EACT responds to consultation on draft RTS on OTC-derivative contracts

14 July 2014

EACT believe it would be helpful if for non-financial counterparties subject to the margin requirements re-hypothecation of collateral was permitted on a contract by contract basis, giving flexibility to non-financial companies in order to preserve liquidity.

EACT welcomed the fact that NFCs are exempted from the initial and variation margin requirements; this is in line with the recognition under EMIR that OTC derivative transactions made by non-financial counterparties in order to hedge their risk are not systemically risky and are an important risk management tool for the real economy. However, EACT makes two comments:

• The obligation under Article 2(4b) for NFCs to explicitly opt out(by written or equivalent agreement) from margining requirements increases the operational and administrative burden for NFCs. We would strongly prefer to reverse the logic of the obligation and instead have an "opt-in" method whereby by default no margin requirements apply to NFCs.
• This provision should be extended to NFCs located outside the EU as under the proposed rules EU banks would be obliged to collect margin from their non-financial counterparties if they are located outside the EU, even if these counterparties are below the clearing thresholds, which would lead to an inconsistent outcome at global level. For EU based non-financial companies this would mean that their non-EU group companies would no longer deal with group-approved EU banks and their business would be directed elsewhere. The exposures towards NFCs cannot be considered systemically significant for the financial system, therefore we would be in favour of an exemption for all NFCs for the margin requirements.

 

Full EACT response

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