The European Supervisory Authorities (ESAs) recently issued a final report outlining proposed revisions to the margin regulatory technical standards (RTS) to the European Market Infrastructure Regulation (EMIR). The proposed amendments, if enacted, will provide clarity on margin requirements under EMIR and could prove beneficial to derivatives end users.
Within their final report, the ESAs have also proposed permanently exempting physically settled FX forwards and swaps from variation margin for trades with non-systemically important counterparties. This change is a significant win for end users and would bring the treatment of deliverable FX forwards and swaps in line with every other jurisdiction and eliminate the reliance of guidance provided by ESMA and certain national regulators regarding how deliverable FX forwards should be treated.
The ESAs also have proposed extending the initial margin implementation date from September 2020 to September 2021 for entities whose aggregate average notional amount (AANA) of non-centrally cleared derivatives is above $/€ 8 billion but below $/€ 50 billion. This effectively raises the Phase 5 AANA threshold of the initial margin implementation from $/€ 8 billion to $/€ 50 billion and creates a new Phase 6 for entities with an AANA over $/€ 8 billion, giving smaller entities more time to comply with the initial margin regulations under EMIR.
The ESAs have also proposed extending the temporary exemption from the margin requirements of intragroup transactions with third-country entities for which there is no equivalence decision. They have proposed extending this exemption from January 4, 2020 to December 21, 2020 due to the fact that very few third-country equivalence decisions have been adopted yet.
The ESA’s draft RTS have been submitted to the European Commission for review. If the European Commission adopts the RTS without significant amendments, then the RTS will be reviewed by the European Parliament and Council. If the RTS passes this review, the RTS will then be published in the Official Journal of the European Union and subsequently enter into force. While the ESAs cannot disapply EU law, the final report notes that the “ESAs expect competent authorities to apply the EU framework in a risk-based and proportionate manner until the amended RTS enter into force.”