ESAs publish Technical Standards for OTC derivatives


10 March, AtoZForex, Lagos – European regulators have introduced new developments to the industry, regarding margin technicalities for OTC Derivatives. The new developments were published by the ESAs, that is the Joint Committee of the European Supervisory Authorities (EBA, EIOPA, ESMA). This represents the final draft for Regulatory Technical Standards (RTS), which is meant to be outline framework related to the European Market Infrastructure Regulation (EMIR). The major focus of the publication is to cover the risk mitigation approaches in connection with the exchange of margin collateral to mitigate against exposure that arises from non-centrally cleared derivatives (i.e. traded over-the-counter ) in OTC markets.

Promotion of a safer derivatives market

The Joint Committee of the European Supervisory Authorities (EBA, EIOPA, ESMA) also emphasized upon the criteria related to intra-group exemptions. They detailed the definitions of practical and legal impediments, which could arise during transfer of funds between counter-parties. These standards are intended to promote a safer OTC derivatives markets in the EU region. Also to provide technical standards across derivatives not centrally cleared by a CCP. The report also pointed that “counterparties have to exchange both initial and variation margins, and other regulatory standards were outlined to help reduce counterparty credit risk.”

See also: ESMA readies MiFID II, MAR, and CSDR

Major focus

All in all, the major goal of the technical Standards for OTC derivatives is to mitigate against potential systemic risk, as well as to ensure operations in accordance with international standards. It also helps to clearly highlight the eligible collateral for the exchange of margins, as well as to ensure that such collateral is sufficiently diversified. So as to avoid collateralization which are subject to wrong-way risk, as well as the methods to determine appropriate collateral haircuts.

Hence, the major points in this document is regarding of the diversification of collateral to avoid wrong-way risk, also methods to determine collateral haircuts, as well as an outline of operational procedures and administration including agreement enforce-ability and timeframe for collateral exchanges. Last but not the least, this draft highlights how counterparties and the relevant authorities involve will look into the handling of intragroup derivatives contracts.

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