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    PRA and FCA Finalize Bilateral Margin Requirements for Derivatives

    June 30, 2021

    PRA and FCA published a joint policy statement (PS14/21) that sets out the final policy, in the form of amendments, to onshored Binding Technical Standards (EU Delegated Regulation 2016/2251) on margin requirements for non-centrally cleared derivatives. PS14/21 also summarizes the feedback received in the joint consultation CP6/21 on amending the onshored Binding Technical Standards. The requirements will be effective on publication of PS14/21, which includes the final technical standards instrument by PRA and FCA.

    In CP6/21, PRA and FCA had proposed to align the initial margin phase-in deadlines and thresholds to those in the BCBS and IOSCO standard (as amended). All respondents were supportive of the proposal. One respondent supported the alignment to international thresholds, while reiterating previously-raised concerns about whether phase six delivers the intended regulatory outcome. PRA and FCA had proposed 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 the Capital Requirements Regulation (CRR). All respondents supported this proposed amendment.

    PRA and FCA had also proposed to extend the temporary exemption for single-stock equity and index options until January 04, 2024. There were three responses to this proposal. While all were supportive, one respondent noted the potential for firms to use derivatives to structure economically equivalent transactions, while avoiding the margin requirements. PRA recognizes the potential for restructuring within financial markets. The issue of avoidance and arbitrage is not unique to this amendment and PRA monitors market developments through its horizon scanning work program and detailed reviews of firms’ risk profiles. One respondent proposed a clarification to the text, requesting the exact date of expiry of the exemption be used in the Binding Technical Standard. This proposal has been adopted. Except for this drafting change, PRA and FCA have decided to maintain the draft policy as consulted on.

    Additionally, PRA has given due regard to the potential challenges faced by firms on the limitation of scope of collateral eligibility and the confluence of the extended implementation phases. PRA and FCA have, therefore, amended the specific transitional provision in the final UK Technical Standards, which temporarily allow the continued use of European Economic Area Undertakings for the Collective Investment in Transferable Securities (UCITS) as collateral. The transitional provision will now last until the end of December 2022. The extended period will also provide PRA and FCA with sufficient time to further consider the relative merits of these challenges for firms. PRA and FCA intend to consult in the first quarter of 2022 on the end-state requirements. Finally, the policy set out in PS14/21 has been designed in context of the end of Brexit transition. Unless otherwise stated, any references to EU or EU-derived legislation refer to the version of that legislation which forms part of retained EU law.

     

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    Effective Date: June 30, 2021

    Keywords: Europe, UK, Banking, Securities, Derivatives, Variation Margin, Initial Margin, CRR, Basel, CP6/21, PS14/21, Binding Technical Standards, Margin Requirements, PRA, FCA

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