The manner in which the excess margin is dealt with by the clearing broker depends on whether the clearing client has an omnibus or individual client account.
The term 'excess margin' is not legally defined in EMIR, however, it is most commonly understood as any amount of assets a clearing member requires from its client in respect of a client transaction that is over and above the amount of assets the CCP requires from a clearing member in respect of the related CCP transaction.
Article 39(6) of EMIR
"When a client opts for individual client segregation, any margin in excess of the client's requirement shall also be posted to the CCP and distinguished from the margins of other clients or clearing members and shall not be exposed to losses connected to positions recorded in another account."
Only in the case of an individual client account the excess margin collected by the clearing member from the clearing client in respect of the related client transactions, is required to be passed onto a CCP. The details are usually the subject of the client clearing agreement.
Such protection does not function when it comes to an omnibus client account, where the clearing member is not required to pass any excess margin onto the CCP.
The above interpretation has been also confirmed by the European financial regulator ESMA, which indicated that Article 39(6) of EMIR "is clear" that for individually segregated clients, any margin called from a client, which is over and above the amount called by the CCP to cover the positions of that client, must be posted to the CCP.
ESMA has underlined, moreover, that "[t]he current practice of clearing members calling excess margin and retaining it is not permitted under EMIR for clients opting for individual segregation."
Where a clearing member has collected additional margin in respect of particular client positions that has opted for individual client segregation, the excess margin should be passed to the CCP that clears those positions.
Hence, depending on the terms of the clearing agreement, the clearing client may bear the credit risk on the clearing member in respect of the excess margin held with omnibus client account.
Besides, referring to the situation, where the relevant positions are with multiple CCPs, ESMA has taken the stance requiring clearing members to ensure that the approach taken is made transparent to clients and where the clients opted for individual segregation, they will need to agree on the allocation of the excess margins to the different CCPs.
Article 48(7) of EMIR
"Clients' collateral distinguished in accordance with Article 39(2) and (3) shall be used exclusively to cover the positions held for their account. Any balance owed by the CCP after the completion of the clearing member's default management process by the CCP shall be readily returned to those clients when they are known to the CCP or, if they are not, to the clearing member for the account of its clients."
Also in the case of the clearing member default contractual arrangements may be significant for managing the excess margin risk of the clearing client. In the light of Article 48(7) of EMIR (see box) the clearing client has legal interest to be known by the CCP.
Usually, this is possible when the clearing client has opted for an individual client segregation.