What changed between the draft committee report and the plenary report

Change 4

Changed:Article 1 –(a) paragraph 1 – point 6 – point b (new), Article 10 – paragraphs 2a to 5: (b) paragraphs 2a to 5 areis replaced by the following:

Change 5

Removed:Regulation (EU) No 648/2012

Added:‘1. Every 12 months, a financial counterparty taking positions in OTC derivative contracts may calculate its aggregate month-end average position in uncleared contracts for the previous 12 months in accordance with paragraph 3.

Removed:Article 1 – paragraph 1 – point 6, Article 10 – paragraph 2a: 2a. The relevant competent authorities of the non-financial counterparty and of the other entities within the group shall establish cooperation procedures to ensure: / (a) the effective calculation of the positions at the group level; and / (b) the effective evaluation and assessment of the level of exposure in OTC derivative contracts at the group level.

Added:Where a financial counterparty does not calculate its positions, or where the result of the calculation of its aggregate month-end average position in uncleared contracts for the previous 12 months exceeds any of the clearing thresholds specified pursuant to Article 10(4), point (b), or where the result of the calculation of its aggregate month-end average position in OTC contracts for the previous 12 months exceeds any activity threshold specified pursuant to Article 10(4), point (b), the financial counterparty shall:

Removed:Changes to clarify that the calculations/assessment applies at group level. Doing the calculation at individual NFCs would not capture the risk posed by groups, would encourage subsidiaries of big groups which centralise trading for other sister companies to move away from the EU if the clearing thresholds were to be set at a level which would allow to capture them, and would impedes capturing the positions taken by subsidiaries of the group outside the EU.

Added:(a) immediately notify ESMA and the relevant competent authority thereof;

Removed:Regulation (EU) No 648/2012

Added:(b) establish clearing arrangements within four months of the notification referred to in point (a) of this subparagraph; and

Removed:Article 1 – paragraph 1 – point 6, Article 10 – paragraph 3: 3. In calculating the positions referred to in paragraph 1, the non-financial counterparty shall include all the OTC derivative contracts that are not cleared in a CCP authorised under Article 14 or recognised under Article 25 entered into by the non-financial counterparty or by other non-financial entities within the group to which the non-financial counterpary belongs which are not objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of the non-financial counterparty or of that group.

Added:(c) become subject to the clearing obligation referred to in Article 4 for all OTC derivative contracts pertaining to any class of OTC derivatives that is subject to the clearing obligation entered into or novated more than four months after the notification referred to in point (a) of this subparagraph.’;

Removed:Reinstating current wording on Article 10(3), as COM proposal may lead to the impossibility for corporate treasurers to centralise their risk management function. Removing the reference to the 'group' level, may lead to a situation whereby every group entity has to hedge their risks for themselves, contradicting the advantages of centralised risk management for no clear benefit.

Added:(b) in paragraph 3, the first subparagraph is replaced by the following:

Removed:Regulation (EU) No 648/2012

Added:‘In calculating the aggregate month-end average positions in uncleared contracts referred to in paragraph 1, the financial counterparty shall include all OTC derivative contracts that are not cleared in a CCP authorised under Article 14 or recognised under Article 25, entered into by that financial counterparty or entered into by other entities within the group to which that financial counterparty belongs.’;

Removed:Article 1 – paragraph 1 – point 6, Article 10 – paragraph 4 – subparagraph 1 – point b: (b) values of the clearing thresholds for uncleared derivatives, which are determined taking into account the systemic relevance of the sum of net positions and exposures per counterparty. ESMA shall also assess whether an aggregate activity threshold, taking into account the overall aggregate position in OTC derivatives of a financial counterparty, is necessary to ensure a prudent coverage of financial counterparties under the clearing obligation and set a level for such a threshold.

Added:(3a) the following article is inserted:

Removed:Technical adjustment which would be needed for the clearing thresholds, in light of the new calculation methodology.

Added:‘Article 4aa

Removed:Regulation (EU) No 648/2012

Added:Exemption from clearing obligation for post-trade risk reduction services

Removed:Article 1 – paragraph 1 – point 7 – point b, Article 11 – paragraph 3 – subparagraph 2 and 3: deleted / (deleted) / (deleted) / (deleted)

Added:1. Without prejudice to risk-mitigation techniques under Article 11, Article 4(1) shall not apply to OTC derivative contracts that initiated and concluded as the result of a post-trade risk reduction services exercise where agreed by both parties to the transaction.

Removed:Regulation (EU) No 648/2012

Added:2. Post-trade risk reduction transactions shall only be exempted from the clearing obligation under Article 4 where the post-trade risk reduction service provider and each participant in the post-trade risk reduction exercise comply with the requirements laid down in this Article.

Removed:Article 1 – paragraph 1 – point 7 – point b a (new), Article 11 – paragraph 3: (b a) in Article 11, paragraph 3 is replaced by the following: / "3. Financial counterparties shall have risk-management procedures that require the timely, accurate and appropriately segregated exchange of collateral with respect to OTC derivative contracts that are entered into on or after 16 August 2012. Non-financial counterparties referred to in Article 10 shall have risk-management procedures that require the timely, accurate and appropriately segregated exchange of collateral with respect to OTC derivative contracts in the asset class or asset classes for which the clearing threshold has been exceeded. / Financial and non-financial counterparties shall notify EBA and their competent authorities about the models used for initial margin calculation at least 60 working days prior to their usage. EBA and the counterparty's competent authorities may object to the use of a specific initial margin model by the counterparty if the model does not meet the conditions laid down in the regulatory technical standards referred to in paragraph 15, point (a). Where EBA or the national competent authorities object, the counterparty is entitled to continue using the initial margin model up to one year following receipt of the objection. Where counterparties cease using such models, they shall notify EBA and their competent authorities by the end of the quarter in which they ceased using the model. / Financial counterparties shall report information on the risk-management procedures refe…

Added:3. A post-trade risk reduction exercise shall meet all of the following conditions:

Removed:(https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02012R0648-20220812)

Added:(a) be performed by an entity independent of the counterparties to the OTC derivative contracts included in the exercise;

Removed:Information on initial margin models is not available within the existing regulatory framework in a form appropriate for prudential purposes. The AM intends to clarify supervisory requirements for counterparties in connection with initial margin models, and to introduce greater proportionality and more flexibility. It also grants competent authorities the power to take action in order to ensure that these models are sufficiently robust. The requirements under this article should be defined via RTS, rather than guidelines, in order to ensure convergence (see following AMs). Lastly, the current wording should be amended to align theasset class approach taken for clearing obligation to the exchange of collateral on a bilateral basis.

Added:(b) be market risk neutral;

Removed:Regulation (EU) No 648/2012

Added:(c) not contribute to price formation;

Removed:Article 1 – paragraph 1 – point 7 – point b b (new), Article 11 – paragraph 3 a (new): (b b) in Article 11, the following paragraph 3a is inserted: / 3a. Notwithstanding paragraph 3, single-stock options and equity index options not cleared by a CCP shall be temporarily exempted from risk-management procedures that require the timely, accurate and appropriately segregated exchange of collateral. / ESMA shall monitor regulatory developments in other jurisdictions and shall, at least every two years, submit a report thereon to the Commission. After submission of the report by ESMA, the Commission shall assess whether international developments have led to more convergence in the treatment of single-stock options and equity index options and whether the temporary exemption of such options is still justified. The Commission may adopt a delegated act specifying that, after the expiry of an adaptation period, the exemption is to be removed. The adaptation period shall not exceed two years, and may only be extended once, by an additional period of six months, where the reasons for granting an adaptation period still exist. / The Commission is empowered to adopt the delegated act referred to in the second subparagraph of this paragraph in accordance with Article 82.

Added:(d) take the form of a compression, rebalancing or optimisation;

Removed:The amendments provides an exemption from the variation and initial margin requirements for single-stock options and equity index options, given that in some jurisdictions those margin requirements are not being enforced, creating an unlevel playing field for EU market players. In light of this, the treatment of those products should be phased-in, to allow ESMA to monitor regulatory developments in other jurisdictions and for the Commission to ensure that appropriate requirements are in place in the Union.

Added:(e) be executed on a bilateral or multilateral basis;

Removed:Regulation (EU) No 648/2012

Added:(f) achieve a reduction in the counterparty credit risk in each of the portfolios submitted to the exercise;

Removed:Article 1 – paragraph 1 – point 7 – point c, Article 11– paragraph 15 – subparagraph 1– point aa: (c) in paragraph 15, first subparagraph, point (aa) is replaced by the following: / "(aa) the supervisory requirements for counterparties in connection with initial margin models additional to those specified in point (a);"

Added:(g) be either accepted or rejected in its entirety with the result that the participants to the exercise are not able to choose which trades to execute under the exercise;

Removed:Art. 11(15aa) includes an obligation for EBA to develop draft RTS specifying the supervisory procedures to ensure initial and ongoing validation of risk-management procedures for OTC derivative contracts not cleared by a CCP. It is unclear why this obligation is deleted, albeit the COM seems to suggest that guidelines should replace the RTS. However, the replacement of RTS with guidelines would reduce the legal certainty for market participants, and create a discrepancy between the chosen legal instrument (RTS vs guidelines) for validation of risk management procedures for the cleared and the bilateral world. For explanation of changes to the wording of this point, see justification to AM of Article 11 paragraph 3.

Added:(h) be open for participation only to the entities initially submitting a portfolio to the exercise.

Removed:Regulation (EU) No 648/2012

Added:4. A post-trade risk reduction service shall be provided by entities authorised in accordance with Directive 2014/65/EU(PTRR service provider).

Removed:Article 1 – paragraph 1 – point 7 – point c a (new), Article 11 – paragraph 15 – subparagraph 1 – point ab (new): (c a) in paragraph 15, first subparagraph, point (ab) is inserted: / “(ab) the data standards, formats and type of information to be reported and disclosed on risk-management procedures, including where relevant on initial margin models, in accordance with the supervisory requirements referred to in point (aa);”’

Added:In providing post-trade risk reduction services, a PTRR service provider shall:

Removed:See justification to AM of Article 11(3).

Added:(a) observe pre-agreed rules, methods and algorithms in pre-scheduled cycles and in a reasonable, transparent and non-discriminatory manner;

Removed:Regulation (EU) No 648/2012

Added:(b) ensure that entities participating in a post-trade risk reduction exercise have no influence over the result of the exercise;

Removed:Article 1 – paragraph 1 – point 7 a (new), Article 11 a (new): (7a) the following article is inserted: / Article 11a / Post-trade Risk Reduction Services / 1. Without prejudice to risk-mitigation techniques under Article 11, Article 4(1) shall not apply to OTC derivative contracts that are formed and established as the result of a post-trade risk reduction services (‘PTRR transactions’) exercise where agreed so elected by both parties to the transaction. / 2. PTRR transactions may only be exempted from the clearing obligation pursuant to the first subparagraph where the PTRR service provider and each participant to the PTRR comply with the requirements set out under paragraph 2 and 3 of this Article, respectively. / 3. A PTRR exercise shall: / a) be performed by an entity independent of the counterparties to the OTC derivative contracts included in the exercise; / b) be market risk neutral; / c) not contribute to price formation; / d) take the form of a compression, rebalancing or optimisation; / e) be executed on a bilateral or multilateral basis and only contain portfolios of OTC derivatives not cleared in a CCP; / f) achieve a reduction in the counterparty credit risk in each of the portfolios submitted to the exercise; / g) be accepted or rejected in full and, as a result, the participants to the exercise shall not be able to choose which trades to execute under the exercise; / h) Be open for participation only to the entities initially submitting a portfolio to the exercise. / 4. A PTRR service provider shall: / a) be authorised in …

Added:(c) in order to prevent a build-up of transactions in portfolios, conduct portfolio compression after every post-trade risk reduction exercise that results in new transactions;

Removed:See justification to AM of Article 11(3).

Added:(d) keep records of all transactions executed pursuant to a post-trade risk reduction exercise, including:

Removed:Regulation (EU) No 648/2012

Added:(i) information on transactions entered within the exercise,

Removed:Article 1 – paragraph 1 – point 8, Article 13: (8) Article 13 is replaced by the following: / 1. The Commission shall be assisted by the ESAs in monitoring the international application of principles laid down in Article 11, in particular with regard to potential duplicative or conflicting requirements on market participants, and recommend possible action. / 2. The Commission may adopt implementing acts declaring that the legal, supervisory and enforcement arrangements of a third country: / (a) are equivalent to the requirements laid down in this Regulation under Article 11; / (b) ensure protection of professional secrecy that is equivalent to that set out in this Regulation; and / (c) are being effectively applied and enforced in an equitable and nondistortive manner so as to ensure effective supervision and enforcement in that third country. / Those implementing acts shall be adopted in accordance with the examination procedure referred to in Article 86(2). / 3. An implementing act on equivalence as referred to in paragraph 2 shall imply that counterparties entering into an OTC derivative contract not cleared by a CCP subject to this Regulation shall be deemed to have fulfilled the obligations contained in Article 11 where at least one of the counterparties is established in, or subject to the equivalent requirements of, that third country.

Added:(ii) transactions resulting from the exercise either as modified transactions or as new transactions, and

Removed:Proposing to keep the equivalence approach with respect to bilateral margins, which has proven to be of some utility for the market participants.