EMIR Newsflash: FCA grant regulatory forbearance from VM for physically-settled FX forwards

A brief summary of the FCA statement granting regulatory forbearance from the exchange for variation margin for physically-settled FX forwards.

On 08 December 2017, the UK Financial Conduct Authority (FCA) released a statement granting regulatory forbearance in respect of the 03 January 2018 deadline for the exchange for variation margin (VM) for physically-settled FX forwards.

This follows the statement at the end of November from the European Supervisory Authorities (ESAs), in which the ESAs indicated that they would be proposing amendments to the EU margin rules to exempt physically-settled FX forwards.

In this very welcome statement, the FCA indicates that, although the details of the amendments to the EU margin rules to be proposed by the ESAs are not yet known, it will not in the meantime require market participants whose physically-settled FX forwards are likely to be outside the scope of the amended rules to continue putting processes in place to exchange VM.

The FCA statement is set out in full below:

Variation margin requirements under EMIR for physically settled FX forwards

On 24 November 2017, the European Supervisory Authorities (ESAs) issued a statement on the variation margin requirements under EMIR for physically settled FX forwards. They confirmed they are in the process of reviewing, and proposing amendments to, the Regulatory Technical Standards (RTS) on risk mitigation techniques for OTC derivatives not cleared by a central counterparty. The ESAs indicated that the changes will look to align the treatment of physically settled FX forwards with the supervisory guidance applicable in other jurisdictions.

We support the ESAs’ statement. They recommend competent authorities “generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in a proportionate manner”.

The amendments to the RTS should become increasingly clear over time and we would expect firms to make their plans as a result. Although how they will be amended is not completely clear at this time, the proposals as outlined in the ESAs’ statement can be used by firms as an indication of what the amended requirements may look like.

Accordingly, we will not require firms whose physically settled FX forwards are likely to be outside the scope of the amended requirements to continue putting processes in place to exchange variation margin. This approach is subject to any further statements that may be issued by the ESAs or the FCA.

We, in any event, continue to recognise that the exchange of variation margin is a prudent risk management tool.