European financial regulators have proposed ending initial margin requirements for both new and existing uncleared derivatives contracts for counterparties whose average derivatives exposure falls below the €8 billion threshold under the European Market Infrastructure Regulation (EMIR).

The European Supervisory Authorities, comprising the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and European Securities and Markets Authority (ESMA), published their final report on draft Regulatory Technical Standards (RTS) earlier this month.

The proposals are aimed at simplifying bilateral margin rules and reducing the regulatory burden on counterparties below the €8 billion threshold for exchanging initial margin.

Under the current framework, counterparties below the threshold are exempt from exchanging initial margin on new over-the-counter (OTC) derivative contracts that are not cleared through a central counterparty, but can still be required to continue exchanging initial margin on contracts already in place.

The proposed amendments would remove that distinction, meaning counterparties that fall below the threshold would no longer have to exchange initial margin on either new or existing contracts.

The European Supervisory Authorities said the change would also bring the European framework into greater alignment with approaches used in other jurisdictions.

The rules concern bilateral derivatives transactions, which are contracts traded directly between two counterparties rather than cleared through a central counterparty.

Commission Delegated Regulation (EU) 2016/2251 sets out the technical requirements for managing risks arising from OTC derivatives that are not centrally cleared, including the amount and type of collateral counterparties must maintain and the arrangements governing its segregation.

The regulation currently allows counterparties to make use of a derogation from the collection of initial margin for all new OTC derivative contracts entered into during a calendar year if one of the two counterparties has an aggregate month-end average notional amount (AANA) of non-centrally cleared OTC derivatives below €8 billion.

The calculation is based on the counterparty’s average notional amount for March, April and May of the preceding year.

The proposed RTS would extend that derogation to existing contracts, addressing what the regulators described as practical problems arising from the current rules.

Under the existing system, a counterparty can fall below the €8 billion threshold while still being required to exchange initial margin on derivatives contracts that were entered into before the threshold was reached.

The proposed change would simplify the treatment of counterparties once one of the parties falls below the threshold, removing the need for different margin arrangements to apply to existing and new contracts.

The European Supervisory Authorities said the amendments followed requests from market participants and formed part of their wider effort to simplify financial regulation and reduce unnecessary burdens.

The proposed changes are also intended to make the treatment of smaller counterparties more consistent with regulatory approaches in other jurisdictions, where falling below the relevant threshold can result in relief covering existing as well as new contracts.

The final report has now been submitted to the European Commission, together with the draft RTS, for endorsement.

The European Commission will review the proposals and decide whether to adopt them as part of the regulatory process.

If adopted, the RTS will then be subject to scrutiny by the European Parliament and the Council of the European Union.

The rules will only take effect after that process has been completed and the RTS have been published in the Official Journal of the European Union.