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Initial Margin requirements for OTC derivatives, not being cleared by a CCP, are neither requested by G20 nor under EMIR. ALFI deems it very laborious and expensive, if possible at all, implementing Initial Margins for OTC derivatives, not being cleared by a CCP. Due to the differing national property- and insolvency laws, it is not clear how a segregation in the manner described by the ESAs shall be realised at all. Due to the expected operationally and monetarily efforts, the ESAs should reconsider if the counterparty risks to be covered by Initial Margins could instead by considered by allowing market participants to apply a haircut higher than the minimum haircut on collateral, as determined by the ESAs.
The ESAs also should consider the specifics of regulated investment funds with regards to the range of collateral eligible for OTC derivatives, not being cleared by a CCP. According to the already existing regulations, regulated investment funds such as UCITS only have very limited access to assets being eligible as collateral, Furthermore, differing from banks, regulated investment funds are not allowed to post collateral received from their counterparty as collateral to a third party. If the ESAs limit the range of assets eligible for collateralisation, regulated investment funds might become unable to hedge existing risks or might consider purchasing other instruments like warrants and certificates subject to an issuer risk which cannot be collateralised. Therefore any limitation on collateral might provoke new risks, currently not existing. It is recommended that the regulator does not treat on the same level UCITS and other types of counterparties when it comes to margining requirements. It should consider the limitations already applicable to regulated investment funds, e.g. by drafting solutions like allowing regulated investment funds to net counterparty exposures arising from OTC derivatives in order to reduce the total of collateral to be posted by a regulated investment funds (which would not lead to an increased counterparty risk).
Consistency across various regulations
ALFI has to express concerns around the coordination across the various regulations that will impact investment funds and their investments in OTC derivatives. The regulator should make sure there are no overlap or contradictory rules in the various regulations. It is also questioned how global regulations will co-exist with some local regulation that already deals with collateral requirements for UCITS.
Margin calculation method
ALFI recommends applying consistent methods across the various participants to avoid any confusion and arbitrage in the margining process. UCITS should be treated as a specific category of counterparties and benefit from low risk ratings when it comes to posting margin to sell side institutions.
ALFI seeks clarification on how EMIR will work together with the US regulation on OTC derivatives, the so-called Dodd-Frank Act Title VII. There is a strong recommendation to agree with US regulators on cross border impacts of the different rules before finalising the RTS for EMIR.
Regarding operational practice around collateral management, the industry has developed several legal and operational practices that should be leveraged as much as possible in the preparation of the new rules. It is recommended to avoid systematic daily exchange of collateral by allowing appropriate minimum transfer amounts.