EMIR Newsflash: EU margin rules endorsed with amendments by European Commission

On 28 July 2016, the European Commission (the "Commission") stated in a letter to the European Supervisory Authorities (ESAs) that it intends to endorse with amendments the draft EU Margin RTS which the ESAs had submitted to the Commission in March (the "ESA Draft RTS"). The Commission also published its own version of the draft EU Margin RTS, with accompanying Annexes (together, the "Commission Draft RTS").

The ESAs now have six weeks in which to consider and further amend the Commission Draft RTS and resubmit it to the Commission in the form of a formal opinion. Following that, it will then be subject to further review by the Commission and then the European Parliament and Council.

The Commission stated in the covering letter that its intention behind the revised draft is only “to make a number of clarifications and restructure the legal text.” Unfortunately, whilst the intention may not have been to deviate materially from the ESA Draft RTS (other than in respect to the deliberate changes made by the Commission, which are highlighted below), the fact that the Commission has not only restructured the text but also reworded a lot of the text itself makes it very difficult to compare directly the Commission Draft RTS against the ESA Draft RTS, and there are a number of incidences that fall into the bucket of potential “unintended consequences”. This restructuring and rewording is especially unhelpful for those market participants who had already commenced implementation projects on the basis of references to specifically numbered Articles in, and specific drafting of particular provisions of, the ESA Draft RTS.

Commencement/phase-in dates

The principal change relates to the commencement date of the EU margin requirements. The Commission letter confirms what had previously been reported by the media in June that the EU margin requirements will not meet the 01 September 2016 global commencement date proposed by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (BCBS-IOSCO) and that the EU will therefore be out of line with the current commencement date for margin requirements in other jurisdictions, such as the US.

The Commission Draft RTS does not identify a specific commencement date, but instead proposes the following:

• Variation margin requirements to commence one month after the entry into force of the margin RTS for covered entities belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives for March, April and May 2016 exceeds €3tn.
• Variation margin requirements to commence from the later of 01 March 2017 and one month after the entry into force of the margin RTS for all other covered entities. This means that, if the margin RTS enters into force after February 2017, the variation margin requirements will start to apply on a “big bang” commencement date for all market participants.
• The phase-in periods for the initial margin requirements remain the same as under the ESA Draft RTS, except that the initial commencement date is no longer 01 September 2016 but one month after the entry into force of the margin RTS for covered entities belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives for March, April and May 2016 exceeds €3tn.

Other deliberate changes

Other key deliberate changes made in the Commission Draft RTS include:

• Clarification that cash initial margin can be held by third country banks which are deemed equivalent, rather than just with EU banks. The ESA Draft RTS had been somewhat ambiguous on this point, in that it contained two potentially contradictory provisions on this point.
• Clarification that the phase-in for variation margin requirements for physically-settled FX forwards extends until the application of the Commission Delegated Regulation under MiFID2 (currently expected to be 03 January 2018), not only until the entry into force of that Commission Delegated Regulation (which may be 2016).
• Clarification that EU counterparties wishing to use the intragroup exemption may submit their application after entry into force of the RTS.
• Removal, with a review after three years, of the initial margin concentration limits for pension schemes and its replacement with procedures to manage concentration risk.