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.

We believe that a number of aspects require careful consideration in the final draft RTS:
• To ensure legal certainty, the final draft RTS should clarify that the eligibility and other requirements of the RTS should not apply to margin collected that is not required by the RTS i.e. voluntary collateral , collateral collected in excess of the regulatory requirements or before the RTS requirements apply;

• The operational changes required by the new requirements are significant. CSAs will have to be updated and put in place on an industry wide basis during a compressed implementation window. As previously mentioned we believe that VM requirements should be phased in at a minimum;

• Certain definitions in the draft RTS should also be clarified e.g. the meaning of the “netting set” in the margin period of risk and the definition of an FX forward which at present does not refer to a settlement date and could potentially cover spot transactions;

• Where funds are considered EU FCs under EMIR due to the fact that they are managed by an AIFMD authorised manager, these non-EU funds will be required to collect margin (including IM where the EUR 8 billion threshold is breached). The operational burdens they are faced with could result in an increased cost of doing business for them.

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?

The use of internal rating models in determining collateral eligibility may have an unintended market impact of releasing non-public information to the market. The internal IRBA approved rating models of banks will be based on a combination of public and non public information, and the use of these models to indicate collateral eligibility may result in the collateral taker releasing non public information to the counterparty, particularly where a request for collateral substitution is required due to a change in CQS. Further, use of internal rating models may lead to disputes if there is disagreement on the collateral quality (particularly if the external CQS differs from the internal CQS).

The explanatory text on page 36 of the consultation paper notes that an institution’s rating model can also be used by the transacting counterparty. Typically an institution is not permitted to share rating information with public side functions therefore we have some concerns around the requirements to share information with third parties. The final draft requirements should clarify how much information is expected to be shared with the counterparty to allow them to fulfil their obligations under the rules. As some rating models are proprietary, only the underlying principles could be disclosed.

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?

While the BCBS-IOSCO conditions on rehypothecation are unlikely to be achievable in the short term, they could be achievable over time. Were other jurisdictions not to introduce an outright ban in their final rules and a model for rehypothecation is developed which meets the conditions of BCBS-IOSCO, EU banks would be at a clear competitive disadvantage. The final draft RTS should therefore state that rehypothecation is possible where the conditions set out by BCBS-IOSCO are fulfilled. This would ensure that international consistency and emerging rehypothecation models could be kept under review by the ESAs and the BCBS-IOSCO monitoring group.

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