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German Banking Industry Committee (Deutsche Kreditwirtschaft)

While the German banking industry of course welcomes that the draft proposal intends to address the diversity in the counterparties by adopting a proportionate approach, we strongly believe that the proposed split is not the right way and and/or not sufficient to address the very specific circumstances under which the models for the calculation of the initial margin (IM models) are used by the market participants.

The proposed approach does, in particular not reflect the central characteristics of IM models and fundamental differences between the use of an IM model in order to calculate the amount of initial margin to be provided in connection with (bilateral) derivative transactions and the application of internal models in the context of the CRR.

The central characteristics of IM models and key differences in comparison to other internal models can be summarized as follows:

- The vast majority of market participants will apply the SIMM methodology developed by ISDA. The application on such a standardised methodology is – for most market participants – a factual necessity as each counterparty receiving a demand for the provision of IM has to be able to monitor, verify or even replicate the underlying IM model based calculations on a continuous basis. For most market participants, even large/model-experienced institutions, this is only practically feasible, if the core aspects of the IM models used by the counterparties they face are standardised and comparable to the ones used by the relevant counterparty or other market participants. Consequently, the level of standardisation of the IM models in use and/or the key building blocks they are built on needs to be significantly higher than in other forms of internal models. Largely independent/individual IM model will thus also be very much the exception.

- Reliance on the SIMM methodology is also a vital prerequisite to allow cross-border/ cross IM-regime transactions.

- The application and implementation of the SIMM model (or any other form of standardised methodology) of course allows for discretion and requires individual adjustments. However, many market participants will rely on service providers for the implementation so that even individual/discretionary elements of the model application will in many instances by standardised where implemented in the same manner/ by the same service provider.

- The widespread use of a standardised methodology, specifically SIMM, but also the standardisation of other individual/discretionary elements of the implementation/application of such a standardised model makes it necessary that these widely used standardised elements are treated uniformly, in order to avoid conflicting validation results.

We do of course recognise the draft proposal addresses some of these specifics and characteristics, but we believe that they already have to be reflected in the basic approach and on all levels and especially call for an approach which - for the purposes of the validation of the IM models - at least distinguishes between
- basic core elements/features underlying a widely used standardised methodology, in particular SIMM,
- other (partially) standardised elements/features of the implementation of a standardised methodology, and
- actual individual/institute specific aspects.
Only the last mentioned individual /institute-specific aspects actually lend themselves to an individual/in depth validation process, which then, of course, should be proportionate.

The first two should generally be subject to a simplified and, in particular, uniform validation process. This would not only avoid conflicts and inconsistencies but also significantly reduce complexity and increase the efficiency of the validation process for all involved parties, including the competent authorities.
As to our concerns/comments on fundamental aspects of the approach, see our response to Q1.

The 750 bn threshold could be a workable/appropriate indicator for establishing a proportionate approach. However, in view of our general/fundamental concerns set out in our response to Q 1 we see limited room for the application of the threshold.
Again, we point to our general/fundamental concerns as set out in our response to Q1. In view of these concerns, we see no practical need for such possibility to deviate.
As to our general concerns, see above, However, we of course welcome and support the possibility to permit an immediate/preliminary use of IM models: In order to ensure continuity and prevent disruptions, it is vital to provide the competent authorities with the ability to at least temporarily/conditionally validate IM models.
We refer to our response to Q 1.
We believe that changes in the initial margin value resulting from the annual recalibration of the ISDA SIMM model should not be considered to constitute a material change for each individual user and should therefore – as such - not trigger the need for a new/additional validation by the competent authority for each market participant.
As already stated in our response to Q 6, we do not believe that changes in the initial margin value resulting from the annual recalibration of the ISDA SIMM model should – as such – be considered to constitute a material changes. Consequently, we believe that thresholds are not a useful indicator.
NA
In general, the requirements appear to be unnecessary formalistic and detailed.

As regards the possibility to allow for the involvement of third parties, which we support and which is addressed in by Art. 6 (1) item (i), it could be considered to review or clarify the provision: Art. 6 (1) first sentence implies that (only) a “counterparty” is required (and able?) to submit the documentation. This appears to conflict with item (i) which sets out a special requirement for a third party (namely to submit proof of the right to act on behalf of a counterparty).
NA
The provisions on outsourcing and delegation are of considerable practical relevance since – as we already indicated in our response to Q 1 - many institutions are likely to rely on external service providers on various levels of the implementation of the IM model.

This means that many aspects of the model implementation will effectively be standardised and include the involvement of service providers. Consequently, the reliance on these standardises elements as well as the involvement of third parties in this connection should be subject to a uniform/ simplified/ streamlined validation and connected requirements. This will need to be reflected in all provisions concerning the delegation/outsourcing of elements of the IM model implementation and use, and the requirements should not be to detailed and inflexible.

Subject to our general concerns set out in our response to Q 1, we fully support the approach to allow reliance on validation results in other validation processes and/or by other authorities: Such reliance will be indispensable to streamline the validation processes and ensure uniformity within the EU and compatibility with third-country regimes.
See our response to Q12.
We note that the requirements are modelled after the governance requirements applicable in the CRR context.

In view of the significant differences and specifics of IM models we already addressed in our response to Q 1, we do however believe that a much simpler/reduced/proportionate approach is merited, in particular considering that these requirements will not only apply to credit institutions but also other market participants and that it is likely that a considerable portion and significant elements of the IM model will be standardised.
See our response to Q 14.
See our response to Q 14.
See our response to Q 14.
See our response to Q 14.
We believe that the backtesting requirements are too closely modelled on parallel CRR market risk requirements and are overly complex and not suited to IM models. We again refer to our general concerns set out in our response to Q1.
See our response to Q19.
See our response to Q19.
See our response to Q19.
See our response to Q19.
See our response to Q19.
See our response to Q19.
See our response to Q19.
See our response to Q19.
See our response to Q19.
See our response to Q19.
Our response to the backtesting requirements applies correspondingly.
Our response to the backtesting requirements applies correspondingly.
We refer to our response to Q1.
We refer to our response to Q1 and Q6.
We refer to our response to Q1.
We of course welcome transition provisions. They are needed to ensure continuity and prevent disruptions. However, in view of our general concerns regarding the approach set out in the draft proposal, and if the current approach is not reviewed, we believe that the transition provisions will not be sufficient to avoid significant disruption and challenges.
See our response to Q 35.
See our response to Q 35.
German Banking Industry Committee (Deutsche Kreditwirtschaft)