European investment associations make urgent call for action on Equity Options margining
Without timely ESA action before the January 4 deadline, EU market participants would have to comply with bilateral margining requirements, including the exchange of variation and initial margin. This would necessitate the establishment or amendment of Credit Support Documentation and segregated initial margin accounts, posing significant legal and operational challenges, especially for small buy-side participants. The requirement might also deter non-EU clients, particularly in the U.S., from trading with EU banks/dealers to avoid compliance complexities.
The Alternative Investment Management Association (AIMA), European Association of Co-operatives Banks (EACB), European Banking Federation (EBF), European Fund and Asset Management Association (EFAMA), International Swaps and Derivatives Association (ISDA), Invest Europe, Managed Funds Association (MFA), and Nordic Securities Association (NSA) – collectively referred to as ‘The Associations’ – have issued a critical appeal regarding the impending expiration of the temporary exemption from margin requirements for single-stock equity options or index options.
This exemption, integral to the regulatory technical standards (RTS) on risk mitigation for OTC derivative contracts not centrally cleared, is due to lapse on January 4, 2024.
The European Supervisory Authorities (ESAs) requested in June 2023 (ESA 2023 11 – ESAs Letter on EMIR bilateral margining framework and equity options) that EMIR 3 should clarify the permanent treatment of equity options.
In response, the co-legislators have signaled an intention to establish a non-time-limited exemption from bilateral margining for these products. The Associations are advocating for the ESAs to publish guidance to national authorities for a proportionate, risk-based supervisory approach to equity options from January 4, 2024, until EMIR 3 takes effect, or to extend the temporary exemption until the amended RTS is in force.
EU’s compromise proposal on EMIR 3 includes permanent exemption for equity optoins
The European Parliament’s compromise proposal on EMIR 3, expected to be approved by ECON on November 27, 2023, includes a permanent exemption for equity options.
This proposal mandates the European Securities Market Authority (ESMA) to monitor the exemption’s impact on financial stability and regulatory developments globally, submitting a report to the Commission biennially. The Commission would then assess the need to remove the exemption based on international convergence on equity options treatment.
Similarly, the Council’s compromise text dated October 20, 2023, aligns with the Parliament’s stance, requiring regular monitoring and reporting by ESMA, in cooperation with the European Banking Authority (EBA) and European Insurance Occupational Pensions Authority (EIOPA).
The assessments focus on regulatory developments and the evolution of EU counterparties’ exposures to uncleared equity options, with the Commission empowered to remove the exemption post an adaptation period.
Impact of temporary bilateral margining requirements
Without timely ESA action before the January 4 deadline, EU market participants would have to comply with bilateral margining requirements, including the exchange of variation and initial margin.
This would necessitate the establishment or amendment of Credit Support Documentation and segregated initial margin accounts, posing significant legal and operational challenges, especially for small buy-side participants.
The requirement might also deter non-EU clients, particularly in the U.S., from trading with EU banks/dealers to avoid compliance complexities.
To prevent market disruption, The Associations urge the ESAs to provide market certainty as soon as practicable.
About The Associations:
AIMA: The global representative of the alternative investment industry, with over 2,100 members managing more than US$2.5 trillion in assets.
EACB: The voice of cooperative banks in Europe, representing 26 member institutions with an extensive network across the EU.
EBF: Represents the European banking sector, uniting 33 national banking associations with about 3,500 banks.
EFAMA: The voice of the European investment management industry, managing over EUR 30 trillion globally.
ISDA: Since 1985, ISDA has aimed to make global derivatives markets safer and more efficient, with over 1,000 members from 77 countries.
Invest Europe: Represents Europe’s private equity, venture capital, and infrastructure sectors and their investors.
MFA: Based in Washington, DC, New York, Brussels, and London, MFA represents the global alternative asset management industry.
NSA: A Nordic cooperation promoting a sound securities market in the Nordic region.