In 2009, the G20 Leaders initiated a reform programme of the over-the-counter (OTC) derivatives markets. In particular, a number of measures were agreed to enhance the transparency and regulation of OTC derivatives, including mandatory central clearing. However, mandatory clearing requirements are only intended to capture standardised OTC derivatives. Non-standardised products will thus continue to be non-centrally cleared and will remain subject to bilateral counterparty risk management.

In 2011, the G20 Leaders agreed to add margin requirements on non-centrally-cleared derivatives to the reform programme. These requirements are expected to further mitigate systemic risk in the derivatives markets. In addition, the G20 believes it would encourage standardisation and promote central clearing of derivatives by reflecting the generally higher risk of non-centrally-cleared derivatives. The consultative paper published jointly by the BCBS and IOSCO lays out a set of high-level principles on margining practices and treatment of collateral, and proposes margin requirements for non-centrally-cleared derivatives.

These policy proposals are articulated through a set of key principles that primarily seek to ensure that appropriate margining practices will be established for all non-centrally-cleared OTC derivative transactions. These principles will apply to all transactions that involve either financial firms or systemically important non-financial entities.

The AMIC Executive Committee believes that the consultation paper is key to the development of the market, and also felt that it would shape the market for the buy-side. In addition to specific and technical responses to the questions posed by the paper, AMIC members made some general comments that they hope will be taken into consideration:
  • As provided for in EMIR regulation in Europe, existing derivative instruments should not be retroactively concerned by new regulation as their economic conditions may just be impossible to maintain with the constraint of a collateral; a grandfathering clause is absolutely necessary to exempt existing transactions from collateral requirements even in case of reset lowering risk (to clear excess counterparty risk or to diminish notional amount, for example).
  • There may be a rush of all stakeholders on collateral due to the fact that all operations will have to be collateralised at once and to a higher degree than eventually required, simply by lack of recognised CCPs. A staged implementation calendar is therefore required.
  • The current wider regulatory agenda is requiring ever more (high quality) collateral, at a time when there is the downgrade of a substantial part of previously reasonable good collateral, and it is widely perceived that the market will suffer from a shortage of high quality collateral.
  • A broad universe of assets as eligible collateral is therefore needed.
  • An international framework is desirable to avoid market fragmentation and regulatory arbitrage.

13 August 2015
AMIC responds to European Commission consultation on central clearing of OTC derivatives

ICMA’s AMIC has submitted a response to the European Commission’s consultation on the review of the European Market Infrastructure Regulation (EMIR). AMIC members have only expressed interest in certain aspects of the review: (1)the functioning of the clearing obligation in the areas of frontloading and risk compression; (2) trade reporting; and (3) the functioning of the pension scheme arrangement (PSA) transitional exemption from the clearing obligation.

To view the response, please click here.

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