EACT Response to ESMA/EBA/EIOPA discussion paper on risk mitigation techniques for OTC derivatives

05 April 2012

The crucial areas covered by the document concern the potential requirements for collateral on OTC derivative transactions by corporates where the corporate concerned is above the 'clearing threshold' and the contracts cannot be cleared through a CCP.

The European Association of Corporate Treasurers (EACT) has responded to the discussion paper from ESMA/EBA/EIOPA on risk mitigation techniques for OTC derivatives. EACT makes two particularly important points: that there appears to be a fundamental inconsistency in the regulatory suggestion that banks should not be allowed to take a limited credit position on their OTC derivative activity with corporates, whilst banks are at the same time free to take credit risk through their lending activities; and that it is strongly opposed to a one-way exchange of collateral between the banks and corporates.

EACT wishes to make certain points very strongly in the context of this important discussion paper:

• There appears to be a fundamental inconsistency in the regulatory suggestion that banks should not be allowed to take a limited credit position on their OTC derivative activity with NFCs, whilst banks are at the same time free to take credit risk through their lending activities with the same NFCs. EACT is comfortable that the regulatory capital requirements will appropriately address capital needs to support all credit exposure to NFCs.
• EACT is strongly opposed to a one-way exchange of collateral between the banks and NFCs, which if enacted would unfairly weaken the ability of NFCs to negotiate with counterparties.
• It is essential that in defining acceptable collateral the discussion recognises that the need for a broad definition of collateral is vital for the prudent management of NFCs.

Full response

Discussion paper

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