EBA欧洲银行-JC-DP-2012-01-ver1Draft-discussion-paper-on-RTS-on-Article-6-3-EMIR-_23页_539kb

Summary of the Joint Discussion Paper on Draft Regulatory Technical Standards for OTC Derivatives Not Cleared by a CCP

Core Content

This Joint Discussion Paper (JDP) by the European Supervisory Authorities (ESAs) – EBA, ESMA, and EIOPA – outlines the considerations and proposals for developing Regulatory Technical Standards (RTS) on risk mitigation techniques for OTC derivatives not cleared by a Central Counterparty (CCP), under the European Market Infrastructures Regulation (EMIR). The JDP seeks stakeholder input to inform the development of these standards, which are expected to be submitted to the European Commission by 30 September 2012.

Main Objectives

• To establish collateral and capital requirements for OTC derivatives not cleared by a CCP.
• To ensure risk mitigation for counterparty credit risk and potential systemic risk.
• To avoid regulatory arbitrage and align with international standards.
• To develop a consistent and effective framework for the exchange of collateral and the application of capital requirements.

Key Sections and Proposals

IV.1 Collateral and Capital Requirements

• Collateral (variation margin and initial margin) and capital are essential tools for managing risk in non-centrally cleared OTC derivatives.
• Variation margin (VM) is exchanged daily to reflect current exposures, while initial margin (IM) is used to cover potential future exposures.
• The ESAs propose that VM should be exchanged between all counterparties subject to collateral requirements.
• The exchange of IM is under consideration, with the ESAs suggesting that all counterparties, including PRFCs, NPRFCs, and NFCs+, should be required to post and collect appropriate IM to ensure robust risk mitigation.

IV.2 Options for Initial Margins

The ESAs propose three options for initial margin requirements:

Option 1: All counterparties must post and collect IM

• Pros: Provides comprehensive protection to the system and individual counterparties.
• Cons: May increase compliance costs and liquidity constraints.

Option 2: Only PRFCs must collect IM

• Pros: Focuses on protecting systemically relevant counterparties.
• Cons: Leaves NPRFCs and NFCs+ exposed to default risk, potentially leading to systemic instability.

Option 3: Threshold-based approach for IM collection

• Pros: Offers flexibility for PRFCs to avoid IM for exposures below a threshold.
• Cons: Risk of procyclicality and potential for regulatory arbitrage if thresholds are not properly defined.

IV.3 Variation Margin

• Article 6/8 of EMIR requires daily mark-to-market of outstanding OTC derivative contracts.
• If daily marking-to-market is not feasible, mark-to-model should be used as an alternative.
• ESMA is tasked with drafting RTS on the conditions for marking-to-market and mark-to-model, ensuring reliability and prudence.

IV.4–IV.10 Additional Topics

• Eligible collateral and collateral valuation (including haircuts) are to be defined.
• Transactions with counterparties outside the EU require special consideration.
• Risk management procedures, operational processes for collateral exchange, and minimum transfer amounts need to be established.
• Intra-group exemptions may be considered for transactions within the same group.
• A cost-benefit analysis is required to evaluate the impact of the proposed standards on the market.

Key Considerations

• Procyclicality: Collateral requirements should not be based solely on external ratings, and internal models and due diligence should be considered to avoid procyclical effects.
• Regulatory consistency: Alignment with international standards, such as those from the Basel Committee, CPSS, IOSCO, and CGFS, is essential to prevent regulatory arbitrage.
• Capital requirements: PRFCs are already subject to prudential capital regimes, which may be sufficient for risk mitigation. NPRFCs and NFCs+ are not subject to such regimes and must rely on collateral.
• Systemic risk: The ESAs emphasize the importance of mitigating systemic risk through appropriate collateral and capital measures.

Stakeholder Engagement

• All interested stakeholders, including financial and non-financial counterparties, and CCPs and their clearing members, are invited to respond.
• Comments should be specific, clear, and supported by rationale, including cost-benefit data where possible.
• Responses will be published unless confidentiality is requested.

Next Steps

• The ESAs will conduct a public consultation and cost-benefit analysis before finalizing the draft RTS.
• The consultation period will depend on the publication of EMIR in the Official Journal of the EU.
• Additional discussion papers are being issued by the ESAs to address other aspects of the Regulation, including capital requirements for CCPs.

Conclusion

The JDP aims to gather early stakeholder feedback to develop robust, consistent, and effective RTS on risk mitigation techniques for OTC derivatives not cleared by a CCP. The proposals emphasize the importance of collateral and capital requirements, consider options for initial margin, and highlight the need to align with international standards and avoid regulatory arbitrage. The final RTS will be submitted to the European Commission for endorsement, forming a legally binding instrument for all EU Member States.