ESAs and ESMA publish proposed revisions to margin and clearing RTSs

Revisions to margin RTS

The European Supervisory Authorities (ESAs) have published a further revised Final Report that sets out proposed revisions to the margin RTS to bring them into line with market expectations and developments.  In addition to confirming certain updates proposed in the previous versions of the Final Report submitted by the ESAs to the European Commission in May 2020 and December 2019, this latest version proposes the extension of phase-in dates for equity options and intra-group transactions, as well as proposing the introduction of a grandfathering provision for Brexit-related novations.

The key proposed revisions to the current margin RTS are:

• Confirmation of the extension of the implementation timetable for regulatory initial margin requirements, to align with the latest timetable set out by BCBS/IOSCO.  This would mean that:

  • the Phase 5 implementation deadline of 1 September 2021 would apply to counterparties with an Aggregate Average Notional Amount (AANA) of EUR 50 billion across the last business day of March, April and May 2021; and

  • the Phase 6 implementation deadline of 1 September 2022 would apply to counterparties with an AANA of over EUR 8 billion across the last business day of March, April and May 2022.

• Confirmation of the exemption of physically-settled FX forwards and physically-settled FX swaps from the requirement to exchange variation margin, where at least one of the counterparties is not a credit institution or a MiFID investment firm (or any third country equivalent).

• Further extension of the temporary exemption for single-stock equity options or index options from both the variation margin and initial margin requirements until 4 January 2024, thus extending the previously suggested phase-in date by a further 3 years.

• Further extension of the temporary intra-group exemption between a counterparty in the EU and a counterparty outside the EU where no equivalence decision has been adopted until 30 June 2022 (coinciding with the expiry of the temporary equivalence/recognition granted to UK CCPs for the purposes of the clearing obligation), thus extending the previously suggested phase-in date by 18 months.

• New grandfathering provision from the margin requirements in respect of non-centrally cleared OTC derivative contracts which:

  • were entered into or novated prior to the application of the margin requirements; and

  • are novated solely for the Brexit-related purpose of replacing a UK counterparty with an EU counterparty; and

  • are novated after 1 January 2021 and prior to 1 January 2022 (or, if later, the phase-in date for the relevant margin requirement).

Revisions to clearing RTSs

At the same time, ESMA has published a Final Report that sets out proposed revisions to the various clearing RTSs to extend the phase-in for intra-group transactions and provide a grandfathering provision for Brexit-related novations.

The key proposed revisions to the clearing RTSs are:

• Extension of the temporary intra-group exemption between a counterparty in the EU and a counterparty outside the EU where no equivalence decision has been adopted until 30 June 2022; and

• New grandfathering provision from the clearing obligation for OTC derivative contracts that are of a class that is subject to the clearing obligation which:

  • were not subject to the clearing obligation (i.e. they are legacy trades that were entered into prior to the application of the clearing obligation and have not been novated since); and

  • are novated solely for the Brexit-related purpose of replacing a UK counterparty with an EU counterparty; and

  • are novated prior to 12 months after the application date of the amendment RTS.

Next steps

The proposed amendments have been sent to the European Commission for endorsement, following which they will be subject to a period of non-objection from the European Parliament and the Council.  Although this is expected to occur in a short timeframe, and the proposed revisions to both amendment RTSs are drafted to take effect from the day following publication in the Official Journal, there is a recognition in the Final Report that it will take some time for this procedure to be completed.

Therefore, bearing in mind that some of the temporary exemptions mentioned above have already expired, that the Phase 5 of the margin requirements that technically still applies actually commenced on1 September 2020 and to counterparties with an AANA of only EUR 8 billion, and the looming expiry of the Brexit transition/implementation period, the ESAs and ESMA also states in the Final Reports that they expect competent authorities to exercise regulatory forbearance and to apply the margin requirements and clearing requirements "in a risk-based and proportionate manner" until the proposed revisions enter into force.