Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty (Text with EEA relevance )

CHAPTER I

GENERAL PROVISIONS ON RISK MANAGEMENT PROCEDURES

SECTION 1

Definitions and general requirements

Article 1

Definitions

For the purposes of this Regulation, the following definitions apply:

(1) ‘initial margin’ means the collateral collected by a counterparty to cover its current and potential future exposure in the interval between the last collection of margin and the liquidation of positions or hedging of market risk following a default of the other counterparty;

(2) ‘variation margin’ means the collateral collected by a counterparty to reflect the results of the daily marking-to-market or marking-to-model of outstanding contracts referred to in Article 11(2) of Regulation (EU) No 648/2012;

(3) ‘netting set’ means a set of non-centrally cleared over-the-counter (‘OTC’) derivative contracts between two counterparties that is subject to a legally enforceable bilateral netting agreement.

Article 2

General requirements

The risk management procedures referred to in paragraph 1 shall include procedures providing for or specifying the following:

(a) the eligibility of collateral for non-centrally cleared OTC derivative contracts in accordance with Section 2;

(b) the calculation and collection of margins for non-centrally cleared OTC derivative contracts in accordance with Section 3;

(c) the management and segregation of collateral for non-centrally cleared OTC derivative contracts in accordance with Section 5;

(d) the calculation of the adjusted value of collateral in accordance with Section 6;

(e) the exchange of information between counterparties and the authorisation and recording of any exceptions to the risk management procedures referred to in paragraph 1;

(f) the reporting of the exceptions set out in Chapter II to senior management;

(g) the terms of all necessary agreements to be entered into by counterparties, at the latest, at the moment in which a non-centrally cleared OTC derivative contract is concluded, including the terms of the netting agreement and the terms of the exchange of collateral agreement in accordance with Article 3;

(h) the periodic verification of the liquidity of the collateral to be exchanged;

(i) the timely re-appropriation of the collateral in the event of default by the posting counterparty from the collecting counterparty; and

(j) the regular monitoring of the exposures arising from OTC derivative contracts that are intragroup transactions and the timely settlement of the obligations resulting from those contracts.

For the purposes of point (g) of the first subparagraph, the terms of the agreements shall comprise all aspects concerning the obligations arising from any non-centrally cleared OTC derivative contract to be concluded, and at least the following:

(a) any payment obligations arising between counterparties;

(b) the conditions for netting payment obligations;

(c) events of default or other termination events of the non-centrally cleared OTC derivative contracts;

(d) all calculation methods used in relation to payment obligations;

(e) the conditions for netting payment obligations upon termination;

(f) the transfer of rights and obligations upon termination;

(g) the governing law of the transactions of the non-centrally cleared OTC derivative contracts.

The requirement to perform the review referred to in the first subparagraph shall be considered to be satisfied in relation to the netting agreement where that agreement is recognised in accordance with Article 296 of Regulation (EU) No 575/2013.

Article 3

Exchange of collateral agreement

The exchange of collateral agreement referred to in point (g) of the first subparagraph of Article 2(2) shall include at least the following terms:

(a) the levels and type of collateral required;

(b) the segregation arrangements;

(c) the netting set to which the exchange of collateral refers;

(d) the procedures for notification, confirmation and adjustment of margin calls;

(e) the procedures for settlement of margin calls for each type of eligible collateral;

(f) the procedures, methods, timeframes and allocation of responsibilities for the calculation of margins and the valuation of collateral;

(g) the events that are considered to be default or termination events;

(h) the law applicable to the non-centrally cleared OTC derivative contract;

(i) the law applicable to the exchange of collateral agreement.

SECTION 2

Eligibility

Article 4

Eligible collateral

A counterparty shall only collect collateral from the following asset classes:

(a) cash in the form of money credited to an account in any currency, or similar claims for the repayment of money, such as money market deposits;

(b) gold in the form of allocated pure gold bullion of recognised good delivery;

(c) debt securities issued by Member States' central governments or central banks;

(d) debt securities issued by Member States' regional governments or local authorities whose exposures are treated as exposures to the central government of that Member State in accordance with Article 115(2) of Regulation (EU) No 575/2013;

(e) debt securities issued by Member States' public sector entities whose exposures are treated as exposures to the central government, regional government or local authority of that Member State in accordance with Article 116(4) of Regulation (EU) No 575/2013;

(f) debt securities issued by Member States' regional governments or local authorities other than those referred to in point (d);

(g) debt securities issued by Member States' public sector entities other than those referred to in point (e);

(h) debt securities issued by multilateral development banks listed in Article 117(2) of Regulation (EU) No 575/2013;

(i) debt securities issued by the international organisations listed in Article 118 of Regulation (EU) No 575/2013;

(j) debt securities issued by third countries' governments or central banks;

(k) debt securities issued by third countries' regional governments or local authorities that meet the requirements of points (d) and (e);

(l) debt securities issued by third countries' regional governments or local authorities other than those referred to in points (d) and (e);

(m) debt securities issued by credit institutions or investment firms including bonds referred to in Article 52(4) of Directive 2009/65/EC of the European Parliament and of the Council (¹);

(n) corporate bonds;

(o) the most senior tranche of a securitisation, as defined in Article 4(61) of Regulation (EU) No 575/2013, that is not a re-securitisation as defined in Article 4(63) of that Regulation;

(p) convertible bonds provided that they can be converted only into equities which are included in an index specified pursuant to point (a) of Article 197 (8) of Regulation (EU) No 575/2013;

(q) equities included in an index specified pursuant to point (a) of Article 197(8) of Regulation (EU) No 575/2013;

(r) shares or units in undertakings for collective investments in transferable securities (UCITS), provided that the conditions set out in Article 5 are met.

A counterparty shall only collect collateral from the asset classes referred to in points (f), (g) and (k) to (r) of paragraph 1 where all the following conditions apply:

(a) the assets are not issued by the posting counterparty;

(b) the assets are not issued by entities which are part of the group to which the posting counterparty belongs;

(c) the assets are not otherwise subject to any significant wrong way risk, as defined in points (a) and (b) of paragraph 1 of Article 291 of Regulation (EU) No 575/2013.

Article 5

Eligibility criteria for units or shares in UCITS

For the purposes of point (r) of Article 4(1), a counterparty may only use units or shares in UCITS as eligible collateral where all the following conditions are met:

(a) the units or shares have a daily public price quote;

(b) the UCITS are limited to investing in assets that are eligible in accordance with Article 4(1);

(c) the UCITS meet the criteria laid down in Article 132(3) of Regulation (EU) No 575/2013.

For the purposes of point (b), UCITS may use derivative instruments to hedge the risks arising from the assets in which they invest.

Where a UCITS invests in shares or units of other UCITS, the conditions laid down in the first subparagraph shall also apply to those UCITS.

The first subparagraph shall apply to any underlying UCITS of a UCITS that has underlying UCITS of its own.

Article 6

Credit quality assessment

The collecting counterparty shall assess the credit quality of assets belonging to the asset classes referred to in points (c), (d) and (e) of Article 4(1) that are either not denominated or not funded in the issuer's domestic currency and in points (f), (g), (j) to (n) and (p) of Article 4(1) using one of the following methodologies:

(a) the internal ratings referred to in paragraph 3 of the collecting counterparty;

(b) the internal ratings referred to in paragraph 3 of the posting counterparty, where that counterparty is established in the Union or in a third country where the posting counterparty is subject to consolidated supervision assessed equivalent to that governed by Union law in accordance with Article 127 of Directive 2013/36/EU;

(c) a credit quality assessment issued by a recognised External Credit Assessment Institution (ECAI) as defined in Article 4(98) of Regulation (EU) No 575/2013 or a credit quality assessment of an export credit agency referred to in Article 137 of that Regulation.

Article 7

Specific requirements for eligible assets

Counterparties shall establish procedures for the treatment of assets exchanged as collateral in accordance with paragraphs 1 and 2 whose credit quality is subsequently assessed to be:

(a) step 4 or beyond for assets referred to in paragraph 1;

(b) beyond step 4 for assets referred to in paragraph 2.

The procedures referred to in paragraph 3 shall meet all of the following requirements:

(a) they shall prohibit counterparties from exchanging additional assets assessed to be of the credit quality referred to in paragraph 3;

(b) they shall establish a schedule by which assets assessed to be of the credit quality referred to in paragraph 3 and already exchanged as collateral are replaced over a period of time not exceeding 2 months;

(c) they shall set a credit quality step that requires the immediate replacement of the assets referred to in paragraph 3;

(d) they shall allow counterparties to increase the haircuts on the relevant collateral insofar as the collateral has not been replaced in accordance with the schedule referred to in point (b).

Article 8

Concentration limits for initial margin

Where collateral is collected as initial margin in accordance with Article 13, the following limits shall apply for each collecting counterparty:

(a) the sum of the values of the initial margin collected from the asset classes referred to in points (b), (f), (g), and (l) to (r) of Article 4(1) issued by a single issuer or by entities which belong to the same group does not exceed the greater of the following values: (i) 15 % of the collateral collected from the posting counterparty; (ii) EUR 10 million or the equivalent in another currency;

(b) the sum of the values of the initial margin collected from the asset classes referred to in points (o), (p) and (q) of Article 4(1), where the asset classes referred to in points (p) and (q) of that Article are issued by institutions as defined in Regulation (EU) No 575/2013, does not exceed the greater of the following values: (i) 40 % of the collateral collected from the posting counterparty; (ii) EUR 10 million or the equivalent in another currency.

The limits laid down in the first subparagraph shall also apply to shares or units in UCITS where the UCITS primarily invests in the asset classes referred to in that subparagraph.

Where collateral is collected as initial margin in accordance with Article 13 in excess of EUR 1 billion and each of the counterparties belong to one of the categories listed in paragraph 3, the following limits to the amount of initial margin in excess of EUR 1 billion collected from a counterparty shall apply:

(a) the sum of the values of the initial margin collected from the asset classes referred to in points (c) to (l) of Article 4(1) issued by a single issuer or by issuers domiciled in the same country shall not exceed 50 % of the initial margin collected from that counterparty;

(b) Where initial margin is collected in cash, the 50 % concentration limit referred to in point (a) shall also take into account the risk exposures arising from the third-party holder or custodian holding that cash.

The counterparties referred to in paragraph 2 shall be one of the following:

(a) institutions identified as G-SIIs in accordance with Article 131 of Directive 2013/36/EU;

(b) institutions identified as O-SIIs in accordance with Article 131 of Directive 2013/36/EU;

(c) counterparties which are not pension scheme arrangements and for which the sum of the values of the collateral to be collected exceeds EUR 1 billion.

SECTION 3

Calculation and collection of margins

Article 9

Frequency of calculation and determination of the calculation date

Counterparties shall calculate initial margin in accordance with Article 11 no later than the business day following one of these events:

(a) where a new non-centrally cleared OTC derivative contract is executed or added to the netting set;

(b) where an existing non-centrally cleared OTC derivative contract expires or is removed from the netting set;

(c) where an existing non-centrally cleared OTC derivative contract triggers a payment or a delivery other than the posting and collecting of margins;

(d) where the initial margin is calculated in accordance with the standardised approach referred to in Article 11(1) and an existing contract is reclassified in terms of the asset category referred to in paragraph 1 of Annex IV as a result of reduced time to maturity;

(e) where no calculation has been performed in the preceding 10 business days.

For the purpose of determining the calculation date for initial and variation margin, the following shall apply:

(a) where two counterparties are located in the same time-zone, the calculation shall be based on the netting set of the previous business day;

(b) where two counterparties are not located in the same time-zone, the calculation shall be based on the transactions in the netting set which are entered into before 16.00 of the previous business day of the time zone where it is first 16.00.

Article 10

Calculation of variation margin

The amount of variation margin to be collected by a counterparty shall be the aggregation of the values calculated in accordance with Article 11(2) of Regulation (EU) No 648/2012 of all contracts in the netting set, minus the value of all variation margin previously collected, minus the net value of each contract in the netting set at the point of entry into the contract, and plus the value of all variation margin previously posted.

Article 11

Calculation of initial margin

Article 12

Provision of variation margin

The posting counterparty shall provide the variation margin as follows:

(a) within the same business day of the calculation date determined in accordance with Article 9(3);

(b) where the conditions in paragraph 2 are met, within 2 business days of the calculation date determined in accordance with Article 9(3).

The provision of variation margin in accordance with paragraph 1(b) may only be applied to the following:

(a) netting sets comprising derivative contracts not subject to initial margin requirements in accordance with this Regulation, where the posting counterparty has provided, at or before the calculation date of the variation margin, an advance amount of eligible collateral calculated in the same manner as that applicable to initial margins in accordance with Article 15, for which the collecting counterparty has used a margin period of risk (‘MPOR’) at least equal to the number of days in between and including the calculation date and the collection date;

(b) netting sets comprising contracts subject to initial margin requirements in accordance with this Regulation, where the initial margin has been adjusted in one of the following ways: (i) by increasing the MPOR referred to in Article 15(2) by the number of days in between, and including, the calculation date determined in accordance with Article 9(3) and the collection date determined in accordance with paragraph 1 of this Article; (ii) by increasing the initial margin calculated in accordance with the standardised approach referred to in Article 11 using an appropriate methodology taking into account a MPOR that is increased by the number of days in between, and including, the calculation date determined in accordance with Article 9(3) and the collection date determined in accordance with paragraph 2 of this Article.

For the purposes of point (a), in case no mechanism for segregation is in place between the two counterparties, those counterparties may offset the amounts to be provided.

Article 13

Provision of initial margin

SECTION 4

Initial margin models

Article 14

General requirements

Where a counterparty uses an initial margin model developed by a third-party agent, the counterparty shall remain responsible for ensuring that that model complies with the requirements referred to in this Section.

Initial margin models shall be developed in a way that captures all the significant risks arising from entering into the non-centrally cleared OTC derivative contracts included in the netting set, including the nature, scale, and complexity of those risks and shall meet the following requirements:

(a) the model incorporates risk factors corresponding to the individual currencies in which those contracts in the netting set are denominated;

(b) the model incorporates interest rate risk factors corresponding to the individual currencies in which those contracts are denominated;

(c) the yield curve is divided into a minimum of six maturity buckets for exposures to interest-rate risk in the major currencies and markets;

(d) the model captures the risk of movements between different yield curves and between different maturity buckets;

(e) the model incorporates separate risk factors at least for each equity, equity index, commodity or commodity index which is significant for those contracts;

(f) the model captures the risk arising from less liquid positions and positions with limited price transparency within realistic market scenarios;

(g) the model captures the risk, otherwise not captured by other features of the model, arising from derivative contracts where the underlying asset class is credit;