective Date: July 01, 2021 (Proposed)

    Keywords: Europe, UK, Banking, Securities, Derivatives, Variation Margin, Initial Margin, COVID-19, CRR, Basel, CP6/21, IOSCO, PRA, FCA

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