We are concerned that these proposals are at odds with international standards, specifically by mandating the exchange of variation margin on foreign exchange forwards and swaps between banks and a wide range of counterparties including pension funds. By contrast foreign exchange forwards and swaps have been exempted in the United States from regulation as “swaps” by the Secretary of the Treasury and therefore are not, and will not be, subject to margin requirements for uncleared swaps. Therefore whilst the proposal requires EU banks to treat EU and non-EU counterparties similarly, there is a disparity of treatment between counterparties within the EU and those outside who are not subject to such regulation. In addition EU banks will be at a disadvantage in transacting with non-EU counterparties. For more details please see our attached document entitled “Record Second Consultation Response 10 July 2015.pdf”.
We have two concerns with respect to the proposal concerning the timing of calculation, call and delivery of variation margin with respect to foreign exchange forwards and swaps. To us it seems perverse that pension funds undertaking currency hedging should be required to comply with variation margin requirements, on a timescale faster than that being applied to initial margin requirements, and to have to do so despite a likely aggregate notional amount of non-centrally cleared derivatives which would wholly exempt them from initial margin requirements. Since the requirement to collect and receive collateral on a daily basis will be sufficiently operationally burdensome to deter some clients altogether, this proposal seems set to increase not decrease risk within EU pension funds. For more details please see our attached document entitled “Record Second Consultation Response 10 July 2015.pdf”.
Furthermore if contrary to our recommendations the requirement to exchange variation margin on foreign exchange forwards and swaps remains, then if one counterparty is out of the money on a transaction leading up to settlement date, it will have been obliged to collateralise the exposure of the trade. On settlement date, the final payment will also be required, however, due to the nature of the collateralisation process, the collateral would not have yet been returned and the collateral could not be able to be used to facilitate settlement of the transaction; thus exposing the paying party to a temporary period of uncollateralised risk, which may also create cash-flow liquidity problems for the firm. There would therefore be additional requirements on funds to hold cash to the level of double the negative exposure of a particular FX forward, which would limit the fund’s ability to trade and be operationally cumbersome.
Not applicable.
Not applicable.
Whilst we fully support the proposals for OTC derivative contracts to be based on written trading relationship documentation, we are concerned that the requirement for an independent legal review at least on an annual basis will be only one of many aspects of the RTS that will prove unduly burdensome in particular for EU pension funds and other institutional investors undertaking currency hedging. The likely consequence of this will be to discourage some investors from undertaking this prudent risk management activity altogether. For more details please see our attached document entitled “Record Second Consultation Response 10 July 2015.pdf”.
Whilst we fully support the proposals for OTC derivative contracts to be based on written trading relationship documentation, we are concerned that the requirement for an independent legal review at least on an annual basis will be only one of many aspects of the RTS that will prove unduly burdensome in particular for EU pension funds and other institutional investors undertaking currency hedging. The likely consequence of this will be to discourage some investors from undertaking this prudent risk management activity altogether. For more details please see our attached document entitled “Record Second Consultation Response 10 July 2015.pdf”.
Not applicable.
As noted above, we continue to be highly concerned that the draft RTS throughout are unduly burdensome and onerous on EU pension funds and other institutional investors undertaking currency hedging, to the likely extent of discouraging some investors from undertaking this prudent risk management activity altogether. We urge the European Supervisory Authorities to re-consider the proposed requirement for counterparties to exchange variation margin on foreign exchange forwards and foreign exchange swaps entered into by pension funds that are objectively measurable as reducing investment risks directly relating to the financial solvency of these funds. For more details please see our attached document entitled “Record Second Consultation Response 10 July 2015.pdf”.
