EU Watchdogs Back Delay To Global Derivatives Rules

By Najiyya Budaly
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Law360, London (May 5, 2020, 12:40 PM BST) -- European Union regulators have amended the bloc's securities rules to give finance companies that trade non-centrally cleared derivatives an extra year to accumulate greater reserves, after global standard setters pushed back the deadline amid the coronavirus crisis.

The European Supervisory Authorities said Monday that they have amended rules for non-centrally cleared over-the-counter derivatives under the European Markets Infrastructure Regulation, which was adopted in 2012 to strengthen the market for over-the-counter derivatives.

The amendment will mean that so-called margin requirements will become effective in September 2021 for European Union companies holding more than €50 billion ($54 billion) of derivatives that are not put through clearing houses, rather than this September, the original deadline.

The margin rules will hit companies holding more than €8 billion of non-centrally cleared derivatives in September 2022.

Initial margin requirements force participants in a non-centrally cleared derivatives contract to hold collateral when they enter into a trade to cover credit risks. The Basel Committee on Banking Supervision and the International Organization of Securities Commissions have announced a global delay to the rules so that the financial sector can concentrate on keeping afloat during the pandemic.

The ESAs — the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority — said their Monday amendments will "incorporate in the EU regulatory framework the one-year deferral" agreed by the global bodies.

"The ESAs have intensified their coordination with national competent authorities, as well as with relevant authorities from other jurisdictions in order to ensure adequate regulatory actions where needed during this crisis," the EU authorities said.

The European Commission must endorse the final rules before they are legally binding, the supervisory authorities added.

The initial margin requirements are designed to ensure there is a buffer, which can be liquidated quickly, to protect against potential losses following a change in value of a derivative position.

The Group of 20, an international forum for economic policymakers, proposed the requirement in the aftermath of the 2008 financial crisis to protect the over-the-counter derivatives market.

The G-20 pushed for the majority of over-the-counter derivatives to be cleared through central counterparties, or CCPs. The group also proposed tighter rules for non-centrally cleared OTC derivatives to reduce risks to the market, calling on the Basel Committee and IOSCO to develop them.

The delay to the rules came after global standard-setters for banks, insurers and other financial services urged regulators to hold off the new regime in March.

--Additional reporting by Lucia Osborne-Crowley. Editing by Ed Harris.

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