Darren Massey
Senior Manager,
Market and Counterparty Credit Risk Policy,
Bank of England

Carmel Deenmamode,
Senior Associate,
Trading & Post Trade Policy
Financial Conduct Authority

Alexander Edwards,
Senior Policy Advisor,
Central Counterparties and Derivatives,
Securities, Markets and Banking,
Financial Services Group,
HM Treasury

April 15, 2021

Eligible Collateral under UK Margin BTS – EEA UCITS

Dear Darren,
Dear Carmel,
Dear Alexander,

The Alternative Investment Management Association (AIMA), the Institutional Money Market Funds Association (IMMFA), the Investment Company Institute (ICI), the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association Asset Management Group (SIFMA AMG) (hereinafter referred to as ‘the associations’) are writing to urge the Prudential Regulation Authority (PRA) to permit use of European Economic Area (EEA) UCITS for initial margin (IM) purposes in the UK Uncleared Margin Requirements (UMR) Binding Technical Standards (2016/2251) once the current ‘standstill’ comes to an end on 31 March 2022.

The associations welcome and support the recent efforts of regulators in leading jurisdictions to effect a pragmatic approach to the implementation of uncleared margin requirements, including, most recently, with regard to the phasing in of the IM rules applicable to firms with an aggregate average notional amount of between €750 billion and €50 billion (‘Phase V’ (effective date postponed until 1 September 2021)) and between €50 billion and €8 billion (‘Phase VI’ (effective date postponed until 1 September 2022)). We recognize and appreciate the role of the UK authorities in developing international regulatory consensus on this change in timetable, agreed against the background of the challenges confronting market participants due to the COVID pandemic.

This pragmatism on the part of regulators in leading derivatives jurisdictions is particularly welcome if we consider the number and type of market participants that will be required to comply with IM requirements in phases V and VI. A much larger number of counterparties with more limited financial and other resources to deploy for purpose of compliance (than was the case for previous IM phases) will come into scope of IM requirements in September 2021 and September 2022.

Many of these counterparties will be funds. One key aspect of the IM regime for these funds, and their managers, is the ability to use UCITS (notably Money Market Funds (MMFs)) as IM.

Under the EU UMR, financial counterparties are permitted to use EEA UCITS as IM, subject to the conditions set out in Articles 4 and 5 of the EU Margin RTS. The UK UMR have similarly restricted financial counterparties to use of UK UCITS as IM (Article 4 (r)).

The impact of this restriction is postponed by the ‘standstill’ approach adopted under UK rules, whereby UK counterparties do not have to adapt current procedures and arrangements for exchange of margin in uncleared derivatives business until 31 March 2022.

The associations believe, however, that once the restriction to use of UK UCITS as IM is in effect, there will be negative consequences for the counterparties concerned and for the attractiveness of the UK as a jurisdiction in which to do uncleared derivatives business. This limitation is also not justified on risk grounds.

Derivatives counterparties may need or prefer to use UCITS (particularly MMFs) as IM

Derivatives counterparties, including UCITS managers and investment managers may use UCITS as IM. In the case of funds, this may be more efficient than (as applicable) having their depository or custodian reinvest cash into UCITS MMFs, for several reasons, including:

• The lack of alternative eligible collateral available to the fund’s managers.
• The investment guidelines within which the fund must operate, which may limit the ability to trade other types of eligible collateral.
• Operational limitations on the ability of the fund to trade other types of collateral.

The pool of EEA UCITS is much larger than the pool of UK UCITS