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Critics argue the draft rules – which are the EU version of internationally agreed standards on compulsory bilateral margining - will result in third-country corporates shunning European banks. "It is absurd and would effectively disincentivise third-country non-financial entities from trading with EU counterparts," says one derivatives risk manager at a US bank in New York. "It is fairly obviously not acceptable," says a risk manager at a UK bank in London. "The bicycle exporter from Mexico may now have to swallow variation margin and possibly initial margin posting as well."
Corporate swaps users typically do not post collateral because many do not have the cash required to handle large potential swings in the mark-to-market value of the trades. In Europe and the US, this has resulted in an exemption for corporate hedgers from new clearing rules. The exemption is copied across for Europe's draft rules on the margining of non-cleared trades – published on April 14 by the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority – but it only applies to EU corporates. Under the terms of the clearing exemption contained in the European Market Infrastructure Regulation (EMIR), non-financial counterparties (NFCs) do not have to count hedging transactions towards the threshold that triggers the requirement to use a central counterparty (CCP) for clearing-mandated trades.
A so-called NFC-minus – a non-financial company operating below the threshold – is also not subject to the bilateral margining rules as long as it is incorporated in the EU. But the rules state that EU entities would have to collect margin from all third-country entities, "even from those that would be classified as non-financial entities below the threshold if they were established in the EU".
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