EU Moves To Remove Physically-Settled FX Forwards From Variation Margin Requirements

On November 24, 2017, the Joint Committee of the European Supervisory Authorities announced a review of the RTS under the European Market Infrastructure Regulation which include the requirement to exchange variation margin for physically-settled FX forwards.

EMIR requires counterparties to uncleared OTC derivative transactions to implement risk mitigation techniques to reduce counterparty credit risk. The RTS prescribe required margin amounts to be posted and collected and the methodologies by which the minimum amount of initial margin and variation margin should be calculated, as well as listing securities eligible as collateral, such as sovereign bonds, covered bonds, some securitization instruments, corporate bonds, gold and some equities. The variation margin requirements have applied to all counterparties since March 1, 2017 although they will only be applicable for physically-settled FX forwards from January 3, 2018. Market participants have experienced