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Article (92/259)
The collateral management challenge in Europe
The collateral management challenge in Europe

The collateral management challenge in Europe


European regulation on derivatives and collateral represents a challenge in 2017 for institutional investors and financial institutions. March 2017 was a key milestone as it introduced the mandatory daily variation margin exchange. As always with major regulatory change, the main challenge for market participants was to identify the key modifications required and to efficiently implement these. 

Margin rules for non-cleared derivatives: what are EMIR’s provisions (European Market Infrastructure regulation)?

The European Market Infrastructure Regulation (EMIR) is the central regulation to impact derivatives markets in 2017. Market participants have -or will have- to comply with the new requirements summarised below:

Daily variation margin (VM) to be exchanged between entities (excluding NFC- or Non-Financial Counterparties below the clearing threshold)

  • On all over-the-counter derivatives from 1 March 2017 with some special exemptions
  • Delayed application until 2018 for physically settled forex forwards
  • Three-year temporary exemption for equity options (single stock and index)
  • Zero threshold

Initial margin (IM) to be exchanged between entities (excluding NFC-) subject to breach of a notional threshold by both entities

  • Phased-in entry into force from 3 February 2017 to 1 September 2020
    • Exemptions for physically settled Forex forwards, swaps and principal exchange of cross-currency swaps
    • Three-year temporary exemption for equity options (single stock and index)
  • IM calculation according to standardised approach or internal method
  • Segregation and no re-use of IM which should be subject to counterparty bankruptcy-remote arrangements
  • Threshold: EUR 50 million applied at consolidated group’s level

Treatment of collateral as defined by the new rules

  • Minimum transfer amount (MTA) which should not be higher than EUR 500,000
  • Collateral to be “provided” on same day as the margin call, when no IM is exchanged between counterparties
  • 8% cross-currency haircut to be applied to non-cash variation margin and to initial margin (cash and non-cash)
  • Daily and two-way margining processes

These new rules will apply to contracts dealt after entry into force of the above requirements or to contracts subject

to material economical amendments and dealt after entry into force of the above requirements.

Read more on EMIR developments in 2017

Variation margin: identifying your contractual and operational challenges

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Click to enlarge

Initial margin and variation margin: key milestones in the EU

EMIR implementation timeline for initial and variation margins
EMIR scope of transactions

Collateral Access, our solution

Implementing new margin rules for uncleared OTC derivatives requires a strategic approach with the involvement of many teams across financial institutions’ organisations. In addition to higher collateral demand, operational complexity and collateral protection necessitate a closer look.

We have been providing collateral solutions through our Collateral Access suite of services since 2010. As an experienced provider of collateral services, we can help you navigate new rules and complex implementation to ensure you are fully compliant. We work closely with the industry and clients to anticipate the impact of new regulations and provide efficient answers to the market in the face of change.


Read more: Asia Pacific: the Collateral  Challenge


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