EBA publishes validation requirements on initial margin models

The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) on Initial Margin Model Validation (IMMV) under the European Markets Infrastructure Regulation (EMIR). These draft RTS set out the supervisory procedures to ensure the prudent use of initial margin models for OTC derivatives. In an accompanying Opinion, and as part of the ongoing negotiations on EMIR, the EBA calls on co-legislators to consider the establishment of a central validation function in the EU.

In order to enhance compliance with the margin framework for non-cleared OTC derivatives laid down by the Basel Committee for Banking Supervision (BCBS) and International Organization of Securities Commissions (IOSCO), the final draft RTS on IMMV sets out the supervisory procedures for the validation of initial margin (IM) models applied for the exchange of IM. Furthermore, the final draft RTS on IMMV envisage a proportionate application of supervisory procedures - this entails a (i) standard supervisory procedure to ensure an in-depth validation of the largest banking counterparties and (ii) a pragmatic and simplified approach applied to smaller counterparties.

The requirements set out in the RTS envisage a phased-in implementation of the supervisory requirements to ensure a smooth model validation process. This phased-in approach will allow more time for smaller counterparties to comply with the new requirements. In addition, to minimise potential market disruption, competent authorities and counterparties will benefit from a transitional phase that will facilitate the validation of models, which are already in place at the moment.

Jointly with the RTS, the EBA published an Opinion on IMMV, calling on co-legislators and the European Commission to consider the establishment of a centralised validation function at the EBA to ease the coordination issues linked to the validation of IM models that have industry-wide application. In addition, the Opinion suggests that the scope of entities subject to the RTS should be reconsidered so as to apply only to the most significant counterparties.

Legal basis

This draft RTS has been developed in accordance with Article 11(15)(aa) of Regulation (EU) No 648/2012 (EMIR) on the risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty which mandates the EBA to specify the supervisory procedures that would ensure initial and ongoing validation of the risk-management procedures in the level of collateral. These draft RTS are being developed in cooperation with European Securities and Markets Authority and European Insurance and Occupational Pensions Authority.