EMIR Collateral Margin Reform

Under EMIR and as part of the obligation to use risk-mitigation techniques, financial counterparties (including most investment funds) and large non-financial counterparties are required to exchange collateral where OTC derivatives are not centrally cleared.

In December 2016, the EU regulatory technical standards (Commission Delegated Regulation 2016/2251) supplementing EMIR with regard to the risk-mitigation techniques applicable to non-centrally cleared OTC derivatives ("Margin RTS") were published in the Official Journal of the EU.

The Margin RTS specify the various procedures that counterparties must include in their risk management procedure. They also set out the methodology to be used for calculating initial and variation margins as well as the eligibility and diversification criteria with which they have to comply.

The Margin RTS provide various phase-in dates for its application and exemptions.

In a nutshell:

For initial margin: the implementation will vary depending on the size of the counterparties from 4 February 2017 (for the largest market participants with an aggregate average notional amount ("AANA") of non-centrally cleared derivatives above EUR 3 trillion) until 1 September 2020 (for counterparties with an AANA above EUR 8 billion). Counterparties whose AANA is below the EUR 8 billion threshold will be exempt from initial margin requirement. For variation margin, the obligation to calculate and provide variation margin applies: as from 4 February 2017, where the two counterparties to a non-centrally cleared derivative have both, or belong to groups each of which has, an AANA above EUR 3 trillion; as from 1 March 2017, for all other counterparties, including most investment funds. FX forwards, FX swaps, currency swaps are all in scope (which is not the case for instance in the US for certain FX derivatives). However, there is no obligation to collect initial margins for such derivatives. In addition, with respect to FX forwards only, the requirement to exchange variation margins is...