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

Go back

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.

A need for a vast number of various agreements, for the purpose of not exchanging initial and variation margin, is required. This will pose a significant operational burden, in particular with respect to the relationship to small and medium sized entities.

The explanatory notes suggest that the exemptions were introduced to ease the operational burden and insure proportionate implementation of margining requirements. We welcome and agree with such considerations.

However, the requirement of a positive agreement (whether in writing or other equivalent electronic means) in order to benefit from exemptions seems in contradiction with such objective. Indeed, it will create administrative burden even for exempted counterparties, products, implementation phases.

The operation burden of collateral substitution due to concentration limits of collateral must be addressed more appropriately. This requirement will result in increased settlement risks and new functionality requirements in Collateral Management systems.

As far as collection of margins is concerned, the RTS foresee that this is done within one business day following the transaction date. However, standard settlement regimes applicable to securities are generally between 1 and 3 days.

Hence, counterparties posting securities as collateral could be in breach of the RTS if collection of collateral is not consistent with securities settlement delays. Next to that, we would like to know to what point in time on the term “collection” itself refers to: it is not clear if this is the point of calculation, claiming or actually receiving collateral.

As a result of the rule proposed in Art 2 LEC - (e), where cash collateral is posted to counterparty, the counterparty should deposit this cash with an entity distinct from the collateral provider.

This approach highly differs from existing market practices and would make much more complex current cash holdings.

The collateral receiver would have to open a high number of cash accounts to comply with this rule without really reducing the counterparty risk attached to the cash collateral. This approach only results from transferring counterparty risk from one place to another without real added protection. Other options that could be considered may be:

(i) application of this rule only above a certain threshold in order to avoid multiplication of cash account openings ;

(ii) where the collateral taker is a bank, other regulations adopted to strengthen the resilience of banking institutions are sufficient to ensure a high level of protection for cash collateral

We consider that transactions that are exempted from the clearing obligation (certain forex derivatives and transactions qualifying as intra-group) should not be taken into account in the calculation of the 8 billion thresholds as these are considered not to pose any systemic risk.

We do not support the proposed 8% haircut on Forex mismatches, as contrary to the envisaged outcome, we think this would create extra counterparty risk and lead to under collateralisation of 1 of the counterparties, even to procyclicality.

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 FBF support the use of internal models for determining collateral haircuts.

The use of an Internal Margin Model (IMM) must remain possible, even if the industry is currently working on propositions for a Unique Margin Model.

Even if a Unique Margin Model were to be approved, counterparty still must be able to choose for an Internal Margin Model, derived from its existing approved models used for the Value at Risk (VaR) for market risk or the Expected Positive Exposure (EPE) for counterparty risk.

In order to avoid any disputes arising from the use of internal models, thr FBF suggest that the counterparties to a contract agree by convention whose model will be used or rely on ISDA calculation agent clauses.

As such we strongly support the IMM RTS as currently drafted that allow for a model to be either developed by one of the two parties or jointly by the two parties, or to be provided by a third party agent.

According to the fact that the counterparty providing the model will have to provide appropriate information on the model to the counterparties to be confident in accessing sufficient information.

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?

Re-use initial margins (IM) are prohibited in the current project. FBF, with a goal of transparency and protection against potential systemic risk, defends the impossibility for initial margins to be segregated and reused at the same time. Both operations should not be duplicated or consecutive.

However, in other countries, the United States in particular, reuse of initial margin is authorized and is, as such, generate distortions of competition vis-à-vis the European entities. A level playing field between different markets is crucial especially in derivatives markets which are global in nature. Therefore we urge ESAs to follow the flexibility provided in global rules and ensure a level playing field for European companies.

Even though we understand that this ban is linked to the obligation to segregate initial margins, we would like to stress that this total ban on re-use of collaterals will generate considerable liquidity problems. As re-use of collateral is allowed for transactions cleared with CCPs, we would advocate for the same kind of rules to apply for non-centrally cleared transactions provided that it is limited to certain type of instruments (e.g. money market funds).

Re-use initial margins are indeed an undeniable competitive advantage
which will overburden the competition ensuring consistency of sound and transparent market.

Upload files

Name of organisation

French Banking Federation (FBF)