EBA欧洲银行-JC-CP-2014-03-28CP-on-risk-mitigation-for-OTC-derivatives29_81页_1mb

Summary of Consultation Paper: Draft Regulatory Technical Standards on Risk-Mitigation Techniques for OTC-Derivative Contracts Not Cleared by a CCP under Article 11(15) of Regulation (EU) No 648/2012

Core Content

This Consultation Paper outlines the draft Regulatory Technical Standards (RTS) for risk-mitigation techniques applicable to over-the-counter (OTC) derivative contracts not cleared by a Central Counterparty (CCP), as mandated by Article 11(15) of Regulation (EU) No 648/2012 (EMIR). The purpose of the paper is to seek stakeholder feedback on the proposed standards, which aim to ensure the safety and transparency of OTC derivatives markets by implementing robust risk management practices.

Main Views and Key Information

1. Risk-Mitigation Framework

• The RTS are developed to implement Article 11(3) of EMIR, which requires the use of risk-mitigation techniques for non-centrally cleared OTC derivatives.
• The framework includes three main topics:
  • Risk-management procedures for the timely and accurate exchange of collateral.
  • Procedures for intragroup exemptions.
  • Criteria for identifying practical or legal impediments to the prompt transfer of funds between counterparties.

2. Collateral and Margin Requirements

• The RTS specify minimum initial and variation margin to be posted and collected, with methodologies for their calculation.
• Variation margin is collected daily to cover mark-to-market exposure.
• Initial margin can be calculated using a standardised method or an internal model, with the latter requiring a 99% confidence level and a 10-day risk horizon.
• The standardised method uses add-on factors aligned with international standards and applies to OTC derivatives with gross notional amounts exceeding EUR 8 billion.
• Eligible collateral includes a broad range of assets such as sovereign securities, covered bonds, corporate bonds, gold, and equities.
• Haircuts are applied to reflect market and FX volatility, and the RTS extend the standardised haircut schedule to cover lower credit quality collateral.

3. Operational Procedures

• Counterparties must implement robust operational procedures to ensure the proper documentation, segregation, and management of collateral.
• Segregation is required to ensure that collateral is bankruptcy-remote.
• Re-hypothecation of initial margin is not allowed, as it is deemed of limited use in the European market.
• Annual testing of procedures is required to ensure compliance.

4. Intragroup Derivative Contracts

• Intragroup transactions may be exempt from the requirement to exchange collateral, provided that certain risk-management procedures are in place and there are no practical or legal impediments to the transfer of funds and repayment of liabilities.
• A clear procedure is established for granting intragroup exemptions, ensuring consistency across EU member states.
• The approval/notification process is specified, depending on the type and location of counterparties.

5. Phase-In of Requirements

• The RTS will enter into force on 1 December 2015, allowing time for market participants to prepare.
• The phase-in is over a four-year period, with requirements initially applying to the largest market participants (with an aggregate notional amount exceeding EUR 3.0 trillion).
• From 1 December 2019, all counterparties with notional amounts exceeding EUR 8 billion will be subject to the rules.
• This approach ensures a proportionate and manageable implementation.

6. International Consistency

• The RTS are aligned with the international standards issued by the Basel Committee for Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO) in September 2013.
• The international framework includes eight key principles and detailed requirements, which the RTS aim to transpose into the EU context.
• The RTS also consider the impact of wrong-way risk and concentration risk, and introduce diversification requirements to mitigate these.

7. Next Steps

• The ESAs will finalize the draft RTS and submit them to the Commission before the end of 2014.
• The consultation period ends on 14 July 2014, and responses must be submitted via the consultation page.
• Stakeholders are encouraged to provide clear rationale, evidence, and alternative regulatory choices when commenting.

Conclusion

The RTS aim to ensure a harmonised and effective implementation of risk-mitigation techniques for non-centrally cleared OTC derivatives. They provide a clear framework for margin requirements, eligible collateral, and operational procedures, while also allowing for flexibility in the choice of methodologies. The phase-in approach and consideration of international standards are designed to reduce systemic risk, promote transparency, and ensure a level playing field across jurisdictions.