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Foreign Exchange

Fund Manager lobby group seeks clarity on FX swaps from ESMA

Fx contracts are not comparable to other over-the-counter derivative contracts and the European Securities and Markets Authority needs to clarify their position under the European Market Infrastructure Directive, according to the Investment Management Association, writes Derivatives Intelligence, a sister publication of EuromoneyFXNews.

Fx contracts are not comparable to other over-the-counter derivative contracts and the European Securities and Markets Authority needs to clarify their position under the European Market Infrastructure Directive, according to the Investment Management Association. In a response to the ESMA consultation paper and draft technical standards for the regulation over OTC derivatives, central counterparties and trade repositories, IMA said the fx market has already found ways to mitigate settlement and other risks so it should not necessarily be treated the same as other OTC derivatives. "There is a continuing and undesirable lack of clarity over the position of fx transactions which it would be helpful if ESMA could dispel," the association wrote.

IMA also raised concerns over margin requirements for centrally cleared derivatives in regard to the 99% confidence level stating that it does not believe there should be a prescriptive distinction between OTC and exchange traded contracts of 0.5% as it would result in significantly higher initial margin requirements. The association noted that if ESMA were to require a 99.5% confidence level for OTC it would be inconsistent with the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions principles as well as standards established in the U.S. under Dodd-Frank. "Material differences in initial margin calculations between the U.S. and Europe will create a disincentive to clear through a European CCP and may also raise issues around ‘equivalency’ testing for third country CCPs."

Another issue raised by the IMA centers around collateral, noting that ESMA needs to specify what constitutes highly liquid collateral. "We would suggest that in addition to highly rated government and corporate bonds, money market funds should also be specified. These are regulated in Europe and the U.S. and are required to hold highly liquid securities." It also noted that IMA believes it should not be an option for CCPs to require the delivery solely of cash for initial margin purposes.

IMA pointed to other concerns with timing uncertainties for reporting trades and the enormous volume of repapering that will be required across the market in order to bring market participants into line with EMIR.

IMA did not respond to requests for comment by press time.

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