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UK regulators launch margin consultation on uncleared derivatives

This article was first published in Global Investor Group.

UK regulatory authorities have launched a consultation on changes to technical standards that govern margin requirements for uncleared derivatives.

The UK Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have jointly proposed extending temporary exemptions for single-stock equity options and index options from their bilateral margin requirements, and rules for the approval of bilateral initial margin models.

“The PRA and the FCA consider that the proposed extension of the temporary exemption for single-stock equity options and index options from UK bilateral margining requirements strikes a proportionate balance in meeting the objectives of prudential safety and soundness, maintaining consistency of approaches and a level playing field across jurisdictions,” the regulators said on Tuesday.

The proposed extension would last until January 4th 2026. The agencies will then gather evidence before adopting a permanent framework, they said. Both agencies have also indicated they will work with firms on existing margin models and practices, rather than introducing a formal pre-approval process, they said.

The consultation is open for responses until October 18th.

Separately, the International Swaps and Derivatives Association (ISDA) and the FIA have published submissions responding to a US Securities and Exchange Commission (SEC) consultation on clearing resilience and recovery rules. The comments focussed on clarity around margin requirements.

“We acknowledge that the SEC prefers principle-based regulation, but we believe more prescriptive guidance is necessary on both intraday margin and recovery and wind-down plans in order to provide clearing members and their clients with clear expectations about the how these tools will be used, so clearing participants can better prepare for these scenarios,” the submission said.

Among the margin recommendations are that clearing houses should make margin calls on a scheduled basis apart from extraordinary circumstances, as opposed to the current looser provision.

In its quarterly review published in February, the BIS estimated that potential margin breaches (where the increase in variation margin is higher than the initial margin held against a position) held by LCH SwapClear peaked at £698 million late last year amid gilt market volatility. This surpassed the previous record of £558 million in the first quarter of 2020.

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