We are back after a short break for the summer.
Last week, the UK’s Financial Conduct Authority published this research note into the thresholds used in EMIR for Financial Counterparties (FC) for two purposes:
- The threshold used to determine when smaller FCs need to start mandatory clearing.
- The threshold used for the start of the Initial Margin (IM) requirements for the Uncleared Margin Rules (UMR).
Mandatory clearing is already in force for “Category 1 and 2” FCs, for products covered (currently some Interest Rate and Credit products). The start of mandatory clearing for Category 3 firms, the smaller FCs with outstanding Gross Notional Value of derivatives is below 8bn EUR, has been postponed until next year. Non Financial Counterparties over the clearing threshold (NFC+) are “Category 4”. The study shows that the majority of activity and inter contentedness is borne by a small number of larger firms. Therefore there is an argument made that smaller FCs should be exempt from mandatory clearing, and there is also one made that the thresholds used should be the same as for NFCs. There has been a great deal of concern expressed by smaller FCs about access to clearing.
The IM requirement part of the UMR is also in the process of being phased in, with the smallest counterparties subject to it (FCs under 8bn EUR and NFC+s) coming in 2020. The study shows that the final stage in 2020 brings in a large number of small counterparties, which once again could have an effect on the market that is not commensurate with the level of inter connectedness.
In the energy and commodities sector, many market participants are “NFC-“, and would thus not be impacted by this study. Never the less, some of the entities in question are FC, and also NFC+, and may be subject to a status change ion future for a variety of reasons. The re-calibration proposed here would reduce the impact of such a status change.
This article on the Finance Feeds web site by Maria Nikolova also summarises the paper.