CP13/23 – Margin requirements for non-centrally cleared derivatives: Amendments to BTS 2016/2251

The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have jointly launched a consultation as regards the margin requirements for non-centrally cleared derivatives. Specifically, the regulators seek to
(1) extend the temporary exemption from the UK bilateral margining requirement for single-stock equity and index options. The extension would be valid through January 4, 2026.
Background: The previous temporary exemptions for these types of options were introduced to prevent market fragmentation, ensure a level playing field across jurisdictions, and avoid regulatory arbitrage since many other jurisdictions provided similar exemptions. This is although both regulators acknowledge that derivatives contracts, including single-stock equity and index options contracts, expose firms to counterparty credit risk and although BCBS-IOSCO margining standards envision applying margining requirements to these contracts. However, as many firms have bilateral margin arrangements in place despite the exemption, the risks should be limited, so the two regulators.
(2) continue to refrain from „pre-approval“ requirements for the application of individual initial margining models: Both regulators choose to not introduce a formal supervisory pre-approval requirement for initial margin models at this time. The FCA and PRA will continue to use their existing supervisory powers to ensure compliance with the modeling requirements and engage with firms on models where necessary to ensure that the bilateral margining requirements are met. This procedure has worked well so far for the UK financial market, although it too contradicts the BCBS-IOSCO margining standards which recommend that firms obtain approval from their supervising authorities for individual initial margin models.
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The consultation will remain open for public comment up to October 18, 2023.