The EU aligns its OTC collateral framework for physically-settled forwards and swaps with other major jurisdictions.




Recent months see the evolution of the European approach to the requirements for the exchange of variation margin with regards to the physically-settled OTC foreign exchange contracts.


The existing EMIR legal frameworks for collateral requires for such contracts the exchange of variation margin (initial margin’s exchange is not required).


This is stipulated in Article 27 and Recitals 16 and 42 of the 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.


On 18 December 2017 the European Financial Authorities (ESAs) adopted, however, the document (JC/2017/79) postulating to exempt all counterparties (except for transactions between credit institutions and investment firms) from the requirement to exchange variation margin for physically settled FX forwards.


In turn, on 26 January 2018 the Committee on Economic and Monetary Affairs of the European Parliament has proposed to extend the above rule also to physically settled FX swaps.


Given the above legal developments it is likely, the EU will, finally, step by step, align its OTC collateral framework with those applying in other major jurisdictions, such as USA, Japan, Canada, Singapore, Australia, Switzerland, Hong Kong, etc.), where there is no mandatory variation margins exchange.