The new European regulation of derivatives (EMIR – the European Market Infrastructures Regulation) will impose the requirement for derivatives traded OTC (Over the Counter) to be cleared through a CCP (central counterparty). There are exceptions for non financial companies. If a company is not eligible for an exemption it might nonetheless find that its derivative transactions are not capable of going through a CCP, if perhaps they are not sufficiently standard. In this case the regulation requires alternative risk mitigation measures, principally the exchange of collateral.
ESMA (European Securities and markets Authority) has published a discussion paper on the details as to how that exchange of collateral could work, and the ACT has submitted comments on this. The ACT points out the anomaly in the regulatory suggestion that banks should not be allowed to take a limited credit position on their OTC derivative activity with corporates, whilst banks are at the same time free to take credit risk through their lending activities. We are opposed to a one-way exchange of collateral between the banks and corporates and to any requirement for initial margin.
