EMIR Newsflash: ESAs announce urgent review of VM requirement for physically-settled FX forwards

The European Supervisory Authorities (ESAs), on 24 November 2017, published a statement in respect of the requirement to exchange variation margin (VM) for physically-settled FX forwards, which is scheduled to apply from 03 January 2018.

In the statement, the ESAs acknowledge the lack of harmony of the EU margin rules with the margin regimes of other jurisdictions, which exempt physically-settled forwards from VM requirements, and the challenges posed to end-users.

The ESAs announce that they have commenced an urgent review of the margin RTS, with a view to proposing amendments to that RTS to bring the VM requirements for physically-settled FX forwards in line with other key jurisdictions. They state that this is likely to be an amendment that limits the VM requirement to transactions between credit institutions and investment firms.

In terms of timing, the ESAs state that the intention is to submit such proposals to the European Commission within one month.

In the meantime, the ESAs state that they expect national competent authorities to “generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in a proportionate manner”. This appears to be a thinly-veiled invitation to national competent authorities to grant regulatory forbearance to market participants in respect of the 03 January deadline.

The statement from the ESAs follows the appearance in the latest Council compromise text of the proposed regulation to amend EMIR, released on Friday 17th, of wording (see page 30) that would limit the obligation to exchange variation margin in respect of physically-settled FX forwards to transactions between two credit institutions only. However, that proposed Regulation is still in the throes of the trilogue process and is not expected to enter into force until Q2 2018 at the earliest or probably more likely, Q3 2018.