Initial Margin - July 2021 Update

It has been a few months since our last update in February 2021 on the implementation of initial margin (“IM”). We set out below a few notable recent developments which market participants should be aware of:

• EU EMIR. The European Commission has recently adopted equivalence decisions for a few third country jurisdictions including Hong Kong and Singapore. On 5 July 2021, six new equivalence decisions adopted by the European Commission under EMIR were published in the Official Journal; these will enter into force 20 days following publication on 26 July 2021. These equivalence decisions relate to various aspects of the margining and other risk mitigation techniques for uncleared OTC derivatives under six third country jurisdictions (namely, Australia, Brazil, Canada, Hong Kong, Singapore and the US prudential regulators). See here for further details on these equivalence decisions. Of more relevance to Asian counterparties, with respect to a counterparty pair comprising an entity subject to HKMA margin rules or MAS margin rules and a counterparty subject to EMIR margin requirements, the EU counterparty may rely on these equivalence decisions and comply with HKMA or MAS margin requirements (as the case may be) instead of EMIR margin requirements, subject to any requirements on scope and conditions.  
• UK EMIR. For those counterparties to which UK EMIR may be relevant, it should be noted that the Prudential Regulation Authority and the Financial Conduct Authority amended the binding technical standards (BTS) in the UK onshored version of Commission Delegated Regulation (EU) 2016/2251 effective on 30 June 2021.  The BTS is now aligned with the changes made to the EU Margin RTS earlier this year as regards:
  - Relief from VM for physically settled FX swaps and forwards (except between “institutions”)
  - Timing for phase-in of IM
  - Transitional relief from margining for equity options
• Taiwan counterparties. More and more counterparties will be in-scope of IM in Phase 5 and Phase 6. Global dealers that will be required to exchange IM with Taiwan counterparties should be aware of the local regulatory requirements applicable to certain types of Taiwan counterparties (e.g. insurance companies) and how that may affect the taking of security over IM collateral. Margin rules implemented for the various jurisdictions may contain certain exemptions and it is worth exploring whether these may be relied upon.
• Mainland Chinese counterparties. Although China has yet to implement any margin requirements for non-centrally cleared derivatives, a number of Mainland Chinese financial institutions have had to prepare for Phase 5 and 6 implementation of IM by reason of trading with foreign counterparties subject to margin requirements in their own jurisdictions. Since China is generally considered by the market as a non-netting jurisdiction, interesting issues arise under US and EU (and also the UK onshored version) margin rules. EU margin rules (and the UK onshore version) provide certain exemptions to EU (and UK) counterparties trading with third country counterparties from posting and collecting IM on in-scope transactions where the legal enforceability of netting and/or segregation agreements in the relevant third country could not be confirmed. The application of such exemptions is nuanced and subject to conditions. Such exemptions are only available in any event if the notional outstanding amounts of transactions for which no collection is made do not exceed a very small proportion (2.5 per cent.) of the OTC derivatives transactions of the EU (or UK) group. Under US margin rules, counterparties will have to consider how or whether IM may have to be collected on a gross / net basis.
• Korean counterparties. ISDA has recently published the 2021 Korean Law Security Agreement for Initial Margin (IM) and the KRW Collateral (IM) Addendum for use with the ISDA 2019 Collateral Transfer Agreement for Initial Margin (IM). Counterparties wishing to use Korean collateral for IM should note these recent publications and consider any repapering exercise required.

Linklaters acted as drafting counsel to ISDA on the "Next Generation" IM documentation and has developed for ISDA an online negotiation tool for IM - “ISDA Create”. We have also been working with numerous Asian clients in this area, and we would be happy to assist you with your IM implementation efforts. For a list of FAQs, click "read more" below.