For the attn. of:

Mr Steven Maijoor, Chair
European Securities and Markets Authority

Mr Andrea Enria, Chair
European Banking Authority

Mr Gabriel Bernardino, Chair
European Insurance and Occupational Pensions Authority

Mr. Patrick Pearson
European Commission

Mr Toomas Vapper
European Council

Mr. Roberto Gualtieri MEP
Mr. Werner Langen MEP
European Parliament

3 October 2017

Dear Sir, dear Madam,

Re: Request for Deferral and Reconsideration of Uncleared Swap Variation Margin (“VM”) Requirements for Physically-Settled Foreign Exchange Derivative Contracts (“FX Contracts”)

Beginning in January 2018, EU investors subject to the European Market Infrastructure Regulation (“EMIR”) will face application of Variation Margin (“VM”) requirements for FX forwards1 , the only remaining type of FX Contract without VM requirements available for hedging EU clients’ FX risk.

Although Article 27 of the RTS finalized under EMIR (see footnote 1) excludes initial margin (“IM”) for FX Contracts, it does not provide a parallel exclusion for VM.

The undersigned Associations wish to express their concern regarding aspects of the application of the RTS that are forcing the collateralisation of FX Contracts. In particular, the signatories to this letter are concerned that a requirement to exchange VM for FX Contracts for counterparties such as fund management companies will:

• undermine funds and their asset managers’ ability to hedge risks, increasing underlying risk levels;

• undermine pension funds’ use of derivative contracts for risk management purposes. Pension funds use derivatives to manage their risks in their balance sheet by hedging – among others – their currency risks. The IORP Directive explicitly allows pension funds to use derivatives for mitigating investment risks or and for efficient portfolio management.

• prevent such counterparties from being able to use FX Contracts on a cost-efficient basis, or indeed at all.

Therefore, we ask the ESAs to request to the Commission the authorisation to review the currently proposed text and to act quickly in seeking deferral of the upcoming VM requirements that will be imposed upon FX forwards, the only remaining FX Contracts over which VM does not yet apply in the EU.

We further request that the above-listed authorities reconsider whether the EU’s VM requirements for FX Contracts are needed for regulatory or systemic objectives. FX Contracts are crucial to the management of currency mismatches in investment strategies when an investor’s home currency is different from the currency of the portfolio’s investments.

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1 Article 37 of the European Supervisory Authorities’ (the “ESAs”) Regulatory Technical Standards on riskmitigation techniques for OTC-derivative contracts not cleared by a CCP derogates the application date VM obligations for FX forwards until the date of entry into application of the Commission Delegated Regulation (2016) 2398, which specify some technical elements related to the definition of financial instruments. See Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty (the “RTS”).