Introduction of EMIR variation margin rules for non-cleared OTC derivatives

January 31, 2017

Dear Clients and Friends,

1 March 2017 sees the introduction (for most counterparties) of new obligations under EMIR to exchange variation margin (“VM”) on OTC derivatives which are not cleared through a central counterparty. In this alert, we take a closer look at the new rules and consider the main practical steps to be taken to ensure that your firm is in compliance. We also take the opportunity to update you on two other recent developments relating to EMIR.


EMIR was introduced after the 2008 financial crisis to ensure greater transparency in derivatives trading and hence reduce systemic risk.  The regulations aim to ensure the vast majority of derivatives contracts are traded through a central counterparty and these trades are reported to supervisory authorities.

In October 2016 the European Commission proposed technical standards setting out detailed rules on margin (both VM and Initial Margin – “IM”) that must be exchanged for OTC derivative contracts that are not cleared through a central counterparty.  These rules came into force on 4th January 2017 and introduced the requirement to exchange VM to the majority of affected counterparties from 1 March.  

Who is in scope for the new regulations?

These new regulations apply to either; two financial counterparties[1] trading together, two non-financial counterparties[2] who are above threshold trading together or financial counterparties or above threshold[3] non-financial counterparties who enter into non-cleared OTC derivative contracts. 

Additionally the rules apply to third country equivalent financial or above threshold non-financial counterparties who trade either with each other or EU financial or above threshold non-financial counterparties.  The new rules will only apply to third country equivalents if both counterparties are acting through an EU branch and would be financial counterparties if established in the EU or either party benefits from a guarantee by an EU established financial counterparty of at least €8bn, which is equal to 5% of the guarantor’s total exposure.

Which securities are eligible for use as margin?

Counterparties are permitted to use the following securities as margin:

  • Cash or gold bullion;
  • Debt securities issued by EU member states’ central banks; governments and local authorities, third countries governments, local authorities and central banks;
  • Corporate bonds;
  • The most senior tranche of a securitisation;
  • Convertible bonds;
  • Equities included in an index; and
  • Shares or units in a UCITS scheme (subject to certain conditions).

Calculation of Variation Margin

VM to be collected is calculated by the aggregation of all contracts in the netting set[4] and the value of all variation margin previously posted, minus the net value of the contracts in the netting set at point of entry and all VM previously collected.

VM should be calculated on a daily basis and initial margin should be calculated on the business day following a change to the netting set, or where there has been no calculation for 10 days.

Provision of VM

The posting counterparty should provide VM either within the same business day as the VM is calculated or within two business days if; an amount of collateral similar to initial margin for contracts that are not subject to EMIR regulation or the initial margin has been adjusted to increase the margin period of risk or the amount of initial margin.


There are a number of exemptions and exceptions outlined in the regulations.  Counterparties are not required to exchange collateral for non-centrally cleared derivative contracts entered into with CCPs authorised as credit institutions under CRD IV or Non-financial counterparties that are below the threshold of EMIR.  Furthermore, no collateral is needed if the balance of a previous collection of collateral is outstanding.

When does this come into force?

For counterparties with more than €3tn aggregate average of non-centrally cleared OTC derivatives, these rules will apply from 4th February 2017 and 1st March 2017 for all other counterparties in scope of this regulation. 

What about initial margin?

The initial margin rules will apply to counterparties above a threshold of the aggregate average of €2.25bn from 1st September 2017 and will be fully introduced for all counterparties with aggregate average above €8bn from 1st September 2020.  

Initial margins are not required for contracts entered into in a calendar year if one of the counterparties has an aggregate amount of less than the applicable threshold in non-centrally cleared OTC derivatives for March, April and May of the preceding year.

The amount of initial margin required can be lowered in certain situations and is not required to be collected for physically settled foreign exchange swaps, physically settled foreign exchange forward contracts or currency swaps.

Change to EMIR reporting

Two technical standards have been published by ESMA on transaction reporting to trade repositories which amends the EMIR regulations.  The changes include clarification of data fields and the introduction of new values to better reflect market practices and other regulatory requirements.  These come into force on 10th February 2017, but with the vast majority of rules coming into effect on 1st November 2017 except article 1(5) which applies from the earlier date.

Possible delay to central clearing requirement

ESMA has proposed a delay to the implementation of the requirement for financial counterparties with a small volume of derivative trading to centrally clear all their OTC derivatives.  ESMA have stated a number of legal reasons for the delay, including the ongoing review of relevant EU legislation.  The delay is to be for two years and the new implementation date would be 21 June 2019.

What do I need to do now?

  • Determine if any of your strategies use non-cleared OTC derivatives.
  • If it has been determined that there has been no process is in place to collateralise derivative transactions, but such a process is now required, firms should consider how such arrangements can be implemented; and
  • Review any documentation agreed with relevant counterparties, such as CSA agreements, and, if necessary, amend it to take the new regulations into account.


Please contact Louis Ward, Martin Lovick or your regular ACA consultant with any questions on this email.


ACA Compliance (Europe) Limited


[1] A financial counterparty is defined under Article 2 (8) of the EMIR directive and includes investment firms, credit institutions, insurance undertakings, UCITS managers and AIFMs authorised under AIFMD.

[2] A non-financial counterparty is defined under Article 2 (9) of the EMIR directive as any undertaking that is not a financial counterparty.

[3] The clearing threshold for non-financial counterparties is €1bn for credit or equity derivatives and €3bn for interest rate, foreign exchange or commodity derivatives.

[4] The Netting Set is defined as “a set of non-centrally cleared OTC derivatives contracts between two counterparties that is subject to a legally enforceable bilateral netting agreement”