EMIR: European Supervisory Authorities publish statement on variation margin deadline

The Joint Committee of the European Supervisory Authorities (ESAs), comprising the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA), has published a statement relating to the operational challenges faced by counterparties in meeting the deadline of 1 March 2017 for exchanging variation margin under the European Market Infrastructure Regulation (EMIR). While noting that the implementation appears to pose a challenge mainly for smaller counterparties, the ESAs express their disappointment that the industry has not managed to prepare in time for the deadline.

The statement emphasises that neither the ESAs nor competent authorities (CAs) possess any formal power to disapply directly applicable EU legal text – for instance by issuing non-action letters, which exists in some non-EU jurisdictions – and that any further delays of the application of the EU rules would formally need to be implemented through EU legislation, which is not possible at this point in time due to the lengthy process for adopting EU legislation.

However, the ESAs expect competent authorities to apply their risk-based supervisory powers in the enforcement of the applicable legislation. This approach entails that competent authorities can take into account the size of the exposure to the counterparty plus its default risk, and that participants must document the steps taken toward full compliance and put in place alternative arrangements to ensure that the risk of non-compliance is contained, such as using existing Credit Support Annexes to exchange variation margins.

The statement stresses that this approach does not entail a general forbearance, but a case-by-case assessment from the competent authorities on the degree of compliance and progress. In any case, the ESAs and competent authorities expect that the difficulties will be solved in the coming few months and that transactions concluded on or after 1 March 2017 remain subject to the obligation to exchange variation margin.