We have identified the following aspects/provisions in the draft RTS as resulting in exceptionally and unnecessarily burdensome obligations; in all instances the burdens could be significantly reduced without compromising the original purpose by implementing the changes or alternatives set out be-low:

1. Contractual opt-out requirements regarding exceptions from margining requirements and postponement of margining requirements – Art. 2 GEN paras. (1) to (4) and Art. 1 FP (3)

Both Art. 2 GEN (addressing the exceptions from mandatory margining requirements or possibil-ity to agree on thresholds) and Art. 1 FP (3) (with the provisions on the phase-in and the thresh-old based exemption from the initial margin requirement) require a formal/written opt-out by way of contractual agreement in order to allow counterparties to benefit from exceptions.

This approach is unnecessary cumbersome and formalistic and would impose unreasonable bur-dens on market participants, in particular, on counterparties which are not subject to the clearing obligation, a great many of which will be small and medium sized corporates (which were always intended to be exempted from the requirements under Art. 11 (3) EMIR).

Credit institutions would be required to confront all customers engaged in derivative transactions with a demand to enter into such a formal opt-out agreement. As many customers will have rela-tions with more than one bank, they will have to deal with different versions of such arrange-ments.

The process of negotiating and entering into opt-out agreements with each customer will be ex-tremely time consuming, bind resources to a very considerable degree and, of course, be very costly for both sides: The possibility to rely on “equivalent permanent electronic means” in this context will only help to reduce the burdens to a limited degree and only for a limited circle of market participants: The majority of the counterparties, in particular non-financial counterparties, will not have access to technical platforms supporting such a process. Likewise, the protocol-system used by ISDA for certain types of changes to contractual arrangements cannot be applied in all situations and in relation to all counterparties. It is also not available for other – widely used – types of master agreements and especially smaller and medium sized counterparties will in any event often not be prepared to adhere to such a system as it would subject them to the courts and laws of a different jurisdiction. Furthermore, the issues to be addressed necessarily require some degree of individualisation and thus direct negotiations.

Based on the experience with the introduction of the risk mitigation requirements under Com-mission Delegated Regulation 149/2013 concerning timely confirmation, portfolio reconciliation by entering into contractual relationships via the so called EMIR-Addendum to the German Mas-ter Agreement , the number of affected counterparties in Germany alone will surpass 50,000 (not counting the cases where master agreements other than a German Master Agreement are in place).

The proposed contractual opt-out approach is not necessary to ensure that counterparties are able to determine whether their counterparty qualifies for certain exemptions in respect of the margin requirements or during the phase in period:

 Where these exemptions depend on the status of the counterparty as financial counterparty (FC), non-financial counterparty exceeding the clearing threshold (NFC+), non-financial coun-terparty not exceeding the clearing threshold (NFC-) or equivalent third-country counterparty (respectively, as counterparty subject to the clearing obligation or not), the relevant infor-mation is already available: The status of counterparties was already determined for the pur-pose of implementing the risk mitigation requirements under Commission Delegated Regula-tion 149/2013 which already required such classification. These classifications can now be di-rectly applied in order to establish whether a counterparty qualifies for the exemption ad-dressed in Art. 2 GEN (4) (b) and (c). A further contractual agreement to this end is therefore not necessary.

 In all other cases, where the eligibility for an exception is based on factors other than the clearing status of the counterparty (e. g. transaction volume or average notional amount as in the case of the initial margin exemption under Art. 1 FP (3) (e)), eligibility can be ascertained as effectively and in a less cumbersome manner: for example by imposing a duty on counter-parties to inform their respective counterparties when they breach the relevant thresholds. Counterparties could also be entitled to demand a confirmation/representation from the other counterparty that the relevant thresholds have not been breached (and the relevant counter-parties would be under a duty to provide this information if requested).

In order to simplify the operational challenges for all market participants but in particular for smaller and medium sized counterparties, the exemptions should therefore be designed as di-rectly applicable exemptions (not requiring an opt-out) and counterparties should be entitled to request the relevant declarations/representations from their counterparties on their status (or in-formation on the relevant factors which permit the determination of the status). The relevant counterparties should in turn be under a duty to provide the relevant information upon such re-quest.

Proposed Alternative:

Replacement of the provisions requiring contractual agreements in order benefit from exemp-tions by provisions directly exempting transactions with the relevant counterparties from margin requirements combined with a right to request representations or declarations from counter-parties regarding their status, where the status has not already been determined.



2. Requirement to obtain legal opinions regarding segregation arrangements – Art. 1 SEG

The requirement set out in Art. 1 SEG (5) of the draft RTS to obtain a “satisfactory legal opin-ion(s)”, in particular in the manner it is currently drafted, would result in very considerable opera-tional challenges and burdens (even taking into account the interpretations provided by the EBA in the Single Rulebook Q & A process on legal opinions in view of Art. 194 CRR – Question ID 2013_23 – which we assume to apply correspondingly to the opinion requirement under the draft RTS) .

As currently drafted, the obligation is also considerably more rigid and formalistic than compara-ble obligations concerning the need to assess and monitor legal risks under the CRR, or in fact the corresponding obligations regarding segregation in the case of CCP clearing under Art. 39 EMIR.

The relevant obligation should therefore be replaced by a general obligation to implement ade-quate measures/procedures safeguarding the legal effectiveness of a segregation arrangement chosen by the counterparties.

If, however, formal legal opinions (still assuming the interpretations in the EBA response in the Rulebook Q & A process – Question ID 2013_23 continue to apply) are nevertheless seen to con-stitute a necessary element, the relevant obligation should at least be modelled more closely on existing similar opinion requirements under the CRR. At the very least, the following should be ensured to avoid unnecessary and also unreasonable effects and unnecessary burdens:

 The provision as currently drafted can be understood to require a new legal opinion for each transaction. This would be impossible to implement and is presumably not intended. It should therefore be clarified that counterparties are required to make a legal assessment regarding the effectiveness of a segregation arrangement prior to entering into such arrangement based on the most recent legal opinion (allowing for the possibility to rely on existing opinions in respect of standard collateral arrangements).

 The rigid timeframe for updates of legal opinions should be replaced by more flexible ap-proach: for example, counterparties could instead be required to regularly review whether ex-isting legal opinions can still be relied upon (that is, whether there have been any material changes in the law indicating a need to update the relevant opinion).

 If, however, in contrast to all existing legal opinion requirements under the CRR, a rigid timeframe for updates is considered to be necessary, the relevant timeframe should at least be expanded to permit counterparties to coordinate timing of the opinions on segregation ar-rangements with other existing opinion requirements (it is likely that opinions on segregation arrangements interact with or will be based on opinions obtained for the purposes of the CRR) and also in order to avoid the situation that updates become due although it is already fore-seeable that legal changes are upcoming. An expansion of the timeframe to at least three years would already alleviate many of the operational problems. In this context it should be taken into account that the legal structures and areas of the law which would be analysed in the legal opinions on segregation arrangements are well-known, well established and are rare-ly subject to fundamental/material changes affecting their effectiveness and are usually stand-ard structures used for collateralisation in general. In addition, it should also be clarified that the relevant legal opinions need only address the legal question of whether the arrangement reviewed safeguards that the assets provided as initial margin are returned to the securing party in the event the secured party becomes insolvent and there is no security event under the relevant security arrangement. Questions of non-legal nature, in particular those which re-quire a general, experience based risk-assessment (such as whether the protection is “suffi-cient” or whether access to the assets posted as initial margin is sufficiently “immediate” in the event of a default of the securing party), cannot be answered by a legal opinion.

Proposed Alternatives:

 Replacement of the obligation to obtain legal opinion by an obligation to implement proce-dures to verify that the segregation arrangements used are legally effective and enforcea-ble in all relevant jurisdictions.
 If a requirement to obtain legal opinions is nevertheless seen to be necessary, the rigid requirement to update such opinion annually should be deleted or at least replaced by a significantly longer period.
 In addition it should be clarified that the legal opinion only needs to address the effects of an insolvency of the secured party.


3. Requirement to annually verify the enforceability of netting agreements – Art. 6 MRM (2)

The consideration above regarding legal opinions regarding segregation arrangements apply to some extent also to the requirement set out in Art. 6 MRM (2) of the draft RTS: Since it is current practice to verify the legal effectiveness and enforceability of netting agreements on the basis of legal opinions, the relevant provision can also be understood to require annual updates of these legal opinions on netting agreements. Such opinions are currently obtained by industry associa-tions in relation to the master agreement documentation they have developed. The relevant opinions are usually updated on a regular, but not necessarily always on an annual basis for a number of valid reasons: The process to obtain an update of an opinion may, for example, take slightly longer because certain legal questions require a more detailed review or the impact of recent or upcoming developments have to be analysed more closely. In this case, a too rigid up-date requirement would actually be counterproductive as it would force counterparties to place speed over thoroughness. In many cases, it will already follow from other opinions obtained on other types of netting agreements for the same jurisdiction that there have not been any devel-opments in the relevant jurisdiction which merit an immediate update. Under these circum-stances an update would be an unnecessary formalism.

Proposed Alternative:

Replacement by a general obligation to implement processes (to be documented) in order to verify the legal effectiveness of netting agreements used.


4. Insolvency, resolution or similar regimes as legal impediment

Art. 3 IGT (1) (a) and (b) mention “regulatory restrictions” and “insolvency, resolution or similar regimes” as one of the legal impediments to the prompt transfer of own funds which would pre-vent reliance on the intragroup exemption. As the relevant provision expressly addresses not on-ly to “current” but also “anticipated restrictions” it appears that already the existence of a poten-tial future impediment would be sufficient to prevent reliance on the intragroup exemption.

However, many regulatory regimes (including the EU) and all insolvency, resolution or similar other legal regimes, by their nature, contain provisions which can affect the ability of the regulat-ed or insolvent party or the party under resolution to effect payments or transfer assets. Thus, unless Art. 1 IGT (1) (b) is intended to mean that such impediment is only deemed to exist upon initiation of such proceedings but not before, the relevant requirement would effectively invali-date the effects of the exemption for intragroup transactions. This cannot be the intention: The intragroup exemption is essential to minimise the adverse effects of and challenges posed by the application of mandatory margining to transactions between members of the same group. If it would factually not possible to rely on this exemption, the negative consequences for groups would be very considerable. The relevant events should therefore not be seen as automatically indicating an impediment within the meaning of Art. 11 (5) to (10) EMIR. Instead, it could be con-sidered to require counterparties to identify and assess any potential adverse effects of such events on the transfer of own funds within a group in advance and implement processes in order to minimise these adverse effects.

Proposed Alternative:

 Deletion of the words “or anticipated” in Art. 3 IGT (1) first sentence.
 Clarification that the mere existence of the mentioned concepts/legal provisions in a cer-tain jurisdiction does not as such indicate an impediment within the meaning of Art. 11 (5) to (10) EMIR.
 Introduction of a requirement to identify and assess any potential adverse effects of such events on the transfer of own funds within a group in advance and implement processes in order to minimise these adverse effects.


5. Third country counterparties – extraterritorial reach of margin requirements

According to the explanations on the rationale laid out on page 7, third paragraph, of the Consul-tation Paper, the margin requirements would have to be applied by counterparties established or regulated in the EU in relation to all of their third-country counterparties. This appears to imply not only that the requirements have an extraterritorial reach but also that the exemptions pro-vided for counterparties depending on the classification as non-financial entity not exceeding the threshold (NFC-) would not necessarily apply to any third country counterparties. As the definition of “counterparty” under Art. 1 DEF (1) (a) only covers counterparties established in/supervised by a EU member state and since the proposed provisions currently do not specifically set out provi-sions if, and if so, how these are to be applied to third-country counterparties, it is not clear whether this is indeed the intention. An extension of the margin requirements to transactions with third country counterparties would go beyond what the BCBS-IOSCO framework recom-mends. It may, depending on the understanding, even conflict with the personal scope of the other risk mitigation requirements under EMIR. Such a far reaching extraterritorial extension of regulatory requirements is not required under EMIR and could significantly affect the ability of Eu-ropean credit institutions to operate and compete internationally: Third country counterparties (affiliates of European companies) are not subject to EMIR. They thus have no obligation to im-plement these requirements and have no reason to accept contractual terms from their Europe-an counterparties requiring them to subject themselves to contractual obligations which would require them to post collateral.

The proposed extension of the regulatory reach of EMIR in respect of margin requirements is par-ticularly difficult to justify if it is intended to affect not only third country counterparties which are equivalent to financial counterparties or non-financial counterparties exceeding the clearing threshold (equivalent third country counterparties) but any third country entity, including those which are equivalent to EU counterparties which are exempted from EMIR.

In any event, it should be considered to specify the extent to which the obligations do exist or do not exist in relation to third country counterparties in order to avoid uncertainties.

Proposed Alternative:

 Clarification that the obligation to collect variation and initial margin does not apply in rela-tion to third country counterparties, or at the very least, not in relation to third country counterparties which are not equivalent to FC and NFC+ (all exemptions applying corre-spondingly).
 Introduction of a provision specifically addressing what/how the obligations apply in relation to third country counterparties.

We support the idea of using an EU-harmonised classification of covered bonds, because it is a ration-al way to provide for adequate and equal privileges for this class of financial instruments. However, we would prefer to link the conditions to covered bonds issued in accordance with Art. 52 (4) of the Di-rective 2009/65/EC (UCITS) and not to covered bonds issued in accordance with Art. 129 of Regula-tion 2013/574/EC (CRR). Covered bond programs which meet the requirements of Art. 52 (4) UCITS are for example also exempted from the bail-in regulations in accordance with the Bank Recovery and Resolution Directive (BRRD). In addition, the use of the CRR definition of covered bonds would estab-lish an unequal treatment of covered programs, which until now, in accordance with the UCITS defini-tion of covered bonds, are considered as safe enough. For example German Aircraft Pfandbriefe, which actually are not in the scope of Art. 129 CRR, would not be exempt from the obligation to post collateral in accordance with Art. 11 (3) EMIR. The issuance of Aircraft Pfandbriefe is based on the German Pfandbrief Act (Pfandbriefgesetz) and the only difference to Mortgage/Public/Ship Pfandbriefe is, that the former are covered by registered liens in accordance with section 1 of the Law on Rights in Aircraft (LuftFzRG) or by foreign aircraft mortgages. In order to prevent a further fragmentation of the covered bond market in Europe, we therefore suggest to rely on the UCITS definition of covered bonds.

The concentration limits introduced by Art. 7 LEC will require fundamental changes to existing collat-eral management systems and procedures as they differ significantly from current practice. This is further exacerbated by the fact that the proposed requirements differ from and conflict with similar requirements under the CRR. Thus, unless the requirements are not aligned, credit institutions would have to operate and coordinate very different processes and systems to implement and monitor concentration limits. The operational implementation of these requirements will therefore be ex-tremely challenging, requiring a very extensive adjustment of existing systems or introduction of completely new systems which may have to be operated in parallel to procedures and systems implemented to comply with CRR requirements.

In particular the requirement to apply the concentration limits in relation to each individual counter-party increases the complexity and thus the operational challenges unnecessarily. Such counterparty-based concentration limits will also be challenging for the relevant counterparties, in particular small and medium, sized counterparties and are not necessary to avoid concentration risks:

The purpose of concentration limits is served just as effectively but with significantly less complexity by permitting the collateralised counterparty to apply these in relation to all counterparties, that is in relation to its total exposure. This would not only reduce the operational complexity for the collateral-ised party. It would also prevent that collateralising counterparties are effectively denied access to the market simply because they are unable to diversify the collateral they have at their disposal.

Moreover, in some cases the concentration limits may actually be counterproductive as they might force counterparties to replace collateral of a very high grade by collateral of a lesser grade simply because the concentration limits have been breached. This applies in particular to debt securities issued by sovereigns.

The above described adverse effects could be best avoided or at least alleviated by replacing the cur-rent proposed provision by a requirement to apply the concentration limits under the CRR corre-spondingly (if these are not already directly applicable as in the case of credit institutions).

Alternatively, at least the following should be considered:

 Amendment to the effect that the concentration limits can be applied by the collateralised party in relation to the overall exposure/all counterparties (and not in relation to each individual counter-party).

 Introduction of a de minimis threshold (proposal: 50 million EUR).

 Introduction of a significantly higher concentration limit for debt securities issued by sovereigns.

Proposed Alternative:

Replacement of the current proposed provision by a requirement to apply the concentration limits under the CRR correspondingly.

Alternatively, at least the following should be considered:

 Amendment to the effect that the concentration limits can be applied by the collateralised party in relation to the overall exposure/all counterparties (and not in relation to each individual counterparty).
 Introduction of a de minimis threshold (proposal: 50 million EUR).
 Introduction of a significantly higher concentration limit for debt securities issued by sovereigns.