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30 June 2016

European Supervisory Authorities write to Commission on the delay to adopt the bilateral margin rules for derivatives

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The Joint Committee of the ESAs has issued a joint letter to Jonathan Hill, European Commissioner for Financial Stability, Financial Services and CMU, on the delayed adoption of the joint draft regulatory technical standards on risk mitigation techniques for non-centrally cleared OTC derivatives.

Following the communication of 9 June 2016 from the European Commission staff and the public communication  by  the  European  Commission  on  the  delayed  adoption  of  the  Joint  draft Regulatory  Technical  Standards  on  risk  mitigation  techniques  for  non-centrally  cleared  OTC derivatives (RTS on bilateral margins), the European Supervisory Authorities (ESAs) would like to express their strong concerns with this  delay,  and  would  like  to  ask   to  keep  this delay  as  short  as  possible.

They mentioned following reasons:

First,  the  calendar  for  the  implementation  of  these  requirements  was  agreed  at  international level.  The  ESAs  and  the  European  Commission  promoted  the  implementation  timeline  of  the BCBS-IOSCO agreement and worked together with the other two major jurisdictions (the United States  of  America  and  Japan)  for  its  consistent  and  coordinated  implementation.

Secondly,  the  ESAs  would  like  to  highlight  that  a  delay  in  the  endorsement  of  the  technical standards would not only generate uncertainty within the European Union but might also raise a number of cross-border issues:

  • In   accordance   with   the   BCBS-IOSCO   agreement,   a   large   number   of   financial counterparties and  some  non-financial  groups  should  start  exchanging  variation  margin from  1  March  2017.  This is  also  the  date  foreseen  in  the  draft  RTS.  This  timeline  is relevant  for  the  entire  industry  as  it  is  of  utmost  importance  for  the  implementation efforts under way. A delay may require re-negotiation of existing agreements.
  • The  absence  of  a  new  timeline,  including  the  phase-in  of  initial  margin,  may  put  third-country authorities in a difficult position. They would not be able to clarify with their firms the  supervisory  expectations  in  relation  with  those  jurisdictions  that  have  not  yet implemented margin rules, including the European Union.
  • The  lack  of  requirements  on  the  margin  exchange  for  intragroup  transactions  may generate  uncertainty  for  those  international  groups  that  end  up  being  subject  to  third-country rules with no clarity, neither for the groups themselves nor for the third-country supervisors, on the implementation of the European Union rules. 

Thirdly, the ESAs believe that although the firms captured by the first date of application are small in number, they still represent a significant size of the market and therefore a substantial source of systemic risk. This is particularly relevant given the global nature of the OTC derivative market, which makes an international alignment of the rules for these large banks of utmost importance.

In addition, the statement in the communication by the European Commission that these entities would be captured by other jurisdictions is not entirely correct. The delay in the European Union might incentivise  global  banks  to  use  their  European  operations  to  carry  out  OTC  derivatives transactions  and  only  part  of  those  might  be  covered  by  extraterritorial  provisions  from  other jurisdictions.  Furthermore,  we  do  not  consider  that  bringing  European  banks  under  the internationally agreed standards through the extra-territorial application of other jurisdictions is consistent with the position that the Union has kept in recent times.

Full letter


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