In April, the European Securities and Markets Authority (ESMA) specified risk mitigation requirements for non-cleared OTC derivative contracts for both financial institutions and non-financial counterparties (primarily corporates). EU corporates are generally exempt from posting initial and variation margins on their OTC derivatives if their outstanding positions are below a threshold of US$8 billion.

However, EU banks would have to collect margins from all third-country entities "even from those that would be classified as non-financial entities below the threshold if they were established in the EU", the draft rules continue. Large corporates outside the EU, including Asia, could therefore be subject to margin requirements if dealing with EU banks for OTC derivative transactions, starting 2019 at the latest. Treasury centre subsidiaries of European corporates outside of the EU that enter such transactions themselves would also be affected.

Association of Corporate Treasurers comments

Most companies if in the NFC- category are not required to clear derivatives, but NGC+ or financial counter-parties who are required to clear and find they cannot because no CCP accepts the derivative in question instead have to put up margin. The UK’s ACT has pointed out one anomaly in the rules around margin, as proposed by ESMA, namely that any EU bank dealing with a non-EU party who would fall in the NFC- category will have to collect margin on those transactions, making it most unlikely that any non-EU NFC- will ever wish to deal with a European bank, in effect blocking European banks from this line of business.

European Association of Corporate Treasurers comments

The EACT, a grouping of national associations representing treasury and finance professionals in 18 countries of the European Union, in their response very much welcome the fact that NFC-‘s 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 counter-parties in order to hedge their risk are not systemically risky and are an important risk management tool for the real economy. However, we would like to make two comments on the topic: 

• the obligation under Article 2(4b) for NFC-‘s to explicitly opt out (by written or equivalent agreement) from margining requirements increases the operational and administrative burden for NFC-‘s. 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 NFC-‘s.
• we believe that this provision should be extended to NFC-‘s located outside the EU as under the proposed rules EU banks would be obliged to collect margin from their non-financial counter-parties if they are located outside the EU, even if these counter-parties 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 NFC-‘s cannot be considered systemically significant for the financial system, therefore we would be in favour of an exemption for all NFC-‘s for the margin requirements. 

They also commented on Article 1 REU - Treatment of collected initial margin:

• We believe it would be helpful if for non-financial counterparties subject to the margin requirements re-hypothecation of collateral was be permitted on a contract by contract basis; this would give some flexibility to non-financial companies in order to preserve liquidity needed in the conduct of their business activities.

And on: Procedures concerning intra-group derivative derivative contracts:

• We support the proposed exemption from initial margin for physically-settled FX swaps and forwards and currency swaps (option 1). This seems to be a very sensible approach in terms of achieving global consistency and also avoiding unnecessary burden on different stakeholders using these instruments. 

---

CTMfile take: This lobbying is a great example of why the cash and treasury management business needs treasury associations to calm the ill-informed enthusiasm of the regulators.