The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have published a consultation paper1 with the proposed changes to the secondary rules regarding the margin requirements applicable to non-centrally cleared derivatives under the UK “onshore” European Market Infrastructure (EMIR) Regulation.2

The proposed changes implement changes in English law to ensure consistency with EU requirements and global standards in three key areas, as outlined below.

1. Variation margin exemption for forward currency contracts and physically settled swaps

Under the proposed amendments, counterparties may include in their risk management procedures that a variation margin is not required for physically settled forward foreign exchange contracts and physically settled currency swap contracts, provided that that at least one of the counterparties does not meet the definition of an “institution”3, that is to say a “credit institution”4 or an “investment firm”5; and, as regards transactions with third country entities, the third country enterprise would not meet the definition of an “institution” if established in the United Kingdom.

The changes formalize the approach defined in the joint statement published by the European supervisory authorities in November 2017 on prudential abstention.6

2. Exemption from margin rules for stock options and index options

Under the proposals, the temporary exemption from margin requirements for stock and index options will be extended until January 4, 2024, in line with the related EU waiver under EMIR.

UK companies already benefited from this exemption, but it expired on January 4, 2020 as companies continued to use the exemption through prudential forbearance following a statement by the European Securities and Markets Authority (ESMA), which the FCA also supported.7

3. Time limits and thresholds for the gradual introduction of the initial margin

The proposals modify the last two UK phased-in deadlines and thresholds for the initial margin requirements to be consistent with the revised EU requirements. Accordingly, the two final dates for setting up the initial margin requirements under UK EMIR would be:

  1. September 1, 2021, when the two counterparties have, or belong to groups each of which has, an aggregate average notional amount of non-centrally cleared derivatives greater than € 50 billion.
  2. September 1, 2022, when the two counterparties have, or belong to groups each of which has, an aggregate average notional amount of non-centrally cleared derivatives greater than € 8 billion.

Companies are aware of the modified thresholds and deadlines following a statement issued by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) in April 2020.8

Next steps

The consultation period ends on May 19, 2021. After reviewing the responses, UK regulators will submit the proposed changes to the UK Treasury for approval. After approval by HM Treasury, FCA and PRA will make and publish changes to the technical standards of their respective companies.

The contribution of Andrea Gonzague is thanked.

1 Binding technical standards 2016/2251 (see here) implementing Commission Delegated Regulation (EU) 2016/2251.

2 CP6 / 21 – Margin requirements for non-centrally cleared derivatives: Amendments to BTS 2016/2251, March 9, 2021 (See here).

3 As defined in point (3) of Article 4, paragraph 1, of Regulation (EU) No. 575/2013 on prudential requirements applicable to credit institutions and investment firms.

4 A “credit institution” means a company whose activity is to receive deposits or other repayable funds from the public and to grant loans for its own account.

5 An “investment firm” means firms authorized under Directive 2014/65 / EU (MiFID 2) as implemented in the UK (excluding “credit institutions” and “premises” ), which are not authorized to provide the ancillary services referred to below, only provide one or more of the following investment services and activities: reception and transmission of orders relating to one or more financial instruments; execution of orders on behalf of clients; Portfolio Management; or investment advice and who are not authorized to hold clients’ money or securities and who, for this reason, cannot at any time become indebted to these clients.
The ancillary services referred to in the above definition are:

  1. Custody and administration of financial instruments on behalf of clients, including custody and related services such as cash management or collateral and excluding the provision and maintenance of senior level securities accounts ( “Central maintenance service”) referred to in point (2) of section A of the annex to Regulation (EU) No 909/2014 (central regulation on securities depositories).
  2. Granting of credits or loans to an investor to allow the investor to carry out a transaction on one or more financial instruments, when the company granting the credit or the loan is involved in the transaction.
  3. Advice to companies on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of companies.
  4. Foreign exchange services when connected with the provision of investment services.
  5. Investment research and financial analysis or other forms of general recommendation regarding transactions in financial instruments.
  6. Subscription related services.
  7. Investment services and activities as well as ancillary services of the type referred to above linked to the underlying of derivative products when these are linked to the provision of investment or ancillary services.

6 Variation Margin Swap for Physically Settled Forward Currency Contracts under EMIR, November 24, 2017 (See here).

7 EMIR RTS on various amendments to the bilateral margin requirements and joint declaration on the implementation of fallbacks with regard to the international framework, December 5, 2019 (See here).

8 Basel Committee and IOSCO announce postponement of final phases of implementation of margin requirements for non-centrally cleared derivatives, April 3, 2020 (see here).

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