Response to joint Consultation on draft RTS on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP

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Question 2. Are there particular aspects, for instance of an operational nature, that are not addressed in an appropriate manner? If yes, please provide the rationale for the concerns and potential solutions.

The current RTS draft requires EU FC and EU NFC+ entities to hold initial and variation margins from non-EU entities that would be classified as non-financial entities below the clearing threshold if they were established in the EU (non-EU NFC-). However, EU FC and EU NFC+ entities are not required to request collateral from non-financial entities below the clearing threshold and established in the EU (EU NFC-). If this proposal remains, it will create a new category of counterparty to further complicate the management of credit exposures.

Including a requirement for EU FC and EU non-NFC+ entities to margin non-EU NFC- entities, extends the scope of margining to NFCs that are not referred to in Article 10. This represents an increase in EMIR scope, beyond the level 1 text and is inconsistent with ESA’s mandate to develop standards that keep in mind the need for international consistency, including BCBS-IOSCO Key Principle 2, Requirement 2 paragraph 2.4 which advocates only inclusion of “financial firms and systemically important non-financial firms”.

Operationally, NFC- entities, whether established within the EU or otherwise, are outside the scope of the EMIR clearing obligation if they do not exceed the clearing threshold. Without the requirement to clear, it is unlikely that such entities would have the infrastructure or systems to support bi-lateral margining. It would therefore seem better aligned to EMIR paragraph (14) “creating a level playing field between market participants” if NFC- entities, whether established within the EU or otherwise, are both treated equally in determining the scope of margining for OTC derivatives that are not cleared.

We would recommend that non-EU entities that would qualify as NFC-, if they had been established within the EU, should not be included within the scope of the margining obligation on EU FC and EU NFC+ entities. This recommendation is within the constraints of the level 1 text, would be consistent with BCBS-IOSCO Key Principle 2, Requirement 2 and would be aligned to the common treatment of both EU NFC- and non-EU NFC- entities under the EMIR clearing and other risk mitigation requirements.

Question 4. In respect of the use of a counterparty IRB model, are the counterparties confident that they will be able to access sufficient information to ensure appropriate transparency and to allow them to demonstrate an adequate understanding to their supervisory authority?


Question 6. How will market participants be able to ensure the fulfilment of all the conditions for the reuse of initial margins as required in the BCBS-IOSCO framework? Can the respondents identify which companies in the EU would require reuse or re-hypothecation of collateral as an essential component of their business models?


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