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Mandatory two-way Initial Margin (IM) posting should be reconsidered in view of the serious negative effects that this would have. A better and equally effective approach would involve exemptions, the exchange of Variation Margin (VM), regulatory capital requirements, larger thresholds and only one-way IM where one of the counterparties is not prudentially supervised. In addition we assume that the posting of IM results in an equivalent reduction in capital in order to avoid double counting counterparty risks and exacerbating a liquidity drain. This should be made more explicit in the proposal.
EBF supports a full exemption from margin requirements for physically-settled FX forwards and swaps. The FX markets should not be subject to significant margin requirements that might interfere with a market that is already transparent, liquid, and has a well-functioning settlement process.
Re-hypothecation should be allowed for both VM and IM. Without the possibility of rehypothecation, liquidity will be strongly impacted and raise transaction costs and potentially funding levels for end users. Legal differences need to be recognised and fully understood:
Requirements or exemptions must not presuppose a specific legal system but be open enough in order to prevent competitive disadvantages.