PS18/23 – Margin requirements for non-centrally cleared derivatives: Amendments to BTS 2016/2251

1: Overview

1.1 This Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) policy statement (PS) provides feedback to responses to consultation paper (CP) 13/23 - Margin requirements for non-centrally cleared derivatives: Amendments to BTS 2016/2251. It also contains the PRA's and FCA's final policy, in the form of amendments to Binding Technical Standards (BTS) 2016/2251 and confirmation of the approach to pre-approval of bilateral initial margin models.

1.2 This PS is relevant to PRA-authorised banks, building societies, and PRA-designated investment firms in scope of the margin requirements under the European Market Infrastructure Regulation (UK EMIR). In addition, this PS is relevant to all FCA solo-regulated entities and non-financial counterparties in scope of the margin requirements under UK EMIR.

Background

1.3 In CP13/23, the PRA and FCA proposed to:

• maintain the status quo under the temporary exemptions for single-stock equity options and index options from the UK bilateral margining requirements until 4 January 2026, allowing the PRA and FCA to gather the evidence necessary to create a permanent regime; and
• set out the PRA's and FCA's approach to model pre-approval in relation to bilateral initial margin models.

Summary of responses

1.4 The PRA and FCA received four responses to CP13/23. Respondents generally welcomed the PRA's and FCA's proposals. Three respondents recommended that the final UK bilateral margin requirements for single-stock equity options and index options should result in the exemption being permanent. One respondent requested the PRA and FCA to clarify that the proposed approach to model pre-approval in relation to bilateral initial margin models was permanent. Respondents also suggested a number of further amendments to the BTS that did not relate to the draft policy under consultation.

Implementation

1.5 The amendments to the BTS will be effective on 18 December 2023, which is when the final technical standards instrument by the PRA and FCA comes into force.

1.6 Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of retained EU law.^{footnote [1]}

2: Feedback to responses

2.1 Before making any proposed technical standards, the PRA and FCA are required by the Financial Services and Markets Act 2000 (FSMA) to have regard to any representations made to them, and to publish an account, in general terms, of those representations and its feedback to them.^{footnote [2]}

2.2 The PRA and FCA have considered the responses received to CP13/23. This chapter sets out the PRA's and FCA's feedback to those responses, and final decisions.

2.3 The sections below have been structured broadly along the same lines as the chapters of CP13/23. The responses have been grouped as follows:

• bilateral margin requirements for single-stock equity options and index options contracts;
• model pre-approval in relation to bilateral initial margin models; and
• responses out of scope of the CP proposals.

Bilateral margin requirements for single-stock equity options and index options contracts

2.4 The PRA and FCA proposed to extend the temporary exemption from the UK bilateral margining requirements in Article 38 of BTS 2016/2251 for single-stock equity and index options from 4 January 2024 until 4 January 2026.

2.5 All four respondents supported the proposals. In addition, three of those respondents recommended that the final UK bilateral margin requirements for equity single-stock equity options should result in the exemption being permanent.

2.6 After considering the responses, the PRA and FCA have decided to maintain the draft policy as consulted. As set out in CP13/23, the PRA and FCA will, during this temporary exemption period, gather information on current market practices and risks posed by these types of products in order to create a permanent UK regime.

Model pre-approval in relation to bilateral initial margin models

2.7 The PRA and FCA proposed not to implement a supervisory pre-approval requirement at this stage for using initial margin models. All respondents supported the proposal. One respondent requested the PRA and FCA to confirm that the proposed approach would not be revisited, absent a significant change to market participants' use of margin models.

2.8 After considering the responses, the PRA and FCA have decided to maintain the current framework to model reviews. The PRA will at this stage continue to use the existing framework to ensure models and practices meet requirements. The FCA will at this stage continue to use existing supervisory powers to engage with firms on their models where necessary to ensure modelling requirements are met. Neither authority is able to restrict future policy options in pursuit of their statutory objectives as suggested, but where new requirements are proposed, the PRA and FCA note that these would be subject to the standard policy making process.

Responses out of scope of the CP proposals

2.9 Three respondents proposed other future revisions to the BTS that did not form part of the proposals in CP13/23. Notably:

• one respondent requested that the PRA and FCA consider additional exemptions from the margin requirements for other product types, which are currently in scope of the UK framework but are exempted from the US framework; and
• two respondents raised broader concerns about the proportionality of the application of certain risk management requirements to small counterparties. The respondents requested that the PRA and FCA consider revising the BTS to exclude smaller counterparties from the application of existing internal initial margin model governance requirements.

2.10 The PRA and FCA note that these responses are outside the scope of the consultation and request the PRA and FCA to consider the issue in the future. Therefore, the PRA and FCA are providing no further feedback at this time.