A buy-side trade association has hit back at two critical areas of new rules for non-cleared OTC derivatives, recommending changes in the legislation.
The challenge was issued to the consultation paper from the European Supervisory Authorities (ESAs) on its draft regulatory technical standards for non-centrally cleared OTC derivatives.
The standards lay out new rules around margin requirements for the non-standardised products in a bid to reduce systemic risk. As part of the G20 requirements, all non-centrally cleared OTC derivatives have to be subject to higher capital requirements.
ICI Global, an affiliate of the Investment Company Institute, has highlited two aspects of the regulation it believes are not consistent with international standards.
These are the collection of margin and the application of the threshold for initial margin.
The group has subsequently suggested five recommendations to regulators in order to meet international standards set by the International Organization of Securities Commissions (IOSCO).
“We also believe certain modifications are necessary to the RTS to make them consistent with international standards and more workable for market participants,” said ICI Global in its letter to ESAs, which is comprised of the European Banking Authority, European Insurance and Occupational Pensions Authority and European Securities and Markets Authority.
Among the recommendations was that EU entities to post and collect initial and variation margin when transacting with non-EU counterparties as well as with EU counterparties and that the RTS should not require counterparties to take a capital charge if they do not collect margin below the initial margin threshold.
ICI also pointed out that models should be developed by one counterparty for initial margin to be transparent to, and replicable by, the other counterparty, while also suggesting a phase in period.
Finally the group asked ESAs not to impose a concentration limit for sovereign debt issued by certain countries that is both highly liquid and high quality.
The framework could come into force on 1 December 2015, with requirements only applying to the largest market participants.
The requirements will be expanded to more market participants and from 1 December 2019, any counterparty belonging to a group that exceeds a threshold of €8 billion will be covered.