Whilst derivatives market players are running at full throttle to implement all measures required under the European Market Infrastructure Regulation (“EMIR”) in advance of the next regulatory deadline which will require the collateralisation of physically settled foreign exchange (“FX”) forwards as from 3 January 2018 (“FX Deadline”), the European Supervisory Authorities (“ESAs”), regulators and firms continue to discuss and assess the challenges that such requirement poses upon certain counterparties.

On 24 November 2017, the Joint Committee of the ESAs (the “Committee”) published a statement acknowledging the challenges faced by certain end-users of these types of derivatives transactions. The Committee further announced that the Boards of the ESAs are currently undertaking a review of the Regulatory Technical Standards on risk mitigation techniques for OTC derivatives not cleared by a central counterparty (“RTS”) and developing draft amendments to these RTS that align the treatment of variation margin for physically-settled FX forwards with the supervisory guidance applicable in other key jurisdictions (such as for instance, the United States).

These proposed amendments would have in mind the exchange of variation margin for physically-settled FX forwards in a risk based and proportionate manner. In particular, this would most likely imply that the scope should cover transactions between institutions (credit institutions and investment firms). Furthermore, for some institution-to-non-institution transactions the competent authorities should consider the actual risk that the exchange of variation margins would mitigate and whether non-institutions might face additional risks related to the daily exchange of variation margin.


These suggested amendments will need in any event to be submitted to the European Commission, but giving the proximity of the FX Deadline and the inconclusiveness of ESAs statement, it seems prudent for firms to continue getting ready their FX trading documentation in light of the coming FX Deadline.

To read the full statement of the Committee, please click here.

For more information, and any guidance or advice on the impact of the EMIR rules on FX derivatives for your firm, Cleveland & Co, your External in-house counsel, are here to help.