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COMMISSION DELEGATED REGULATION (EU) .../..
of XXX
Supplementing Regulation (EU) No 648/2012 of the European
Parliament and of the Council on OTC derivatives, central
counterparties and trade repositories with regard
to regulatory technical standards for risk-mitigation techniques
for OTC derivative contracts not cleared by a central
counterparty
(Text with EEA relevance)
THE EUROPEAN COMMISSION,
Having regard to the Treaty on the Functioning of the European
Union,
Having regard to Regulation (EU) 648/2012 of 274 July 2012 of
the European Parliament andof the Council on OTC derivatives,
central counterparties and trade repositories6 1 , and inparticular
the third subparagraph of Article 11(15) thereof,
Whereas:
Counterparties have an obligation to protect themselves against
credit exposures to(1)derivatives trading partnerscounterparties by
collecting margins, as described in thisRegulation. This Regulation
lays out the standards for the timely, accurate andappropriately
segregated exchange of collateral. These standards apply on a
mandatorybasis only to the portion of collateral that
counterparties are required by this Regulationto collect andor
post. However, counterparties which agree to collecting or
postingcollateral beyond the requirements of this Regulation may
retain the rightshould beable to choose to have such collateral to
be covered by these standards or not.
Over-the-counter derivatives (OTC derivative contracts from)
entered into by clients or(2)indirect clients to be cleared by a
central counterparty (CCP) may be centrally clearedthrough a
clearing member intermediary or through an indirect clearing
arrangement.Under this type ofthe indirect clearing arrangement the
client or the indirect client issubject to the margin requirements
of the CCP, or, the client or the indirect clientprovides margins
consistent with the relevant corresponding CCP's
marginrequirementsposts the margins directly to the CCP, or to the
party that is between theclient or indirect client and the CCP.
Indirectly cleared OTC derivative contracts areconsidered as
centrally cleared and are therefore not subject to the risk
managementprocedures prescribedset out in this Regulation.
Counterparties subject to the requirements of Article 11(3) of
Regulation (EU)(3)648/2012 should take into account the different
risk profiles of non-financialcounterparties that are below the
clearing threshold referred to in Article 10 of thatRegulation when
establishing their risk management procedures for OTC
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derivative contracts with such entities. It is therefore
appropriate to allowcounterparties to determine whether or not the
level of counterparty credit risk posedby a
nonfinancialnon-financial counterparty that is below that clearing
threshold needsto be mitigated through the exchange of collateral.
When taking this decision, thecounterparty credit risk resulting
from transactingthe transactions with thenon-financial counterparty
should be taken into account together with the size andnature of
the OTC derivative contracts. Given that non-financial entities
establishedin a third country that would be below the clearing
threshold if established in theUnion can be assumed to have the
same risk profile as non-financial counterpartiesbelow the clearing
threshold established in the Union, the same approach should
beapplied to them in order to prevent regulatory arbitrage.
6
1 OJ L 201, 27.7.2012.27.7.2012, p.1.
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19
A CCP may enter into non-centrally cleared OTC derivative
contracts in the context of(4)customer position management upon the
insolvency of a clearing member. Thesetrades are subject to
requirements on the part of the CCP as referred to in point 2
ofAnnex II of Delegated Regulation (EU) No 153/20132 and are
reviewed by thecompetent authorities. These non- centrally cleared
OTC derivative contracts are animportant component of a robust and
efficient risk management processes for a CCP.The additional
liquidity needs that those trades could trigger, were they covered
byregulatory margin requirements, would fall under the
responsibility of the CCP. As thiswould potentially increase
systemic risk, instead of mitigating it, rules on the
riskmanagement procedures prescribedset out in this Regulation
should not apply to theabove-mentioned casesuch trades.
Counterparties of OTC derivatives contracts need to be protected
from the risk of a(5)potential default of the other counterparty.
Therefore, two types of collateral in theform of margins are
necessary to properly manage the risks to which thosecounterparties
are exposed. The first type is variation margin, which
protectscounterparties against exposures related to the current
market value of their OTCderivative contracts. The second type is
initial margin, which protects counterpartiesagainst expected
losses which could stem from movements in the market value of
thederivatives position occurring between the last exchange of
variation margin before thedefault of a counterparty and the time
that the OTC derivative contracts are replaced orthe corresponding
risk is hedged.
Initial margins cover current and potential future exposure due
to the default of the(6)other counterparty and variation margins
reflect the daily mark-to-market ofoutstanding contracts, for. For
OTC derivativesderivative contracts that imply thepayment of a
premium upfront to guarantee the performance of the contract,
thecounterparty receiving the payment of the premium (option
seller) is not exposed tocurrent or potential future exposure if
the counterparty paying the premium defaultsand. Also, the daily
mark-to-market is already covered by the premium paid. Thereforethe
counterparty collecting the premium should, where the netting set
consists solely ofsuch option positions, the option seller should
be able to choose not to collectadditional initial or variation
margins for these typetypes of OTC derivatives, whereasthe
counterparty paying the premiumoption buyer should collect both
initial andvariation margins as long as the option seller is not
exposed to any credit risk.
While dispute resolution processes contained in bilateral
agreements between (7)counterparties are useful for minimising the
length and frequency of disputes,
together with the size and nature of the OTC derivative
contracts. Given thatnonfinancial entities established in a third
country that would be below the clearingthreshold if established in
the Union can be assumed to have the same risk profile
asnon-financial counterparties below the clearing threshold
established in the Union, thesame approach should be applied to
both types of entities in order to prevent regulatoryarbitrage.
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counterparties should, at a first stage, collect at least the
undisputed amount in case theamount of a margin call is disputed.
This will mitigate the risk arising from the
2 Commission Delegated Regulation (EU) No 153/2013, of 19
December 2012, supplementing Regulation (EU) No 648/2012of the
European Parliament and of the Council with regard to regulatory
technical standards on requirements for centralcounterparties (OJ L
52, 23.2.2013, p.41).
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(7) While dispute resolution processes contained in bilateral
agreements between counterparties are useful for minimising the
length and frequency of disputes, counterparties should in a first
stage collect at least the undisputed amount in case the amount of
a margin call is disputed. This will mitigate the risk arising from
the
disputed transactions and therefore ensure that OTC derivative
contracts arecollateralised in accordance with this Regulation.
However, both parties should makeall necessary and appropriate
efforts, including timely initiation of dispute
resolutionprotocols, to resolve the dispute and exchange any
required margin in a timely fashion.
In order to guarantee a level playing field across
jurisdictions, where a counterparty(8)established in the Union
enters into a OTC derivative contract with a counterparty thatis
established in a third country and would be subject to the
requirements of thisRegulation if it was established in the Union,
initial and variation marginmarginsshould be exchanged in both
directions. Counterparties should remain subject to theobligation
ofRISK MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVESassessing the legalenforceability of the bilateral
agreements of the effectiveness of the segregationagreements. When
such assessments highlight the potential for the non-compliance
ofthe agreements assessing the legal enforceability of the
bilateral agreements and theeffectiveness of the segregation
agreements. When such assessments highlight that theagreements
might not be in compliance with this Regulation,
Europeancounterpartiescounterparties established in the Union
should identify alternativeprocesses to post collateral, such as
relying on third-party banks or custodiansdomiciled in
jurisdictions where those requirementsthe requirements in
thisRegulation can be guaranteed.
It is appropriate to allow counterparties to apply a minimum
transfer amount when(9)exchanging collateral in order to reduce the
operational burden of exchanging limitedsums when exposures move
only slightly. However, it should be ensured that suchminimum
transfer amount is used as an operational tool and not with the
view toserving as an uncollateralised credit line between
counterparties. Therefore, amaximum level should be set out for
that minimum transfer amount.
For operational reasons, it might in some cases be more
appropriate to have separate(10)minimum transfer amounts for the
initial and the variation margin. In those cases itshould be
possible for counterparties to agree on two separate minimum
transferamounts for variation and initial margin with respect to
OTC derivative contractssubject to this Regulation. However, the
sum of the two separate minimum transferamounts shallshould not
exceed the maximum level of the minimum transfer amountas set out
in this Regulation. For practical reasons, it should be possible to
define theminimum transfer amount in the currency in which margins
are normally exchanged,which may not be the Euro. However,
recalibration of the minimum transfer amountshould be frequent
enough to maintain its effectiveness.
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The scope of products subject to the proposed margin
requirements is not consistent (11)across the Union and other major
jurisdictions. Where this Regulation require thatonly OTC
derivative contracts governed by Regulation (EU) No 648/2012
areincluded in the margin calculations for cross-border netting
sets, the twocounterparties would have to double the calculations
to take into account differentdefinitions or different scope of
products of the margin requirements. Furthermore,this would likely
increase the risk of disputes. Allowing the use of a broader set
ofproducts in cross-border netting sets that includes all the OTC
derivative contractsthat are subject to regulation in one or the
other jurisdiction would facilitate theprocess of margin
collection. This approach is consistent with the
systemicrisk-reduction goal of this Regulation, since all regulated
products will be subject tothe margin requirements.
(11) Counterparties may choose to cover exposures arising from
price variations of their (12)OTC derivative contracts in cash. In
this case, the credit arising in connection withsuch exposures
shall be considered to have been settled, considered as a payment
andtherefore not subject to any haircut. Alternatively
counterparties may opt tocollateralise these exposures with
eligible assets. In order to cover the credit, market orforeign
exchange risks of these assets, appropriate haircuts should
apply.collect initialmargins in cash, in which case the collateral
should not be subject to any haircut.However, where initial margins
are
20
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recommendations of the international standard setting bodies
referred to in Recital 24of Regulation (EU) No 648/2012.
(14) In the case ofWith regard to initial margin, it is
recognised that these newthe(15)requirements of this Regulation
will likely have a measurable impact on marketliquidity, as assets
provided as collateral cannot be liquidated or otherwise reused
forthe duration of the OTC derivative contract. It is also
recognised that suchSuchrequirements will represent a significant
change in market practice and will presentcertain operational and
logistical challenges that will need to be managed as the
newrequirements come into effect. Taking into account that the
variation margin already
collected in cash in a currency different than the currency in
which the contract isexpressed, currency mismatch may generate
foreign exchange risk. For this reason, acurrency mismatch haircut
should apply to initial margins collected in cash in
anothercurrency. For variation margins collected in cash no haircut
is necessary in line withthe BCBS-IOSCO framework, even where the
payment is executed in a differentcurrency than the currency of the
contract.
(12) When setting the level of initial margin requirements that
counterparties should (13)collect from each other, the proposals
of, the international standard setting bodiesreferred to in Recital
24 of the Regulation (EU) No 648/2012 have explicitlyconsidered two
aspects. The first one in their framework. This framework is the
BaselCommittee on Banking Supervision and Board of the
International Organization ofSecurities Commissions Margin
requirements for non-centrally cleared derivatives,March 2015
(BCBS-IOSCO framework). The first aspect is the availability of
highcredit quality and liquid assets covering the initial margin
requirements. The second isthe proportionality principle, as
smaller financial and non-financial counterpartiesmight be hit in a
disproportionate manner from the initial margin requirements.
Inorder to maintain a level playing field, this Regulation should
introduce a thresholdbelow which two counterparties are not
required exchangingto exchange initial marginthat is exactly the
same as in the international agreementsBCBS-IOSCO framework.This
should substantially alleviate costs and operational burden for
smaller participantsand address the concern onabout the
availability of high credit quality and liquid assetswithout
undermining the general objectives of Regulation (EU) No
648/2012.
(13) While the thresholds should always be calculated at group
level, investment(14)funds should be treated as a special case as
they can be managed by a singleinvestment advisormanager and
improperly captured as a single group. Therefore,whereWhere the
funds are distinct segregated poolpools of assets, and they are
notcollateralised, guaranteed or supported by other investment
funds or the investmentadvisormanager itself, and as a resultthey
are relatively risk remote from the rest ofthe group, they. Such
investment funds should therefore be treated as separateentities
when calculating the thresholds. This approach is consistent with
theBCBS-IOSCO framework.
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the point of default, it is considered proportionate to apply a
threshold of EUR 8 billionin gross notional amounts of outstanding
amountsOTC derivative contracts to theapplication of the initial
margin requirements under this Regulation. This thresholdapplies at
the group level or, where the counterparty is not part of a group,
at the levelof the single entity. Further, counterparties that are
above this threshold and thereforesubject, prima facie, to the
initial margin requirements wouldshould have the option ofnot
collecting initial margin for an amount of up to EUR 50 million,
calculated atgroup level, and an amount of up to EUR 10 million,
calculated at intragroup level.The aggregated gross notional amount
of outstanding OTC derivative contracts shouldbe used as the
measure asgiven that it is, in certain circumstances, an
appropriatemeasurebenchmark, or at least an acceptable proxy, for
size and complexity of theportfolio of non-centrally cleared OTC
derivatives. It is also a measure that is easy tomonitor and
report. These thresholds are in line with the BCBS-IOSCO framework
fornon-centrally cleared OTC derivatives.
21
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DERIVATIVES
measuring the size and complexity of a portfolio of
non-centrally cleared OTCderivatives. It is also a benchmark that
is easy to monitor and report. These thresholdsare also in line
with the BCBS-IOSCO framework for non-centrally cleared
OTCderivatives.
(15) Exposures underarising from either OTC derivative contracts
or to counterparties(16)that are subject to a special
treatmentpermanently or temporarily exempted or partiallyexempted
from margins according to this Regulation, should also countbe
included inthe calculation of the aggregated gross notional amount,
including those OTCderivative contracts that might not be subject
to regulatory requirements on variation orinitial margin. This is
because they. This is due to the fact that all the
contractscontribute to the determination of the size orand
complexity of the portfolio of acounterparty's portfolio.
Therefore, non-centrally cleared OTC derivatives such
asphysically-settled FXforeign exchange swaps and forwards, cross
currency swaps,swaps associated to covered bonds for hedging
purposes and derivatives entered intowith exempted counterparties
or with respect to exempted counterpartiesintragrouptransactions
are also relevant for determining the size, scale orand complexity
of thecounterparty's portfolio and should therefore count such OTC
derivative contractstowards itsalso be included in the calculation
of the thresholds.
(16)The definition of a group included in Regulation (EU) No
648/2012 is relevant also forall requirements prescribed in this
Regulation when referring to group or grouplevel.
It is appropriate to set out in this Regulation special risk
management procedures for(17)certain types of products that show
particular risk profiles. The exchange of variationmargin without
initial margin should, consistently with the BCBS-IOSCO
framework,be considered an appropriate exchange of collateral for
selected physically-settledforeign exchange (FX) products
consistently with the proposals of the internationalstandard
setting bodiesproducts. Similarly, as cross-currency swaps can be
decomposedin a sequence of foreign exchange forwards, only the
interest rate component should becovered by initial margin.
Recital (24) of Regulation (EU) No 648/2012 states that this
Regulation should take (18)into account the impediments faced by
covered bonds issuers or cover pools inTheCommission Delegated Act
referred to in Article 4(2) of Directive 2014/65/EUintroduce a
harmonised definition of physically-settled foreign exchange
forwardswithin the Union. At this juncture, these products are
defined in a non-homogenousway in the Union. Therefore, in order to
avoid creating an un-level playing field withinthe Union, it is
necessary that the corresponding risk mitigation techniques in
thisRegulation are aligned to the date of entry into force of that
Delegated Act. A specificdate on which the margin requirements for
such products will enter into force even inabsence of that
Delegated Act is also laid down in this Regulation to avoid
excessdelays in the introduction of the risk mitigation techniques
set out in this Regulation,with respect to the BCBS-IOSCO
framework.
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In order to ensure a level playing field for Union
counterparties on a global level, in (19)order to avoid market
fragmentation, and acknowledging the fact that in somejurisdictions
the exchange of variation and initial margin for single-stock
options and
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equity index options is not subject to equivalent margin
requirements, the treatment ofthose products should be aligned to
international practices. This can be achieved by adelayed
implementation of the requirements concerning the margin exchange
giventhere is no international alignment on the margins for those
types of options.Recital 24 of Regulation (EU) No 648/2012 states
that this Regulation should takeinto account the impediments faced
by covered bonds issuers or cover pools inproviding collateral.
Under a specific set of conditions, covered bonds issuers or
coverpools should therefore not be required to post collateral.
This includes the case wherethe relevant OTC derivative contracts
are only used for hedging purposes and where aregulatory
overcollateralization is required. This should ensure that the
risks for thecounterparties of covered bonds issuers or cover pools
are limited, while providingsome flexibility for allow for some
flexibility for
22
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covered bonds issuers or cover pools while ensuring that the
risks for theircounterparties are limited.
(19) Covered bond issuers or cover pools may face legal
impediments to posting and(21)collecting non-cash collateral for
initial or variation margin or posting variation marginin cash.
However, there are no constraints on a covered bond issuer or cover
pool toreturn cash previously collected as variation margin.
Counterparties of covered bondissuers or cover pools should
therefore be required to post variation margin in cash andshould
have the right to get back part or all of it. Therefore this
Regulation shouldrequire counterparties of, but the covered bond
issuerissuers or cover poolpools shouldonly be required to post
variation margin but not require the latters to post
variationmargin if not for the amount in cash that was previously
received. The reason behindthis is that a variation margin payment
could be considered a claim that ranks seniorwith respect to the
bond holder claims and this, which could result in a
legalimpediment. Similarly, the possibility to substitute or
withdraw initial margin could beconsidered a claim that ranks
senior with respect to the bond holder claims facing thesame type
of constraints.
Counterparties should always assess the legal enforceability of
their netting and (22)segregation agreements. Where, because of the
legal framework of a third country,these assessments turn out to be
negative (non-netting jurisdictions), it can happenthat
counterparties have to rely on arrangements different from the
two-way exchangeof margins. With a view to ensuring consistency
with international standards, to avoidthat it becomes impossible
for Union counterparties to trade with counterparties inthose
jurisdictions and to ensure a level playing field for Union
counterparties it isappropriate to set out a minimum threshold
below which counterparties can trade withthose non-netting
jurisdictions without exchanging initial or variation margins.
Wherethe counterparties have the possibility to collect margins and
it is ensured that for thecollected collateral, as opposed to the
posted collateral, the provisions of thisRegulation can be met,
Union counterparties should always be required to
collectcollateral. Exposures from those contracts that are not
covered by any exchange ofmargin because of the legal impediments
in non-netting jurisdictions should beconstrained by setting a
limit, as capital is not considered equivalent to marginexchange in
relation to the exposures arising from OTC derivative contracts.
The limitshould be set in such a way that it is simple to calculate
and verify. To avoid thebuildup of systemic risk and to avoid that
such specific treatment would create thepossibility to circumvent
the provisions of this Regulation, the limit should be set at avery
low level. These treatments would be considered sufficiently
prudent, becausethere are also other risk mitigation techniques as
an alternative to margins. Forexample, credit institutions usually
have to hold capital for cross border OTCderivative contracts with
counterparties in non-netting jurisdictions on a gross basisbecause
the netting arrangements are not legally enforceable and therefore
notrecognised for regulatory purposes.
In case that collateral cannot be liquidated immediately after
default, it is necessary to (23)take into account the time period
from the most recent exchange of collateral coveringa netting set
of OTC derivative contracts with a defaulting counterparty until
the OTCderivative contracts are closed out and the resulting market
risk is re-hedged,which is known as 'margin period of risk' (MPOR)
and is the same tool as that
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used in Article
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(20) The concept of margin period of risk (MPOR) is the same as
that used in Article
272(9) of Regulation (EU) No 575/2013; as such, MPOR refers to
the time periodfrom the most recent exchange of collateral covering
a netting set of OTC derivativecontracts with a defaulting
counterparty until the OTC derivative contracts are closedout and
the resulting market risk is re-hedged. of the European Parliament
and of theCouncil3. Nevertheless, as the objectives of the two
Regulations differ, and Regulation(EU) No 575/2013 sets out rules
for calculating the MPOR for the purpose of ownfunds requirements
only, this Regulation should include appropriatespecific rules
onthe MPOR that are required in the context of the risk management
procedures infornon-centrally cleared OTC derivatives. The MPOR
should take into account the typicalsettlement cycle applied
toprocesses required by this Regulation for the exchange ofthe
margins. This Regulation assumes thatNormally, both initial and
variation marginare exchanged byno later than the end of the
following business day. If counterpartiesagree to a extended
settlement cycle for exchange of margins, any extension beyond the
the following business day should be included in the calculation of
the MPOR.Anextension of the time for the exchange of variation
margin could be compensated by anadequate rescaling of the MPOR.
Therefore, taking into account possible operationalissues, it
should be allowed to extend the time for the exchange of variation
marginwhere such an extension is included in the rescaling of the
MPOR. Alternatively,where no initial margin requirements apply an
extension is allowed if an appropriateamount of additional
variation margin has been collected.
(21) When developing initial margin models and when estimating
the appropriate(24)MPOR, counterparties should take into account
the need to have models that capturethe liquidity of the market,
the number of participants in that market and the volume ofthe
relevant OTC derivative contracts. At the same time there is the
need to relyondevelop a model that both parties can understand,
reproduce and on which they canrely to solve disputes. Therefore
counterparties should be allowed to calibrate themodel and estimate
MPOR dependent only on market conditions, without the need toadjust
their estimates to the characteristics of specific counterparties.
This in turnimplies that counterparties may choose to adopt
different models to calculate the initialmargin from each other,
and that the initial margin requirements are not symmetrical.
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(22) While there is thea need for recalibrating an initial
margin model with sufficient(25)frequency, a new calibration might
lead to unexpected levels of margin requirements.For this reason,
an appropriate time period should be established, during
whichmargins may still be exchanged based on the previous
calibration. This should allowcounterparties to have enough time to
comply with margin calls resulting from therecalibration.
(23) Collateral should be considered as being freely
transferable in the case of a default(26)of the collateral provider
if there are no regulatory or legal constraints or third
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party claims, including those of the third party custodian.
However, certain claims,such as costs and expenses incurred for the
transfer of the collateral, in the form ofliens routinely imposed
on all securities transfer should not be considered animpediment.
Otherwise it would lead to a situation where an impediment would
alwaysbe identified.
(24) The collateral takercollecting counterparty should have the
operational capability(27)to appropriate and, if necessary,where
necessary, to liquidate the collateral in the caseof a default of
the collateral provider. ItThe collecting counterparty should also
be ableto use the cash proceeds of liquidation to enter into an
equivalent contract with anothercounterparty or to hedge the
resulting risk. Existing
3 Regulation (EU) No 575/2013 of the European Parliament and of
the Council of 26 June 2013 on prudentialrequirements for credit
institutions and investment firms and amending Regulation (EU) No
648/2012 (OJ L 176, 27.6.2013,p. 1).
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The impact on financial stability of collateral liquidation by
non-systemicallyimportant counterparties may be expected to be
limited. Further, concentration limitson initial margin might be
burdensome for counterparties with small OTC derivativeportfolios
as they might have only a limited range of eligible collateral.
Therefore,even though collateral diversification is a valid risk
mitigant, non-systemicallyimportant counterparties should not be
required to diversify collateral. On the otherhand, systemically
important financial institutions and other counterparties with
largeOTC derivative portfolios trading with each other should apply
the concentrationlimits to all collateral, includingat least to
initial margin and that should includeMember States sovereign debt
securities. It is considered that theseThosecounterparties are
sophisticated enough to either transform collateral or to have
accessto multiple markets and issuers to sufficiently diversify the
collateral posted. AnumberArticle 131 of Directive 2013/36/EU4
provides for the identification of
the resulting risk. Having access to the market should be a
pre-requisite for thecollateral taker to enable it to either sell
the collateral or repo it within a reasonableamount of time. This
capability should be independent of the collateral provider
andshould therefore include having broker arrangements, and repo
arrangements withother counterparties or comparable measures.
(25) Collateral collected must be of sufficiently high liquidity
and credit quality to(28)allow the collecting counterparty to
liquidate the positions without significant pricechanges in case
the other counterparty defaults. The credit quality of the
collateralshould be assessed relying on recognised methodologies
such as the ratings ofexternal credit assessment institutions. In
order to mitigate the risk of mechanisticreliance on external
ratings, however, this Regulation should introduce a number
ofadditional safeguards. These should include the possibility to
use an approvedInternal Rating Based ('IRB') model and the
possibility to delay the replacement ofcollateral that becomes
ineligible due to a rating downgrade, with the view toefficiently
mitigating potential cliff effects that may arise from excessive
reliance onexternal credit assessments.
(26) While haircuts mitigate the risk that collected collateral
is not sufficient to cover(29)margin needs in a time of financial
stress, other risk mitigants shouldare also beconsideredneeded when
accepting non-cash collateral. In particular, counterpartiesshould
ensure that the collateral collected is reasonably diversified in
terms ofindividual issuers, issuer types and asset classes. As a
result, this Regulation shouldinclude such requirements.
(27)The impact on financial stability of collateral liquidation
by when non-systemicallyimportant counterparties may be expected to
be limited. Further, concentration limitson collateral might be
burdensome for counterparties with small OTC derivativeportfolios.
Therefore, even though collateral diversification is a valid risk
mitigant,non-systemically important counterparties should not be
required to diversify
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institutions are already identified as systemically important
under Union law inaccordance with Article 131 of Regulation
575/2013.. However, given the broad scopeof Regulation (EU) No
648/2012, a quantitative threshold should be introduced so thatthe
requirements for concentration limits apply also to counterparties
that might notfall under the existing classifications of
systemically important institutions but thatcanwhich should
nonetheless be considered systemically importantsubject
toconcentration limits because of the size of their OTC derivative
portfolio. Recital (26)of the EMIR suggests that counterparties
such as pension scheme arrangement shouldbe subject to the
bilateral collateralisation requirements; the same recital,
however,recognises the need to avoid excessive burden from such
requirements on theretirement income of future pensioners.
4 Directive 2013/36/EU of the European Parliament and of the
Council of 26 June 2013 on access to the activity ofcredit
institutions and the prudential supervision of credit institutions
and investment firms, amending Directive 2002/87/ECand repealing
Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p.
338).
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Therefore it would be disproportionate to require those
counterparties to apply therequirements to monitor the
concentration limits in the same manner as for othercounterparties.
Consequently, it is appropriate to provide that the monitoring of
suchexposures is carried out on a less frequent basis than for
other counterparties, providedthat the exposures of such
counterparties remain significantly below the level wherethe
concentration limits start applying. For the same reasons, where
this condition isonly temporarily not met it is appropriate to
provide the possibility for thosecounterparties to return to the
monitoring of such exposures on a less frequent basis.
(28) In order to limit the effects of the interconnectedness
between financial institutions(31)that may arise from non-centrally
cleared derivative contracts, different concentrationlimits should
apply to the different classes of debt securities issued by the
financialsector. Therefore, stricter diversification requirements
should be set out for debtsecurities issued by institutions and
used as collateral for variation or initial marginpurposes should
be introducedinitial margin purposes. On the one hand, the
difficultiesin segregating cash collateral should be acknowledged
by allowing participants to posta limited amount of initial margin
in the form of cash and by allowing custodians toreinvest this cash
collateral in accordance with the relevant rules on custody
services.On the other hand, cash held by a custodian is a liability
that the custodian has towardsthe posting counterparty, which
generates a credit risk for the posting counterparty.Therefore, in
order to address the general objective of Regulation (EU) No
648/2012 toreduce systemic risk, the use of cash as initial margin
should be subject todiversification requirements at least for
systemically important institutions.Systemically important
institutions should be required to either limit the amount ofcash
initial margin collected for the purpose of this Regulation or to
diversify theexposures relying in more than one custodian.
(29) The value of collateral should not exhibit a significant
correlation with the(32)creditworthiness of the collateral provider
or the value of the underlying non-centrallycleared derivatives
portfolio because, since this would undermine the effectiveness
ofthe protection offered by the collateral collected. Accordingly,
securities issued by thecollateral provider or its related entities
should not be accepted as collateral.Counterparties should be
required to monitor that collateral collected is not subject tomore
general forms of wrong way risk.
(30) It should be possible to liquidate assets collected as
collateral for initial or variation(33)margin in a sufficiently
short time in order to protect collecting counterparties fromlosses
on non-centrally cleared OTC derivatives contracts in the event of
a counterpartydefault. These assets should therefore be highly
liquid and should not be exposed toexcessive credit, market or
foreign exchange risk. To the extent that the value of
thecollateral is exposed to these risks, appropriately
risk-sensitive haircuts should beapplied.
(31) In order to ensure timely transfer of collateral,
counterparties should have efficient(34)operational processes in
place. This requires that the processes for the bilateralexchange
of collateral are sufficiently detailed, transparent and robust. A
failure bycounterparties to agree upon and provide an operational
framework for efficientcalculationscalculation, notification and
settlementfinalisation of margin calls can leadto disputes and
fails that result in uncollateralised exposures under OTC
derivative
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contracts. As a result, it is essential that counterparties set
clear internal policies andstandards in respect of collateral
transfers. Any deviation from those standards shouldbe rigorously
reviewed by all relevant internal stakeholders that are required
toauthorise those deviations. Furthermore, all applicable terms in
respect of operationalexchange of collateral should be accurately
recorded in detail in a robust, prompt andsystematic way.
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27
collateral transfers. Any deviation from those standards should
be rigorously reviewedby all relevant internal stakeholders that
are required to authorise those deviations.Furthermore, all
applicable terms in respect of operational exchange of
collateralshould be accurately recorded in detail in a robust,
prompt and systematic way.
(32) Trading relationship documentation should be
executedproduced by(35)counterparties entering into multiple OTC
derivative contracts in order to providelegal certainty. As a
result, the trading relationship documentation should include
allmaterial rights and obligations of the counterparties applicable
to non-centrallycleared OTC derivative contracts. Where parties
enter into a single, one-off OTCderivative contract, the trading
relationship documentation could take the form of atrade
confirmation that includes all material rights and obligations of
thecounterparties.
(33) Collateral protects the collecting counterparty fromin the
event of the default of(36)the posting counterparty. However, both
counterparties are also responsible forensuring that the collateral
collected does not increase the risk for the postingcounterparty in
case the collecting counterparty defaults. For this reason, the
bilateralagreement between the counterparties should allow both
counterparties to access thecollateral in a timely manner when they
have the right to do so, hence the need for ruleson segregation and
for rules providing for an assessment of the effectiveness of
theagreement in this respect, taking into account the legal
constraints and the marketpractices of each jurisdiction.
(34) The re-hypothecation, re-pledge or re-use of collateral
collected as initial margins(37)would create new risks due to
claims of third parties over the assets in the event of adefault.
Legal and operational complications could delay the return of the
collateral inthe event of a default of the initial collateral taker
or the third party or even make iteven impossible. In order to
preserve the efficiency of the framework and ensure aproper
mitigation of counterparty credit risks, the re-hypothecation,
re-pledge orreusere-use of collateral collected as initial margin
should therefore not be permitted.Nevertheless, collateral taker or
the custodian should be allowed to secure cash postedor deposited
as initial margin by re-investing it in eligible securities as long
as this isdone to protect the collateral poster.
Given the difficulties in segregating cash, the current
practices on the exchange of cash (38)collateral in certain
jurisdictions and the need of relying on cash instead of securities
incertain circumstances where transferring securities may be
impeded by operationalconstraints, cash collateral collected as
initial margin should always be held by acentral bank or third
party credit institution, since this ensures the separation from
thetwo counterparties in the OTC derivative contract. To ensure
such separation, the thirdparty credit institution should not
belong to the same group as either of thecounterparties. Credit
institutions that are not able to segregate cash collateral
shouldbe allowed to reinvest cash deposited as initial margin.
RISK -MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
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(35) When a counterparty notifies the relevant competent
authority regarding the(39)exemption of intragroup transactions, in
order for the competent authority to decidewhether the conditions
for the exemption are met, the counterparty should provide
acomplete file including all relevant information.
(36) For a group to be deemed to have adequately sound and
robust risk management(40)procedures, a number of conditions have
to be met. The group should ensure a regularmonitoring of the
intragroup exposures. The timely settlement of the
obligationsresulting from the intragroup OTC derivative contracts
should also be guaranteed.Furthermore, the monitoring and liquidity
tools at group level should be consistentwith the complexity of the
intragroup transactions., based
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28
being available to meet payment obligations as they fall due on
a day-to-day basis, orin prompt electronic transfer of funds not
being possible.
This Regulation includes a number of detailed requirements to be
met for a group to (42)obtain the exemption from posting margin for
intragroup transactions. In addition tothose requirements, where
one of the two counterparties in the group is domiciled ina
third-country for which an equivalence determination under Article
13(2) ofRegulation (EU) No 648/2012 has not yet been provided, the
group has to exchange,and where appropriate segregate, variation
and initial margins for all the intragrouptransactions with the
subsidiaries in those third-countries. In order to avoid
adisproportionate application of the margin requirements and taking
into accountsimilar requirements for clearing obligations, this
Regulation should provide for adelayed implementation of that
particular requirement. This would allow enoughtime for completing
the process to produce the equivalence determination, while
notrequiring an inefficient allocation of resources to the groups
with subsidiariesdomiciled in third-countries.
(38) Taking into account the principle of proportionality,
counterparties that have(43)smaller portfolios and therefore
generally smaller operations should be allowed moretime to adapt
their internal systems and processes in order to comply with
therequirements of this Regulation. In order to achieve a proper
balance betweenmitigating the risks of OTC derivatives and the
proportionate application of thisRegulation, as well as achieve
international consistency and minimise possibilities ofregulatory
arbitrage with the view to avoiding economic disruptions, a
phase-in periodof the requirements is necessary. The phase-in
period for the requirements introducedin this Regulation are
consistent with the schedule agreed in the BCBS-IOSCOframework for
non-centrally cleared OTC derivatives.
(39) In order to avoid any retrospectiveretroactive effect of
this Regulation, the(44)requirements hereunder should apply only to
new contracts entered into after therelevant phase-in dates.
Exchanges of variation margin and initial margin on
contractsentered into before these dates should not be subject to
the regulatory obligation tomodify the existing bilateral
agreements as this would impact their market value.
on the monitoring and liquidity tools at group level, which are
consistent with thecomplexity of the intragroup transactions.
(37) In order to usefor the exemption for intragroup
transactions to be applicable, it(41)must be certain that no
legislative, regulatory, administrative or other
mandatoryprovisions of applicable law could legally prevent the
intragroup counterparties frommeeting their obligations to transfer
monies or repay liabilities or securities under theterms of the
intragroup transactions. Similarly, there should be no operational
orbusiness practices of the intragroup counterparties or the group
that could result infunds not being available to meet payment
obligations as they fall due on a day-to-daybasis, or in prompt
electronic transfer of funds not being possible.
RISK MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
RISK-MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
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(40)The BCBS and IOSCO are expected to perform a coordinated
review of theinternational standards on margins including
implementation and interaction withother regulatory requirements
once they are in place and there is some experience withtheir
functioning across various jurisdictions. Given the need to be
consistent withthose international standards it may become
necessary to review the provisions of thisRegulation after such a
review.
(41) This Regulation is based on the draft regulatory technical
standards submitted by(45)the European Banking Authority, the
European Insurance and Occupational PensionsAuthority and the
European Securities and Markets Authority to the Commission.
(42) The European Banking Authority, the European Insurance and
Occupational(46)Pensions Authority and the European Securities and
Markets Authority have conductedopen public consultations on the
draft regulatory technical standards on which thisRegulation is
based, analysed the potential related costs and benefits and
requested theopinion of the Banking Stakeholder Group established
in accordance with Article 37 ofRegulation (EU) No 1093/20107, the
opinion of the Insurance and ReinsuranceStakeholder Group and the
Occupational Pensions Stakeholder Group established inaccordance
with Article 37 of Regulation (EU) No 1094/20108, and the
7 Regulation (EU) No 1093/2010 of the European Parliament and of
the Council of 24 November 2010 establishing aEuropean Supervisory
Authority (European Banking Authority), amending Decision No
716/2009/EC and repealingCommission Decision 2009/78/EC (OJ L 331,
15.12.2010, p. 12).8 Regulation (EU) No 1094/2010 of the European
Parliament and of the Council of 24 November 2010 establishing
aEuropean Supervisory Authority (European Insurance and
Occupational Pensions Authority), amending Decision No716/2009/EC
and repealing Commission Decision 2009/79/EC (OJ L 331, 15.12.2010,
p. 48).
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29
RISK -MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
Securities and Markets Stakeholder Group established in
accordance with Article 37 of Regulation (EU) No 1095/20109,
opinion of the Banking Stakeholder Group established in
accordance with Article 37of Regulation (EU) No 1093/20105, the
opinion of the Insurance and ReinsuranceStakeholder Group and the
Occupational Pensions Stakeholder Group established inaccordance
with Article 37 of Regulation (EU) No 1094/20106, and the
Securities andMarkets Stakeholder Group established in accordance
with Article 37 of Regulation(EU) No 1095/20107,
HAS ADOPTED THIS REGULATION:
CHAPTER 1 - I Counterparties Risk Management Procedures required
for
compliance with paragraph 3 of Article 11 of Regulation (EU)
No648/2012
Section 1 - Overview of the procedures
SECTION 1RISK MANAGEMENT PROCEDURES
Article 1 GEN - General counterparties risk management
proceduresrequirements
1. The risk management procedures required for compliance with
paragraph 3 1.ofArticle 11(3) ofRegulation (EU) No 648/2012 (the
risk management procedures) shall apply tofinancial counterparties
within the meaning of Article 2(8) of Regulation (EU) No648/2012
and nonfinancialnon-financial counterparties referred to in Article
10 ofRegulation (EU) No 648/2012 (the counterparties).
2. The risk management procedures required for compliance with
paragraph 3 2.ofArticle 11(3) ofRegulation (EU) No 648/2012 shall
apply throughout the life of all over-the-counter(OTC) derivative
contracts that were subject to the requirements of this
Regulationat the contracts inception date.
3. The risk management procedures required for compliance with
paragraph 3 3.ofArticle 11 of Regulation (EU) No 648/2012 shall
provide for all of the following,unlessotherwise provided in
accordance with Articles 2 GEN to 4 GEN2, 3 and 4:
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(a) the collection of collateral, in the following two ways:
i. the collection of collateral as initial margin, in accordance
with Article 1 EIM, (a)14, without the possibility of offsetting
the initial margin amounts between the twocounterparties;
ii. the collection of collateral as variation margin in
accordance with Article 1 (b)VM13;
(b) the ex-ante agreement between counterparties on a list of
eligible collateralfulfilling the requirements of Article 1
LEC.
4. For the purposes of point (i) of paragraph 3(a), initial
margin means the collateralcollected by a counterparty to cover its
current and potential future exposure in theinterval between the
last margin collection and the liquidation of positions following
adefault of the other counterparty or hedging the risk.
5 Regulation (EU) No 1093/2010 of the European Parliament and of
the Council of 24 November 2010 establishing aEuropean Supervisory
Authority (European Banking Authority), amending Decision No
716/2009/EC and repealingCommission Decision 2009/78/EC (OJ L 331,
15.12.2010, p. 12).
6 Regulation (EU) No 1094/2010 of the European Parliament and of
the Council of 24 November 2010 establishing aEuropean Supervisory
Authority (European Insurance and Occupational Pensions Authority),
amending Decision No716/2009/EC and repealing Commission Decision
2009/79/EC (OJ L 331, 15.12.2010, p. 48).
9 7 Regulation (EU) No 1095/2010 of the European Parliament and
of the Council of 24 November 2010 establishing aEuropean
Supervisory Authority (European Securities and Markets Authority),
amending Decision No 716/2009/EC andrepealing Commission Decision
2009/77/EC (OJ L 331, 15.12.2010, p. 84).
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30
Explanatory text for consultation:
Some of the respondents to the first Consultation Paper
commented that the treatment of
nonfinancial counterparties domiciled outside the Union could be
seen as inconsistent with
the principles of the Basel Committee and IOSCO. The ESAs,
recognising the fact that the risk
profile of exposures to non-financial counterparties should be
treated in the same way as
they were domiciled in the Union are therefore consulting on
this new draft.
Question 1. Respondents are invited to comment on the proposal
in this section concerning the
treatment of non-financial counterparties domiciled outside the
EU.
(c) the ex-ante agreement between the counterparties on a list
of eligible collateralfulfilling the requirements of Article
22.
For the purposes of this Regulation, initial margin means the
collateral collected by a 4.counterparty to cover its current and
potential future exposure in the interval betweenthe last margin
exchange and the liquidation of positions following a default of
theother counterparty or hedging the risk.
RISK -MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
For the purposes of point (ii) of paragraph 3(a)this Regulation,
variation margin5.means the collateral collected or paid out to
reflect the results of the daily marking-to-market of outstanding
contracts referredto in Article 11(2) of Regulation (EU) No
648/2012.
The collateral referred to in pointpoints (a) and (b) of
paragraph 3 shall meet the6.eligibilitycriteria referred to in
Section 5, and shall be adjusted according to the
modalitiesreferred to in Articles 1 HC28 and 2 HC29 of that
Section.
SECTION 2RISK MANAGEMENT PROCEDURES FOR SPECIFIC CASES
Subsection 1Section 2 - Risk management procedures for specific
cases Sub-section 1 - Potential
exemptions from the requirement to collect collateral
Article 2 GEN - Non-Financial CounterpartiesNon-financial
counterparties
-
RiskThe risk management procedures required for compliance with
paragraph 3 of Article 11of Regulation (EU) No 648/2012 may include
the provisionmay provide that no collateral isexchanged in relation
to transactions with certain non-financial counterparties other
thanthose referred to in Article 10 of Regulation (EU) No
648/2012;2012, or with non-financialentities established in a third
country that would be considered non-financial counterpartiesother
than those referred to in Article 10 of Regulation (EU) No 648/2012
if they wereestablished in the Union OTC derivative contracts.
Article 3 GEN Transactions with third country counterparties
Where a counterparty referred to in Article 1(1) GEN, which is
established in the Union entersinto aan OTC derivative contract
with a counterparty that is established in a third country andwould
be subject to the requirements of this Regulation if it was
established in the Union, therisk management procedures shall
includeprovide that initial and variation margin areexchanged
between the counterparties and that the collateral is maintained
and protected, inaccordance with this Regulation.
Article 4 GEN - Minimum Transfer Amounttransfer amount
RISK MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
1.RiskThe risk management procedures required for compliance
with paragraph 3 of Article 11of Regulation (EU) No 648/2012 may
provide that no collateral is collected from a
single counterparty where the amount due from the last
collection of collateral isequal to or lower than a certain amount
to be agreed by the counterparties (minimumtransfer amount) and
which cannot be highergreater than EUR 500 000.000 or theequivalent
amount in another currency.
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31
RISK-MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
2. Where counterparties agree on a minimum transfer amount, the
amount due shall becalculated as the sum of :
the variation margin due from its last collection calculated in
accordance with(a)Article 1 VM13;
the initial margin due from its last collection calculated in
accordance with(b)Article 1 EIM14;
any excess collateral that may have been provided to or returned
by both(c)counterparties.
3.Counterparties may agree on separate minimum transfer amounts
for initial and
variation margins, provided that the sum of those two minimum
transfer amounts isequal to or lower than the amount set out in
paragraph 1.
4. Where the amount of collateral due to the collecting
counterparty collecting collateral exceeds the minimum
minimum transfer amount agreed by the counterparties, the
collecting counterpartyshall collect the full amount of collateral
due without deduction of the minimumtransfer amount. Counterparties
that agree to separate the minimum transfer amountin accordance
with paragraph 2, the risk management procedures shall provide
thatthe counterparty collecting collateral collects3 shall collect
the full amount of initialor variation margin due, without any
deduction ofwhere it exceeds the minimumtransfer amount for initial
or variation margin, respectively.
Article 1 CCP - 5Margin calculation with third country
counterparties
Where a counterparty is domiciled in a third country using a
definition of OTC 1.derivative contracts that is different from
that of Regulation (EU) No 648/2012,counterparties shall calculate
margins for all contracts that meet either definition ofan OTC
derivative contract, provided that the counterparty domiciled in
the thirdcountry is subject to margin requirements for those
contracts which are considered asOTC derivative contracts under the
third country regulatory regime.
For the purposes of calculation of the margins, where a netting
agreement is in place 2.between two counterparties, one of which is
domiciled in a third country, thatagreement has to meet the same
conditions as if both counterparties were domiciledin the EU.
Article 6Treatment of OTC derivative contracts in the context of
a CCPs position management upon
the insolvency of a clearing member
Risk management procedures required for compliance with
paragraph 3 ofWhere a centralcounterparty (CCP) is an authorised
credit institution and therefore qualifies as a
financialcounterparty in accordance with Article 112(8) of
Regulation (EU) No 648/20122012, therisk management procedures may
provide that no initial margin or variation margin is
-
collected in relation to the OTC derivative contracts referred
to in Annex II, paragraph 2 ofCommission Delegated Regulation (EU)
No 153/201310.2013.
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32
physically settled OTC derivative contracts that solely involve
the exchange of(a)two different currencies on a specific future
date at a fixed rate agreed at theinception of the contract
covering the exchange (foreign exchange forwards );
physically settled OTC derivative contracts that solely involve
an exchange of(b)two different currencies on a specific date at a
fixed rate that is agreed at theinception of the contract covering
the exchange;, and a reverse exchange of thetwo currencies at a
later date and at a fixed rate that is also agreed at theinception
of the contract covering the exchange (foreign exchange swaps);
the exchange of principal of an OTC derivative contract by which
the two(c)counterparties solely exchange the principal (and any
interest) payments in onecurrency, for the principal (and any
interest) payments in another currency, atsomespecified points in
the futuretime according to a specified formula(currency swap).
Article 6 GEN - 8Threshold based on initial marginnotional
amount
1. Risk management procedures required for compliance with
paragraph 3 of Article 11The risk management procedures may provide
that initial margins are not collected
of Regulation (EU) No 648/2012 may provide that initial margins
are not collectedwhere the total initial margin required to be
collected from a counterparty, inaccordance with Section 3, for OTC
derivative contracts with that counterparty,calculated at the group
level, is equal to or lower than EUR 50 million.
for all new contracts from January of each calendar year where
one of the twocounterparties has at entity level an aggregate
month-end average notional
Sub-sectionSubsection 2 -
Potential exemptions in calculating levels of initial margin
Article 5 GEN - 7Foreign Exchange Contractsexchange
contracts
Risk 1.The risk management procedures required for compliance
with paragraph 3 of Article 11 of Regulation (EU) No 648/2012 may
include provisionsmay provide that initial margins are
notcollected
with respect to:10 Commission Delegated Regulation (EU) No
153/2013 of 19 December 2012 supplementing Regulation (EU) No
648/2012 of the European Parliament and of the Council with regard
to regulatory technical standards on requirements for central
counterparties (OJ, L52, 23 February 2013, p.41).
RISK MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
RISK-MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
-
amount or belongs to a group which has an aggregate month-end
average notionalamount of non-centrally cleared derivatives for the
months March, April and May ofthe preceding year below EUR 8
billion.
2. Both of the following shall be included in the calculation of
the group aggregatemonth-end average notional amount:
all non-centrally cleared OTC derivative contracts of the
group;(a)
all intragroup non-centrally cleared OTC derivative contracts of
the group, (b)taken into account only once.
3. Investment funds may be considered distinct entities and
treated separately whenapplying the thresholds referred to in
paragraph 1, only where the funds are distinctsegregated pools of
assets for the purposes of the funds insolvency or bankruptcythat
are not collateralised, guaranteed or supported by other investment
funds or theinvestment managers.
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33
RISK-MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
Article 9Threshold based on initial margin amount
1. The risk management procedures may provide that a
counterparty is not required tocollect initial margins where:
neither counterparty belongs to any group and the sum of all
initial margins (a)required to be collected by that counterparty is
equal to or lower than EUR 50million;
the counterparties are part of different groups and the sum of
all initial margins (b)to be collected from all counterparties
belonging to the posting group by allcounterparties belonging to
the collecting group is equal to or lower than EUR50 million;
both counterparties belong to the same group and the sum of all
initial margins (c)required to be collected by that counterparty is
equal to or lower than EUR 10million.
2. Where counterparties apply the threshold referred to in
paragraph 1, the followinga counterparty applies one of the
thresholds referred to in paragraph 1, all of
the following shall apply:
counterpartiesthe counterparty applying the threshold referred
to in paragraph 1(a)may reduce the amount of initial margin
collected by the value of the threshold;
the risk management procedures shall include determiningof the
group applying (b)the threshold referred to in paragraph 1(b) shall
determine how to allocate thereceived initial margin amongst the
relevant entities within the group;
the risk management procedures of the group applying the
threshold referred to (c)in paragraph 1(b) shall include provisions
on monitoring, at the group level, ofwhether the threshold is
exceeded and provisions on the maintenance ofappropriate records of
itsthe groups exposures to each single counterparty inthe same
group.
3. Investment funds that are managed by a single investment
advisor may be considereddistinct entities and treated separately
when
distinct entities and treated separately in the course of
applying the thresholds referred to in paragraph 1, only where the
funds are distinctsegregated pools of assets for the purposes of
the funds insolvency or bankruptcythat are not collateralised,
guaranteed or supported by other investment funds or theinvestment
advisor itself.
Article 7 GEN - Threshold based on notional amount
-
notional amount of non-centrally cleared derivatives for the
months June, July andAugust of the preceding year below EUR 8
billion.
2.For the purposes of calculating the group aggregate month-end
average notional amount all non-centrally cleared OTC derivative
contracts of the group shall beincluded.
3.Investment funds that are managed by a single investment
advisor may be considered distinct entities and treated separately
in the course of applying the thresholds referredto in paragraph 1,
only where the funds are distinct segregated pools of assets for
thepurposes of fund insolvency or bankruptcy that are not
collateralised, guaranteed orsupported by other investment funds or
the investment advisor itselfmanagers.
Sub-sectionSubsection 3 - Potential exemptions from the
requirement to post or collect initial or variation margin
Article 8 GEN - 10Treatment of derivatives associated to covered
bonds for hedging purposes
1. Subject to the conditions set out in paragraph 2,3, the risk
management proceduresrequired for compliance with paragraph 3 of
Article 11 of Regulation (EU) No 648/2012, relating to derivatives
associated to covered bonds may specify thefollowing:
that variation margin is not posted by the covered bond issuer
or cover pool;(a)
that initial margin is not posted or not collected or
neither;.(b)
1. Risk management procedures may provide that initial margins
are not collected forall new contracts from January of each
calendar year where one of the two counterparties has or belongs to
a group which has an aggregate month-end average
RISK MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
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34
the covered bond to which the derivatives are associated meets
the(f)requirements of paragraphs (1), (2) and (3) of Article 129 of
Regulation (EU)No 575/2013;
the cover pool of the covered bond to which the OTC derivative
contract is(g)associated is subject to a regulatory
collateralisation requirement of at least 102%.
Section 3 - Calculation and collection of margins
Article 11Treatment of derivatives with counterparties in
jurisdictions where legal enforceability of
netting agreements or collateral protection may not be
ensured
Where a counterparty concludes OTC derivative contracts with
counterparties 1.domiciled in the third-country jurisdictions
meeting the conditions of paragraph 4,that counterparty does not
need to post any variation or initial margin for
thosecontracts.
Where a counterparty concludes OTC derivative contracts with
counterparties 2.domiciled in a third-country jurisdiction, that
counterparty does not need to either
The covered bond issuer or cover pool shall collect variation
margin, in cash and 2.shall return the collected amount where it is
no longer due.
2. Paragraph 1 applies where all of the following conditions are
met:3.
the OTC derivative contract is not terminated in case of
resolution or(a)insolvency of the covered bond issuer or cover
pool;
the counterparty to the OTC derivative contract ranks at least
pari passu with(b)the covered bond holders except where. A more
junior ranking of thecounterparty to the OTC derivative contract
concluded with covered bondissuers or with cover pools for covered
bonds is permitted only where thecounterparty is the defaulting or
the affected party;
the OTC derivative contract is registered or recorded in the
cover pool of the(c)covered bond in accordance with national
covered bond legislation;
the OTC derivative contract is used only to hedge the interest
rate or currency(d)mismatches of the cover pool in relation to the
covered bond;
the netting set as defined in Article 272(4) of Regulation (EU)
575/2013(e)(netting set) does not include OTC derivative contracts
unrelated to the coverpool of the covered bond;
RISK MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
RISK-MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
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collect or post variation or initial margin for those contracts,
where all of thefollowing conditions are met:
the OTC derivative contracts are entered into with a
counterparty domiciled in a (a)third-country jurisdiction meeting
the conditions of paragraph 4;
the legal reviews referred to in paragraph 4 conclude that
collecting collateral in (b)accordance with this Regulation is not
possible;
the ratio calculated in accordance with paragraph 3 is lower
than 2.5%.(c)
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Text for consultation
Some respondents to the first public consultation noticed that
the requirement to complete the
collection of margins margin within the following business day
(T+1) of the first Consultation
Paper may be unfeasible because it was not considering some of
the operational delays that, in
certain circumstances, are unavoidable. In particular this
refers to time zone differences and
margin calls reconciliations. However, as the daily exchange of
margins is considered a core
component of the entire framework, the current proposal remain
similar to the one in the first
consultation paper identifying very limited circumstances where
the exchange of variation margin
can occur less frequently than on a daily basis.
Question 2. Respondents are invited to comment on the proposal
in this section concerning
the timing of calculation, call and delivery of initial and
variation margins.
RISK-MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
3. A counterparty shall calculate the ratio referred to in
paragraph 2(c) as follows:
it shall add the notional outstanding amounts of the OTC
derivative contracts of (a)the group to which it belongs, for which
no margin is collected for all thecounterparties in all the
jurisdictions meeting the conditions of paragraph 4;
it shall calculate the notional outstanding amount for all the
OTC derivative (b)contracts of the group to which it belongs,
excluding intragroup transactions;
it shall divide the amount resulting from point (a) with that
resulting from point (c)(b).
4. In order to apply the treatment laid down in paragraphs 1, 2
and 3, either of thefollowing conditions shall be met:
Article 1 VM - Variation marginthe legal review referred to in
Article 32(2) (a)does not confirm that the bilateral netting
arrangements in the jurisdictionconcerned can be legally enforced
with certainty at all times;
the legal review referred to in Article 33(5) confirms that no
segregation (b)arrangement with a counterparty domiciled in the
jurisdiction concerned canmeet the requirements referred to in
paragraphs 1 to 3 of Article 33.
SECTION 3CALCULATION AND COLLECTION OF MARGINS
Article 12Calculation date
1. Counterparties shall calculate their variation margin at
least on a daily1.basis and initial margin at least as prescribed
in Article 14(3). The
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For the purpose of setting the dates for the margin calculation,
the following shall 2.apply:
where two counterparties are located in the same time-zone the
calculation shall (a)refer to the netting set of the previous
business day;
where two counterparties are not located in the same time-zone,
the calculation (b)shall refer to the transactions in the netting
set entered into before 16:00 hoursof the previous business day of
the time-zone where it is first 16:00 hours.
Article 13Calculation of variation margin
calculation shall be based on the current valuation, performed
in accordance with Article 11(2) of Regulation (EU) No 648/2012 and
Articles 16 and 17 of the Commission Delegated Regulation No
149/2013. 1. The amount of variation margin to be collected isby a
counterparty shall be the
outstanding balance between the aggregated value of all
contracts in the netting setand the balancecalculated in accordance
with Article 11(2) of Regulation (EU) No648/2012, and the value of
all variation margin previously posted, collected or settledagainst
this value.
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2. Variation margins shall be collected in one of the following
ways:
by settling exposurescollecting in cash in accordance with point
(a) of Article (a)22(2);
by collecting in non-cash collateral in accordance with Section
3,points (b) to (r) (b)of Article 22(2), subject to the haircuts
requirements referred to in Section 4.5 and thehaircut requirements
referred to in Section 6.
3. Variation margins shall be collected within 3 business days
from the calculation date.one of the following:RISK MANAGEMENT
PROCEDURES FOR NON-CENTRALLY CLEARED OTC DERIVATIVES
4.For all netting sets for which the
within the business day of the calculation;(a)
where the conditions in paragraph 4 are met, within two business
days after the (b)calculation date.
4. The collection of variation margin can exceed one business
day, the MPOR referred to in Article 2 MRM (2) shall be increased
by the number of days in between the calculation and the
collection.
5.For all netting sets where no initial margin is required,
because of the potential exceptions of Section 1, Chapter 1 of this
Regulation, the collection shall not exceedone business day.in
accordance with paragraph 3(b) may be applied
only to netting sets that meet either of the following
conditions:
for all the derivative contracts not subject to initial margin
requirements by (a)virtue of Regulation (EU) No 648/2012 and this
Regulation, where thecollecting counterparty has collected, at or
before the calculation date of thevariation margin, an amount of
variation margin calculated in the same manneras that applicable to
initial margins in accordance with Article 17, adjusted bythe
number of days in between, and including, the calculation date and
thecollection date; in case no mechanism for segregation is in
place between thetwo counterparties, these may offset the amounts
to be collected.
for derivative contracts subject to initial margin requirements,
where the initial (b)margin has been rescaled in accordance with
paragraph 5.
5. For the purpose of paragraph 4(b), initial margin may be
adjusted in one of thefollowing ways:
by increasing the margin period of risk ('MPOR') referred to in
Article 17(2) by (a)the number of days in between, and including,
the calculation date and thecollection date;
RISK-MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
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by increasing the initial margin calculated in accordance with
Article 15 by the (b)number of days in between, and including, the
calculation date and thecollection date adjusted using an
appropriate methodology.
6. The part of the collateral related to variation margin
referred to in paragraph 4(a)shall be collected in accordance with
Article 22.
6. 7. In the event of a dispute over the amount of variation
margin due for collection,
counterparties shall collect, in the same time frame as referred
to in this Article, atleast the undisputedpart of the variation
margin amount that is not being disputed.
Article 1 EIM - Initial14Calculation of initial margins
1. CounterpartiesA counterparty shall calculate and callthe
amount of initial margin in accordance with paragraphs 2and 3to be
collected using
either the standardised approach laid down in Article 1 SMI
(Standardised Method15(standardised approach) or the initial margin
models laid down in Articles 1 MRMto 6 MRMreferred to in Article 16
(initial margin models) or both.
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5. 6. In the event of a dispute over the amount of initial
margin due for collection,counterparties shall collect, in the same
time frame as referred to in this Article, atleast the
undisputedpart of the initial margin amount that is not being
disputed.
Section 4 - Margin methods
Where both of these approaches are used, the total initial
margin requirements for anetting set shall be the sum of the
initial margins calculated according to the twoapproaches.
2. The counterparties shall agree on the method each
counterparty uses to determine theinitial margin it has to collect.
Where one or both counterparties rely on an initialmargin model
they shall agree on the characteristics of the model and on the
data usedfor the calibration. referred to in Article 18.
Counterparties may use different methodsto determine the initial
margins they collect, and are not required to agree on acommon
methodology.
3. Counterparties shall calculate and collect the 3. The total
amount of initialmargins withinoneshall be calculated no later than
the business day
following one of these events:
whenwhere a new OTC derivative contract is executed or added to
the netting(a)set;
whenwhere an existing OTC derivative contract expires or is
removed from the(b)netting set;
whenwhere an existing OTC derivative contract triggers a payment
or a(c)delivery other than the posting and collecting of
margins;
when, underwhere the initial margin is calculated in accordance
with the(d)standardised method,approach and an existing contract is
reclassified in termsof the asset category referred to in Article 1
SMIparagraph 1 of Annex IV as aresult of reduced time to
maturity;
whenwhere no calculation has been performed in the preceding ten
business(e)days.
4. Initial margins shall be collected in one of the following
ways:
by collecting in cash, in accordance with point (a) of Article
22(2);(a)
by collecting non-cash collateral in accordance with Section
3,points (b) to (r) of (b)Article 22(2), subject to the haircuts
requirements referred to in Section 4.5 and thehaircut requirements
referred to in Section 6.
RISK MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
5. Initial margin shall be collected within the business day of
calculation.
RISK-MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
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SECTION 4APPROACHES FOR CALCULATING INITIAL MARGIN
Explanatory text for consultation
Respondents to the first Consultation Paper noticed that the
treatment of derivatives that
present no counterparty credit risk for one of the two
counterparties, such as short options with
the premium paid in advance, was not clear. Therefore, the new
Recital (6) under both the
standardised method and the initial margin models, the
counterparty that is not exposed to any
counterparty credit risk is allowed not to include those trades
in the initial margin calculations.
Article 1 SMI - 15Standardised Methodapproaches
Where counterparties apply the Standardised Methoda counterparty
uses the standardisedapproach, the initial margin for each netting
set shall be calculated in accordance with AnnexIV.
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Article 1 MRM - 16Initial margin models
1. AnWhere a counterparty uses an initial margin model may be:,
that model may 1.be developed by any of, or both, counterparties or
by a third party agent.
(a)developed by one of the two counterparties or jointly by the
two counterparties;
(b)provided by a third party agent.
2. Where a counterparty uses an initial margin model is
provideddeveloped by a2.third party agent, the counterparty
collecting the marginshall remain responsible forensuring
compliance of thethat that model complies with the requirements
referred toin this Section.
3. If an initial margin model ceases to comply with the relevant
requirements of thisSection, a counterparty using that model shall
calculate the initial margins to becollected using the Standardised
Method for all the netting sets for which therequirements are not
met.
4. At the request of one of the two counterparties the other
counterparty shall3.provide all the information necessary to
explain the determination of a given value ofinitial margin in a
way that a knowledgeable third party would be able
toreplicateverify the calculation.
Article 2 MRM - 17Confidence interval and margin period of risk
horizon
1. In order to qualify for the purposes of Article 1 EIM, theThe
assumed variations1.in the value of the contracts in the netting
set for the calculation of initial marginsusing an
RISK MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES initial margin model shall bebased on a one-tailed 99
percent confidence interval over a margin period ofriskMPOR of at
least 10 days.
2. The margin period of riskMPOR of a netting set for the
calculation of initial2.margins using an initial margin model shall
include:
the period that may elapse from the last collectionmargin
exchange of variation(a)margin to the default of the
counterparty;
the estimated period needed to replace the OTC derivative
contracts or hedge(b)the risks taking into account the level of
liquidity of the market where that typecontracts or risks are
traded, the total volume of the OTC derivative contracts inthat
market and the number of participants in that market.
RISK-MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
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Article 3 MRM - 18Calibration of the model
Initial margin models shall be calibrated based on historical
data from a period of at1.least three years and not exceeding five
years.
The data used in initial margin models shall include the most
recent continuous2.period from the calibration date and shall
contain at least 25% of data representativeof a period of
significant financial stress (stressed data).
Where the most recent data period does not contain at least 25%
of stressed data, the3.least recent data in the time series shall
be replaced by data from a period ofsignificant financial stress,
until the overall proportion of stressed data is at least 25%of the
overall data set.
The period of financial stress used for calibration shall be
identified and applied4.separately at least for each of the asset
classes referred to in Article 4 MRM 19(2).
The model shall be calibrated using equally weighted data.5.
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RISK-MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
10. Proxies shall be appropriately conservative and shall be
used only where available data isinsufficient or is not reflective
of the true volatility of an OTC derivative contract orportfolio of
OTC derivative contracts;
where the proxies lead to a conservative level of
margins.(a)
Article 4 MRM - 19Diversification, hedging and risk offsets
across underlying classes
The parameters may be calibrated for shorter periods than the
margin period of risk 6.and scaled upMPOR and adjusted to the
margin period of riskMPOR by anappropriate methodology.
The model shall be recalibrated at least every 12 months.
Counterparties shall have7.written policies which set out the
circumstances that would trigger an earlierrecalibration.
Counterparties shall establish procedures for adjusting margin
requirementsthe 8.margins to be collected in response to changing
market conditions. These proceduresmay allow each counterparty to
post the additional initial margin resulting from therecalibration
of the model over a period that ranges between one and thirty
businessdays.
The quality of the process relating to the data used in the
model shall be subject to a 9.process that ensures their qualityin
accordance with paragraph 1, including theselection of appropriate
data provider, the cleaning of the data and interpolation of
thedata, shall be ensured.
RISK MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
Proxies shall be used only where both of the following
conditions are met:10.
Explanatory text for consultation
Respondents to the first Consultation Paper commented that the
requirement to assign every
single trade to a specific asset class instead of calculating
all the sensitivities to the relevant risk
factors had two major drawbacks. First, the approach would have
been more restrictive than
the wording in the BCBS-IOSCO framework and, second, that this
would have implied a
substantial increase of the IM requirements. On the top of that,
operational processes would
need to change. In order to avoid unintended consequences and
with the intention to preserve
the overall principle of limiting the offset between
well-defined asset classes, the ESAs are
consulting on a new draft of the RTS that allows more
flexibility in the modelling phase which at
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produce unintended consequences concerning the design or the
implementation of
initial margin models.
3. The total initial margin requirements for a netting set shall
be the sum of initialmargin requirements calculated for the OTC
derivative contracts assigned to eachunderlying asset class within
the netting set.
Article 5 MRM - 20Integrity of the modelling approach
Initial margin models shall be conceptually and practically
sound and shall capture all1.the risk drivers that are material
forrisks arising from entering into the OTCderivative contracts
included in the netting set.
Counterparties shall estimatecalculate the initial margin to be
collected without taking2.
Initial margin models shall include only non-centrally cleared
OTC derivative1.contracts not centrally clearedwithin the same
netting set. Initial margin models may account fordiversification,
hedging and risk offsets arising from the risks of OTC
derivativecontracts that are in the same netting set. Initial
margin models may account for,provided that the diversification,
hedging andor risk offsetsoffset is carried out withinthe same
underlying asset class referred to in paragraph 2 and not across
such classes.
For the purpose of accounting for diversification, hedging and
risk offsets referred to 2.in paragraph 1, the following underlying
asset classes shall be considered:
interest rates, currency and inflation;(a)
equity;(b)
credit;(c)
commodities and gold;(d)
other.(e)RISK MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED
OTC DERIVATIVES
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3.3. Initial margin models shall meet the following
requirements:
the model shall incorporate risk factors corresponding to the
individual foreign(a)currencies in which the OTC derivative
contracts in the netting sets aredenominated;
the model shall incorporate interest rate risk factors
corresponding to the(b)individual foreign currencies in which the
OTC derivative contracts aredenominated;
for exposures to interest-rate risk in the major currencies and
markets, the yield(c)curve shall be divided into a minimum of six
maturity buckets;
the model shall capture the risk of less than perfectly
correlated movements(d)between different yield curves and between
different maturity buckets;
the model shall use a separate risk factor at least for each
equity or equity index(e)that is significant for the OTC derivative
contracts within the netting set;
the model shall use a separate risk factor at least for each
commodity or(f)commodity index which is significant for the OTC
derivative contracts withinathe netting set;
the model shall conservatively assessaccount for, in a
conservative manner, the(g)risk arising from less liquid positions
and positions with limited pricetransparency under realistic market
scenarios.;
the model shall capture the idiosyncratic risk for credit
underlyingunderlyings;(h)
the model shall capture the risk of less than perfectly
correlated movements(i)between similar, but not identical,
underlying risk factors and the exposure tochanges in values
arising from maturity mismatches;
the model shall capture main non-linear dependences.(j)RISK
MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC DERIVATIVES
4. The 4. A counterparty shall monitor the performance of the
model shall be monitored on a continuous basis; this.
The performance analysis shall include a comparison between the
risk measuresgenerated by the model and realized risk
measuresmarket value of the derivatives inthe netting set
(back-testing) every three months. The counterparties shall
retainrecords of the results of thisthat analysis.
5. Counterparties policies and 5. The risk management procedures
shall outline themethodologies used for
undertaking back-testing, including statistical tests of
performance.
RISK-MANAGEMENT PROCEDURES FOR NON-CENTRALLY CLEARED OTC
DERIVATIVES
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6. Counterparties 6. The risk management procedures shall
clearly identifydescribe what results of the back-testing shall
trigger
would lead to a model change, recalibration of the modelor other
remediation action.
7. 7. The modelling approach shall reflect the nature, scale and
complexity of the risks
inherent in the underlying OTC derivative contracts. The initial
margin model shallbe calibrated in a sufficiently conservative
manner such that aspectsreflect factors likeparameter uncertainty,
correlation, basis risk and data quality are properly capturedina
prudent manner.
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3.4. The counterparties shall maintain clear documentation
showing all changes to theinitial margin model and detailing the
tests performedresults of the validation carriedout after those
changes.
Section 5 - Eligibility and treatment of collateral
SECTION 5ELIGIBILITY AND TREATMENT OF COLLATERAL
Article 1 LEG - 22Eligible collateral for initial and variation
margin
Article 6 MRM - 21Qualitative requirements
1. Initia