Response to second Joint Consultation on draft RTS on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP
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We do however want to raise that it is not sufficiently clear what is meant with ‘calculation date’. Is this the day that the margin call is being issued or the day that the margin call is based upon (which is one business day earlier)? We would suggest that the day that the margin call is issued should be taken as the day from which the clock starts ticking.
ING Bank strongly advocates not having the outstanding notional for intercompany transactions count against the aggregate notional size of non-centrally cleared derivatives that determines the timing of when the initial margin requirement becomes effective as (and in so far) they are exempt from exactly those requirements. Similarly, this should apply to other trades that are exempted from the initial margin requirements, i.e. physically-settled FX Forwards and trades with sovereigns, central banks, multilateral banks, BIS and PSE. The reasoning behind this is that the trade population which is used to determine a firm’s materiality level and related phase-in requirement should be 100% in sync with which trade population is going to be subject to the initial margin requirements.
If intercompany trades should be included, their notional value should only be counted once instead of twice (as the risks for two entities within one group are typically offsetting).
A typical banking group (or financial group in general) would have its treasury activities concentrated in one entity, where all the clearing and platform memberships are set. Affiliates in the group would make use of that central treasury entity for its clearing and trading activities, as an access point to the financial markets. Cleared transactions are exempted, however it is not clear from the RTS that client clearing transactions (client –clearing broker trades) are also excluded. In the ESMA Q&A it was made clear in general answer (2) that cleared ‘affiliate trades’ should be treated differently than regular OTC trades, but this needs however to be expressly set out in the RTS to provide legal certainty to market participants.
For counterparties which we do not have large exposure to on an individual name basis, monitoring concentration limits expressed in percentages of the total collateral we receive from that counterparty is in our view not sufficiently risk-based yet. We therefore would propose to include a minimum absolute level above which the percentages apply. We suggest to set the minimum absolute level at EUR 100 mln.
A general remark is that if institutions from a risk perspective are uncomfortable with exchanging a wider set of collateral than cash and government bonds, the high quality collateral market may be squeezed.
In addition, with respect to the combination of article 2.1. OPD(page 47) and article 1.2. FP (page 52). Additional documentation requirements for all parties (FC, NFC+, NFC, EEA/non-EEA, intragroup and for all products) which lead to the necessity to sign ISDA documentation (or equivalent master agreement documentation) in all cases. This is understandable, however we highlight that the timing is burdensome. Master agreement negotiations may take a long time in some cases. We suggest to bring the documentation requirements in line with the VM timeline.
Respondents are invited to comment on the proposal in this section concerning the timing of calculation, call and delivery of initial and variation margins.
In light of the time zone differences and the time it takes to settle different eligible asset types, the extra slack provided in collecting initial and variation margin calls is welcomed.We do however want to raise that it is not sufficiently clear what is meant with ‘calculation date’. Is this the day that the margin call is being issued or the day that the margin call is based upon (which is one business day earlier)? We would suggest that the day that the margin call is issued should be taken as the day from which the clock starts ticking.
Respondent are invited to provide comments on whether the draft RTS might produce unintended consequence concerning the design or the implementation of initial margin models.
ING Bank is of the opinion that the RTS should promote the usage of industry models. By using the same model across a large group of market participants, the extra reconciliation and dispute management burden regarding the determination of the proper initial margin amount can substantially be reduced.ING Bank strongly advocates not having the outstanding notional for intercompany transactions count against the aggregate notional size of non-centrally cleared derivatives that determines the timing of when the initial margin requirement becomes effective as (and in so far) they are exempt from exactly those requirements. Similarly, this should apply to other trades that are exempted from the initial margin requirements, i.e. physically-settled FX Forwards and trades with sovereigns, central banks, multilateral banks, BIS and PSE. The reasoning behind this is that the trade population which is used to determine a firm’s materiality level and related phase-in requirement should be 100% in sync with which trade population is going to be subject to the initial margin requirements.
If intercompany trades should be included, their notional value should only be counted once instead of twice (as the risks for two entities within one group are typically offsetting).
A typical banking group (or financial group in general) would have its treasury activities concentrated in one entity, where all the clearing and platform memberships are set. Affiliates in the group would make use of that central treasury entity for its clearing and trading activities, as an access point to the financial markets. Cleared transactions are exempted, however it is not clear from the RTS that client clearing transactions (client –clearing broker trades) are also excluded. In the ESMA Q&A it was made clear in general answer (2) that cleared ‘affiliate trades’ should be treated differently than regular OTC trades, but this needs however to be expressly set out in the RTS to provide legal certainty to market participants.
Respondents are invited to comment on whether the requirements of this section concerning the concentration limits address the concerns expressed on the previous proposal.
We are welcoming the decrease in operational burden that this second draft RTS proposes vis-à-vis the first draft (though for systemically important institutions like ING the decreased burden is limited).For counterparties which we do not have large exposure to on an individual name basis, monitoring concentration limits expressed in percentages of the total collateral we receive from that counterparty is in our view not sufficiently risk-based yet. We therefore would propose to include a minimum absolute level above which the percentages apply. We suggest to set the minimum absolute level at EUR 100 mln.
A general remark is that if institutions from a risk perspective are uncomfortable with exchanging a wider set of collateral than cash and government bonds, the high quality collateral market may be squeezed.
Respondent to this consultation are invited to highlight their concerns on the requirements on trading relationship documentation.
ING suggests to amend Art. 2 OPD (2) (p48) regarding the annual independent legal review requirement and align it with the existing legal opinion review requirements in the Capital Requirement Regulation under Article 296. The legal opinion requirement should be applicable for all FCs and NFC+s.In addition, with respect to the combination of article 2.1. OPD(page 47) and article 1.2. FP (page 52). Additional documentation requirements for all parties (FC, NFC+, NFC, EEA/non-EEA, intragroup and for all products) which lead to the necessity to sign ISDA documentation (or equivalent master agreement documentation) in all cases. This is understandable, however we highlight that the timing is burdensome. Master agreement negotiations may take a long time in some cases. We suggest to bring the documentation requirements in line with the VM timeline.