EMIR: Exchange of collateral for uncleared OTC derivatives


On 15th December 2016, the European Commission published the delegated regulation of 4th October 2016 on over-the-counter derivatives and established a requirement to exchange variation and/or initial margins on OTC derivatives not cleared by a central counterparty. 

Kais Haj Taieb

This regulation requires counterparties to uncleared OTC derivatives transactions to: 

- exchange collateral in the form of variation margins

- the case of the largest market counterparties, to exchange an initial margin. 

The Variation Margin (VM) is the guarantee collected by a party on a regular basis to reflect changes in the market value of outstanding contracts.

The Initial Margin (IM) is the guarantee collected by a counterparty to cover its current and potential future exposure between the last margin exchange and the liquidation of positions after the counterparty's default or the hedging of this exposure.

The requirement to exchange variation margins is applicable to the largest market counterparties since 4th February 2017 and to all counterparties since 1st March 2017. The new rules also require the update of contract documentation (around 160,000 documents in Europe).

However, given the risk of derivative traders not meeting this deadline, the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and European Securities and Markets Authority (ESMA) released a statement on 2nd March announcing that they would leave it to the competent national authorities to assess the extent of market participants' readiness on a case by case basis.

Implementation of initial margin requirements will be gradual over 2017 and up to 2020 for counterparties whose group AANA* on OTC contracts exceeds certain thresholds (see below).

Under certain conditions, when OTC derivative transactions are concluded, issuers of covered bonds or covered pools are not required to provide or receive the IM or VM.

Stock options and single-stock index options are exempted from these requirements for three years. Some exceptions may also apply to intra-group transactions.

"CACEIS has considerable experience in collateral management with a large number of counterparties, and is doing its best to help its clients satisfy these new requirements. To meet initial margin requirements, we have adopted ISDA's standard initial margin model (SIMM) for un-cleared derivatives", said Kais Haj Taieb, Group Product Manager.

CACEIS offers a comprehensive range of flexible services. This solution fully meets EMIR requirements, while taking into account the clients' business and operational needs