ESMA Stand Firm on New Variation Margin Exchange Requirements 17/1

24th February 2017

Despite many firms making the regulator aware of the operational difficulties of meeting the March deadline, the European regulator released a statement stating that they have decided to uphold the original deadline of 1st March for the introduction of the new margin requirements. Moving uncleared OTC derivatives to a collateralised framework has been a long standing aim for regulators globally. More stringent margin requirements reduce counterparty credit risk, a key component of the internal objective to help ensure that the derivatives market is safe, sound and efficient.

When will the margin rules apply?

Obligations in relation to variation margin will apply from 1 March 2017.

Amount of Variation Margin

A party must collect variation margin equivalent to the positive mark-to-market value of its OTC derivatives. The variation margin requirements must be calculated on each business day based on the prior day’s values. Also, haircuts must be applied in calculating the amount of non-cash variation margin to be collected.

When must variation margin be provided?

The posting party must provide variation margin “within the same business day” of the date of the calculation of the amount of the variation margin.

Eligible collateral includes:

» cash;
» gold (of a certain type);
» certain debt securities (including
issued by governments, central
banks, credit institutions or investment firms);
» corporate bonds; and
» certain listed equities

Given the push from a segment of the market to delay the margin deadline, the FCA today published a statement with reassuring proposal for those in danger of not being in full compliance by the 1st March. In their supervision of firms’ progress, the FCA will take a risk-based approach and use judgement as to the adequacy of progress, taking into account the position of particular firms and the credibility of the plans they have made. Furthermore, ESMA announced that they expect firms to be in full compliance within the next few months.

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