EMIR aims to reduce systemic risks related to OTC derivatives markets and, from February this year, some corporates with OTC derivatives on their books have to have them cleared. So what do corporate treasurers need to know about the margin requirements for uncleared derivatives under the European Market Infrastructure Regulation (EMIR)?

Compliance has been one of the biggest workloads for the corporate treasurer in recent years but there doesn't seem to be much easing of regulatory pressure. From January 2018, several new standards and directives will come into effect (IFRS 9, MIFID II and PSD2) and corporates will have to stay on top of what these changes will mean for their payments and cash management practices. Another regulation that's getting a lot less airtime is the uncleared margin requirement under EMIR, which regulates derivatives, central counterparties and trade repositories in the EU. This came into effect from February this year (4 February 2017) and its aim is to reduce systemic risks related to over-the-counter (OTC) derivatives markets. The regulation mainly affects financial entities but some non-financial companies will also be required to comply (in particular: systemically important non-financial entities that engage in non-centrally cleared derivatives).

This means that some corporates with OTC derivatives on their books will now have to have them cleared if they fall into certain categories. According to the Financial Conduct Authority (FCA), “the margin requirements under EMIR require counterparties who are in scope to exchange margin on their OTC derivatives contracts that are not cleared through a central counterparty (CCP)”.

These requirements are subject to phase-ins that are based on firms’ categorisation and derivatives volumes. The phase-in for variation margin and initial margin began on 4 February 2017 for entities with group notional amount above €3 trillion. Further phase-ins for groups of other sizes will extend to September 2020 – more information is given on the FCA website.

According to the FCA, variation margin covers current exposure and is calculated using a mark-to-market position, while initial margin covers potential future exposure for the expected time between the last variation margin exchange and the liquidation of positions on the default of a counterparty.