FCA Announcement on Physically Settled FX Forwards

fca logo On 24 November 2017, the Joint Committee of the European Supervisory Authorities (the “Committee”) issued a statement (the “ESAs Statement”) acknowledging the challenges of the requirement under the European Market Infrastructure Regulation (“EMIR”) to collateralise physically settled foreign exchange (“FX”) forwards, faced by certain end-users of these types of derivatives.[1]

The ESAs Statement also sets out 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.

The ESAs Statement recommends competent authorities “generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in a proportionate manner”.

With that in mind, on 7th December 2017, the FCA made an announcement supporting the views of the Committee and expressing that although it is not completely clear at this time how amendments to the RTS will be shaped, the proposals as outlined in the ESAs’ statement can be used by firms as an indication of what the amended requirements may look like.

Accordingly, the FCA have announced that it will not require firms, whose physically settled FX forwards are likely to be outside the scope of the amended requirements, to continue putting processes in place to exchange variation margin.

This approach, however, is subject to any further statements that may be issued by the ESAs or the FCA.


We would suggest firms to closely monitor any further statements that may be issued by either the FCA or the ESAs.

In addition, firms that may be exempted from collateralising physically settled FX forwards upon any amendments of the RTS being implemented, should consider whether or not they wish to continue trading physically settled FX forwards on an uncollateralised basis or else to begin collateralising this type of transactions from a risk-mitigation point of view.

To read the full announcement of the FCA, 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.

[1] Please see our brief note on this statement https://cleveland-co.com/european-supervisory-authorities-statement-physically-settled-fx-forwards/


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