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    EBA Proposes Standards on Initial Margin Model Validation Under EMIR

    November 04, 2021

    The European Banking Authority (EBA) is consulting on the draft regulatory technical standards on the initial margin model validation (IMMV) under the European Markets Infrastructure Regulation (EMIR). The consultation sets out the supervisory procedures for initial and ongoing validation of initial margin models, which will be used to determine the level of margin requirements for uncleared over-the-counter (OTC) derivatives. These draft regulatory technical standards also address the issue of how to validate an initial margin model when this is outsourced (in terms of design or implementation) to external providers. The comment period for this consultation ends on February 04, 2022.

    The consultation paper envisages the application of supervisory procedures to both large and medium-size counterparties by using a dual approach, proportionate to the size of the counterparty. This entails a standard supervisory procedure to ensure an in-depth validation of the largest banking counterparties and a more pragmatic and simplified approach applied to smaller counterparties. The consultation paper foresees a phased-in implementation of the supervisory requirements to ensure a smooth model validation process. This phased-in provision allows more time for smaller counterparties to comply with the new requirements. To minimize market disruption, competent authorities and counterparties will be supported in the application of the new validation approach for a transitional period of two years since the application of the new rules. This transitional provision will apply for the validation of models already in place at the moment of application of the rule.

    In the design of requirements for the IMMV, EBA paid great attention to the variety of the market participants in the scope of these draft regulatory technical standards. On one side of the spectrum, it is possible to observe (a few) subjects that deal with a very significant volume of OTC derivatives, who generally have an extensive experience in terms of model approval. On the opposite, there are (many) market participants dealing with a smaller volume of OTC derivatives and with less experience on model validation processes. For this reason, a dual process is foreseen in the proposed draft regulatory technical standards on IMMV, where the most significant market participants would apply a “standard” validation process very similar to the standard internal model approval process for market risk, while the smaller counterparties would apply a “simplified” validation process in the scope of these requirements.

    Although the proposed standards address the validation of any initial margin model, in case a model is adopted by a plurality of market participants or at industry-wide level, the possibility for competent authorities to avoid assessing the same core methodology more than once is offered. Moreover, for counterparties adopting the same model, there will be simplified communication processes with their competent authority. These standards are an important step in improving the accuracy, relevance, and effectiveness of initial margin calculations across the European Union. Supervisory validation will ensure harmonized supervisory procedures and an appropriately prudent approach to the level of initial margins for derivatives counterparties in European Union.


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    Comment Due Date: February 04, 2021

    Keywords: Europe, EU, Banking, Initial Margin, EMIR, Regulatory Technical Standards, OTC Derivatives, IMMV, Market Risk, Basel, EBA

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