Response to consultation on Guidelines on the authorisation of initial margin models
Q1. Do you have any comments on the proposed Guidelines? If you identify an issue, please describe it an suggest how to address it.
[CP14.1] We propose that, where a counterparty subscribes to an investment manager for proforma model use, the Guidelines should require only that appropriate contractual arrangements are in place to permit use of an initial margin model, rather than requiring proof that the model has been internally validated and approved by the counterparty.
Paragraph 14 is practically problematic for many counterparties. Institutional Investors (such as Pension Funds, and Endowments) will often not be in a position to internally validate the IM model. They are reliant instead on retained investment managers, effectively using an IM model on their behalf. Counterparties will in many cases not be able to “supply proof that the use of the IM model has been internally validated and approved”.
The Guidelines could more helpfully require that such counterparties ensure that the IM model is appropriately permissioned for use. Where counterparties are using investment managers, they may for example be allowed to verify that their managers have the requisite contractual terms in place to allow for the use of an IM model.
[CP19.1] The Guidelines should define model changes as those determined by the EBA
The Guidelines should clearly define model changes by reference to those explicitly determined by the EBA. In the context of a pro forma model, concepts such as a “fundamental change to the design of the model” or a “change in the use of the model” should be specified by the EBA, including through illustrative examples. [CP19.1] also applies to Paragraphs 24 and 25. A pro forma model user is not in a position to unilaterally assess whether such changes have occurred. Absent clear specification, the notion of what constitutes a “fundamental” change remains ambiguous and risks inconsistent interpretation and application.
[CP19.2] We propose that fundamental changes in internal governance should not be treated as model changes
We propose that changes to the internal governance structure of a counterparty should not be classified as model changes. Changes to the counterparty’s internal governance arrangements do not affect the functioning, calibration, or use of the model.
Treating such governance changes as model changes would therefore be misaligned with the underlying operating model and could introduce unnecessary operational burden without delivering a corresponding prudential benefit. The Guidelines should instead distinguish between changes that directly impact the model and its outputs, and those that relate solely to the internal organisation of the counterparty.
[CP32.1] We propose that, where a counterparty subscribes to an investment manager for proforma model use, the Guidelines should allow such a counterparty to attest compliance with the EMIR requirements, without having to turn over a full self-assessment.
As currently drafted, paragraph 32 places impractical expectations on such counterparties. Where trading and model usage are delegated to investment managers, counterparties may not have sufficient visibility or control to independently perform a comprehensive self-assessment against EMIR requirements. In these circumstances, a more proportionate and operationally feasible approach is for counterparties to rely on attestations or confirmations provided by their investment managers.
The Guidelines should explicitly recognise this model and permit reliance on such arrangements, subject to appropriate oversight, rather than requiring counterparties to undertake self-assessments that they are not well placed to perform.
[CP50.1] We propose that, where a counterparty subscribes to an investment manager for proforma model use, that the counterparty provide attestation that the use of the model has been appropriately permissioned
Paragraph 50(e) creates an unworkable request of counterparties that use external investment managers. Such counterparties will not necessarily be able to confirm that an IM Model has been audited and validated in accordance with the counterparty’s own internal policies and procedures.
In the scenario of a counterparty with multiple investment managers, it is difficult to envisage how they could obtain consistent verifications, even if the underlying information were to become available to them.
To address this operational complexity, we propose that the Guidelines instead require that such counterparties attest that the use of the model has been appropriately permissioned, if necessary through verification from the body with relevant oversight responsibility at the OCP.
[CP55.1] We propose that the EBA clarify that for the minimum information to be provided in the application for authorisation of changes to a previously authorised IM model, the RTS framework should prevail, whereby:
- Internal validation/review is required for each change (Article 11), and
- Audit remains a periodic control (Article 8), rather than a prerequisite for each change
Paragraph 55(e) implies that all changes to a previously authorised initial margin (IM) model must be subject to an audit. However, this appears to be inconsistent with the requirements set out in the RTS:
- Article 8 requires that audits are conducted at least annually.
- Article 11 requires that all model changes undergo internal validation or review, but does not explicitly require an audit prior to implementation.
This creates ambiguity regarding the expected scope and timing of audit involvement in the model change process.
This clarification would ensure consistency with the RTS framework, preserve a proportionate and risk-based approach to model governance, avoid unnecessary operational burden; and reinforce the effectiveness of both validation and audit functions within their respective roles.
[CP55.2] We propose that the text “… audited and…” be deleted from Paragraph 55(e) to bring it in line with the clarification requested in [CP55.1].
The proposed wording appears to extend beyond the governance arrangements typically applicable to prudential internal models under the Capital Requirements Regulation (CRR) framework. The CRR, associated RTS, and the ECB Guide to Internal Models are grounded in well-established governance principles, including independent validation, model governance, formal change management processes, and supervisory approval mechanisms.
Within this framework, independent validation is responsible for the ex-ante review and challenge of model changes, while Internal Audit provides periodic independent assurance on the effectiveness of the overall model governance and change management framework.
Although recurring Internal Audit reviews are an established expectation, prudential internal model frameworks do not generally require explicit confirmation that each individual model change has been audited prior to submission to the competent authority. To this end, we propose that Article 55(e) be revised as follows:
“the confirmation that the change has been audited and internally validated in accordance with the counterparties internal policies and procedures for the use of the IM model, including the date of the internal approval of the change by the competent body, as applicable;”
This formulation ensures that audit involvement is appropriately reflected, while avoiding the implication that audit is systematically required for each individual model change. We believe that this revision would better align the Guidelines with the established governance architecture applicable to prudential internal models. It would also ensure consistency with the RTS, which also requires periodic (at least annual) audit under Article 8, while Article 11 requires validation or review of model changes without introducing a specific requirement for audit at the individual change level.
[CP55.3] We propose that, where a counterparty subscribes to an investment manager for proforma model use, that the counterparty provide attestation that the use of the model has been appropriately permissioned
Paragraph 55(e) raises many of the same challenges highlighted in the commentary against Paragraph 50(e). Counterparties that use external managers will not have access to internal validation and audit materials.
Requiring that the counterparty attest that a change to a previously authorized IM model has been appropriately permissioned will address this concern. If necessary, this attestation will verified by the body with relevant oversight responsibility at the counterparty.
[CP56.1] We propose that “… or includes also updates made by the counterparties on their own accord” be deleted from Paragraph 56(a)
Paragraph 56(a) makes reference to updates that a pro forma IM model user may make “on their own accord”. This is a fundamental misunderstanding of pro forma IM models; legally and operationally, it is impossible for a user to unilaterally change the model.
[CP59.1] We propose that the trigger for requiring authorisation should be limited to circumstances in which a counterparty changes the basis on which it has been permissioned to use an IM model.
Paragraph 59(c) raises similar concerns to those set out in [CP19.1] and [CP19.2]. Counterparties are unlikely to be in a position to determine whether or when a “fundamental” change has occurred, even where a detailed list of indicative scenarios is provided.
We therefore recommend refocusing the requirement on changes to the underlying basis of the original permission to use the IM model. By contrast, changes in internal governance arrangements should not, in themselves, trigger a reassessment of that permission.
[CP65.1] We propose that where a counterparty subscribes to an investment manager for proforma model use, that such a counterparty be required to retain evidence of the permission of the investment manager to use an IM model.
Paragraph 65(a)-(e) will prove unworkable for many OCPs. OCPs which use external investment managers will not have access to the documentation that is required to be maintained. For entities that retain multiple investment managers, this requirement would be especially burdensome if it were realistic.
We propose that counterparty that subscribes to an investment manager for use of a proforma model be required to retain evidence of the permission of third parties to use an IM model on their behalf.
Q2. Do you deem the authorisation process described in these Guidelines to be sufficiently simple and proportionate, in particular regarding the authorisation of OCPs? If not, please suggest how to enhance the proportionality or simplify the authorisation process.
We would characterize the authorization as not particularly simple, and somewhat proportionate.
- The key reason for assessing the lack of simplicity, is that the process is not tailored to address the differences between different types of counterparties. For a centralized counterparty, that carries out all trading in-house, the information needed to support an application is theoretically all contained in-house. For any counterparty that uses an external manager to carry out trading, and for many that use multiple managers, they are unlikely to have access to the specified governance documents in the Guidelines.
- Where the Guidelines are proportionate is around the quantitative data required for counterparty applications. The calculation process may require some coordination across multiple parties, but the requirements are clear.
- The qualitative information is in general quite onerous, and will prove difficult for certain entities to obtain. For any entities that use a third party investment manager, audit reports and internal validation documents will not be possible to be obtained.
[CG0.4] A proportional solution would be one that recognizes these types of industry arrangements, and allows for representations and attestations in lieu of the underlying documentation detailed currently in the Guidelines. We also believe that proportionality would take into account an appropriate role for Competent Authorities to assess if entities have taken sufficient steps to ratify that the appropriate control structures are in place.