Article 11 Risk-mitigation techniques for OTC derivative contracts not cleared by a CCP

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1.  Financial counterparties and non-financial counterparties that enter into an OTC derivative contract not cleared by a CCP, shall ensure, exercising due diligence, that appropriate procedures and arrangements are in place to measure, monitor and mitigate operational risk and counterparty credit risk, including at least:

(a) the timely confirmation, where available, by electronic means, of the terms of the relevant OTC derivative contract;
(b) formalised processes which are robust, resilient and auditable in order to reconcile portfolios, to manage the associated risk and to identify disputes between parties early and resolve them, and to monitor the value of outstanding contracts.
2.  Financial counterparties and non-financial counterparties referred to in Article 10 shall mark-to-market on a daily basis the value of outstanding contracts. Where market conditions prevent marking-to-market, reliable and prudent marking-to-model shall be used.
A non-financial counterparty that becomes subject to the obligations laid down in the first subparagraph of this paragraph shall establish the necessary arrangements to comply with those obligations within four months of the notification referred to in Article 10(1), second subparagraph, point (a). A non-financial counterparty shall be exempted from those obligations for contracts entered into during the four months following that notification.
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 that are entered into on or after the clearing threshold is exceeded.

A non-financial counterparty that becomes subject to the obligations set out in the first subparagraph of this paragraph shall establish the necessary arrangements to comply with those obligations within four months of the notification referred to in Article 10(1), second subparagraph, point (a). A non-financial counterparty shall be exempted from those obligations for contracts entered into during the four months following that notification.

Financial counterparties and non-financial counterparties referred to in Article 10(1) shall apply for authorisation from their competent authorities before using, or adopting a change to, a model for initial margin calculation with regard to the risk-management procedures laid down in the first subparagraph of this paragraph. When applying for authorisation, those counterparties shall provide their competent authorities, via the central database, with all relevant information regarding those risk-management procedures. Those competent authorities shall grant or refuse such authorisation within six months of receipt of the application for a new model or within three months of receipt of the application for a change to an already authorised model.

Where the model referred to in the third subparagraph of this paragraph is based on a pro forma model, the counterparty shall apply to EBA for the validation of that model and shall provide EBA with all relevant information referred to in that subparagraph via the central database. In addition, the counterparty shall provide EBA with the information on the outstanding notional amount referred to in paragraph 12a of this Article via the central database.

Where the model referred to in the third subparagraph of this paragraph is based on a pro forma model, the competent authorities may grant the authorisation only where the pro forma model has been validated by EBA.

EBA, in cooperation with ESMA and EIOPA, may issue guidelines or recommendations with a view to ensuring the uniform application and authorisation process of the risk-management procedures referred to in the first subparagraph of this paragraph in accordance with the procedure laid down in Article 16 of Regulation (EU) No 1095/2010.

3a.   By way of derogation from paragraph 3, single stock options and equity index options not cleared by a CCP shall not be subject to risk-management procedures requiring the timely, accurate and appropriately segregated exchange of collateral.

For the purpose of the first subparagraph of this paragraph, ESMA, in cooperation with EBA and EIOPA, shall monitor:

(a) regulatory developments in third-country jurisdictions in relation to the treatment of single stock options and equity index options; 

(b) the impact of the derogation laid down in the first subparagraph on the financial stability of the Union or of one or more of its Member States; and 

(c) the development of exposures in single stock options and equity index options not cleared by a CCP.

At least every three years from 24 December 2024, ESMA, in cooperation with EBA and EIOPA, shall report to the Commission the findings resulting from its monitoring referred to in the second subparagraph.

Within one year of the date of receipt of the report referred to in the third subparagraph, the Commission shall assess whether:

(a) international developments have led to more convergence in the treatment of single stock options and equity index options; and 

(b) the derogation laid down in the first subparagraph endangers the financial stability of the Union or of one or more of its Member States.

The Commission is empowered to adopt a delegated act in accordance with Article 82 to amend this Regulation by revoking the derogation laid down in the first subparagraph following an adaptation period. The adaptation period shall not exceed two years.

4.  Financial counterparties shall hold an appropriate and proportionate amount of capital to manage the risk not covered by appropriate exchange of collateral.
5.  The requirement laid down in paragraph 3 of this Article shall not apply to an intragroup transaction referred to in Article 3 that is entered into by counterparties which are established in the same Member State provided that there is no current or foreseen practical or legal impediment to the prompt transfer of own funds or repayment of liabilities between counterparties.

6.  An intragroup transaction referred to in Article 3(2)(a), (b) or (c) that is entered into by counterparties which are established in different Member States shall be exempt totally or partially from the requirement laid down in paragraph 3 of this Article, on the basis of a positive decision of both the relevant competent authorities, provided that the following conditions are fulfilled:

(a) the risk-management procedures of the counterparties are adequately sound, robust and consistent with the level of complexity of the derivative transaction;
(b) there is no current or foreseen practical or legal impediment to the prompt transfer of own funds or repayment of liabilities between the counterparties.

If the competent authorities fail to reach a positive decision within 30 calendar days of receipt of the application for exemption, ESMA may assist those authorities in reaching agreement in accordance with its powers under Article 19 of Regulation (EU) No 1095/2010.

7.  An intragroup transaction referred to in Article 3(1) that is entered into by non-financial counterparties which are established in different Member States shall be exempt from the requirement laid down in paragraph 3 of this Article, provided that the following conditions are fulfilled:

(a) the risk-management procedures of the counterparties are adequately sound, robust and consistent with the level of complexity of the derivative transaction;
(b) there is no current or foreseen practical or legal impediment to the prompt transfer of own funds or repayment of liabilities between the counterparties.

The non-financial counterparties shall notify their intention to apply the exemption to the competent authorities referred to in Article 10(5). The exemption shall be valid unless either of the notified competent authorities does not agree upon fulfilment of the conditions referred to in point (a) or (b) of the first subparagraph within three months of the date of the notification.

8.  An intragroup transaction referred to in Article 3(2)(a) to (d) that is entered into by a counterparty which is established in the Union and a counterparty which is established in a third-country jurisdiction shall be exempt totally or partially from the requirement laid down in paragraph 3 of this Article, on the basis of a positive decision of the relevant competent authority responsible for supervision of the counterparty which is established in the Union, provided that the following conditions are fulfilled:

(a) the risk-management procedures of the counterparties are adequately sound, robust and consistent with the level of complexity of the derivative transaction;
(b) there is no current or foreseen practical or legal impediment to the prompt transfer of own funds or repayment of liabilities between the counterparties.

9.  An intragroup transaction referred to in Article 3(1) that is entered into by a non-financial counterparty which is established in the Union and a counterparty which is established in a third-country jurisdiction shall be exempt from the requirement laid down in paragraph 3 of this Article, provided that the following conditions are fulfilled:

(a) the risk-management procedures of the counterparties are adequately sound, robust and consistent with the level of complexity of the derivative transaction;
(b) there is no current or foreseen practical or legal impediment to the prompt transfer of own funds or repayment of liabilities between the counterparties.

The non-financial counterparty shall notify its intention to apply the exemption to the competent authority referred to in Article 10(5). The exemption shall be valid unless the notified competent authority does not agree upon fulfilment of the conditions referred to in point (a) or (b) of the first subparagraph within three months of the date of notification.

10.  An intragroup transaction referred to in Article 3(1) that is entered into by a non-financial counterparty and a financial counterparty which are established in different Member States shall be exempt totally or partially from the requirement laid down in paragraph 3 of this Article, on the basis of a positive decision of the relevant competent authority responsible for supervision of the financial counterparty, provided that the following conditions are fulfilled:

(a) the risk-management procedures of the counterparties are adequately sound, robust and consistent with the level of complexity of the derivative transaction;
(b) there is no current or foreseen practical or legal impediment to the prompt transfer of own funds or repayment of liabilities between the counterparties.

The relevant competent authority responsible for supervision of the financial counterparty shall notify any such decision to the competent authority referred to in Article 10(5). The exemption is valid unless the notified competent authority does not agree upon fulfilment of the conditions referred to in point (a) or (b) of the first subparagraph. If there is disagreement between the competent authorities, ESMA may assist those authorities in reaching an agreement in accordance with its powers under Article 19 of Regulation (EU) No 1095/2010.

11.  The counterparty of an intragroup transaction which has been exempted from the requirement laid down in paragraph 3 shall publicly disclose information on the exemption.

A competent authority shall notify ESMA of any decision adopted pursuant to paragraph 6, 8 or 10, or any notification received pursuant to paragraph 7, 9 or 10, and shall provide ESMA with the details of the intragroup transaction concerned.

12.  The obligations set out in paragraphs 1 to 11 shall apply to OTC derivative contracts entered into between third country entities that would be subject to those obligations if they were established in the Union, provided that those contracts have a direct, substantial and foreseeable effect within the Union or where such obligation is necessary or appropriate to prevent the evasion of any provision of this Regulation.

12a.   EBA shall set up a central validation function for the elements and general aspects of pro forma models, and changes thereto, used or to be used by financial counterparties and non-financial counterparties referred to in Article 10 for the purpose of complying with the requirements set out in paragraph 3 of this Article. EBA shall collect feedback from ESMA, EIOPA, and the competent authorities responsible for the supervision of counterparties using the pro forma models subject to validation, including on the performance of those pro forma models, and shall coordinate their views with the aim of developing consensus on the elements and general aspects of pro forma models. EBA shall serve as the main point of contact for discussions with market participants and developers of those pro forma models.

In its role as a central validator, EBA shall validate the elements and general aspects of those pro forma models, including their calibration, design and coverage of instruments, asset classes and risk factors. EBA shall grant or refuse such validation within six months of receipt of the application for validation referred to in paragraph 3, fourth subparagraph, for a new pro forma model and within three months of receipt of the application for a change to an already validated model. To facilitate EBA’s validation work, developers of pro forma models shall, upon EBA’s request, submit to EBA all the necessary information and documentation.

EBA shall assist the competent authorities in their authorisation processes regarding the general aspects of the implementation of the models under paragraph 3. To that end, EBA shall prepare a yearly report on the relevant aspects of its validation work, including the verification of the calibration of the models under the second subparagraph of this paragraph and the analysis of the issues reported. Where it deems it necessary, EBA shall issue, in cooperation with ESMA and EIOPA, recommendations in accordance with Article 16 of Regulation (EU) No 1093/2010 addressed to those competent authorities. In order to assist EBA in drafting the reports and recommendations, competent authorities shall provide EBA, upon its request, with the information collected during their initial and ongoing entity-level authorisation process of the models under paragraph 3, or changes thereto.

Competent authorities shall be solely responsible for authorising the use of the models under paragraph 3, or changes thereto, at the supervised entity level.

EBA shall charge an annual fee, per pro forma model, to financial counterparties and non-financial counterparties referred to in Article 10(1) using the pro forma models validated by EBA under the second subparagraph of this paragraph. Competent authorities shall report to EBA the financial counterparties and non-financial counterparties that implement models subject to the validation process under the first subparagraph. The fee shall be proportionate to the monthly average outstanding notional amount of non-centrally cleared OTC derivatives over the last 12 months of the counterparties concerned using the pro forma models validated by EBA and shall be assigned to cover all costs incurred by EBA for the performance of its tasks in accordance with the first subparagraph.

For the purposes of this Article, “pro forma model” means an initial margin model established, published, and revised through market-led initiatives.

The Commission is empowered to adopt a delegated act in accordance with Article 82 to supplement this Regulation by setting out:

a) the method for the determination of the amount of the fees; and 

(b) the modalities of the payment of the fees.’

13.  ESMA shall regularly monitor the activity in derivatives not eligible for clearing in order to identify cases where a particular class of derivatives may pose systemic risk and to prevent regulatory arbitrage between cleared and non-cleared derivative transactions. In particular, ESMA shall, after consulting the ESRB, take action in accordance with Article 5(3) or review the regulatory technical standards on margin requirements laid down in paragraph 14 of this Article and in Article 41.
14.  In order to ensure consistent application of this Article, ESMA shall draft regulatory technical standards specifying:
(a) the procedures and arrangements referred to in paragraph 1;
(b) the market conditions that prevent marking-to-market and the criteria for using marking-to-model referred to in paragraph 2;
(c) the details of the exempted intragroup transactions to be included in the notification referred to in paragraphs 7, 9 and 10;
(d) the details of the information on exempted intragroup transactions referred to in paragraph 11;
(e) the contracts that are considered to have a direct, substantial and foreseeable effect within the Union or the cases where it is necessary or appropriate to prevent the evasion of any provision of this Regulation as referred to in paragraph 12;

ESMA shall submit those draft regulatory technical standards to the Commission by 30 September 2012.

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.

15.  In order to ensure consistent application of this Article, the ESAs shall develop common draft regulatory technical standards specifying:

(a) the risk-management procedures, including the levels and type of collateral and segregation arrangements referred to in paragraph 3;

(aa) the supervisory procedures, to ensure initial and ongoing validation of the risk-management procedures referred to in paragraph 3 applied by credit institutions authorised in accordance with Directive 2013/36/EU and investment firms authorised in accordance with Directive 2014/65/EU that have, or belong to a group that has, a monthly average outstanding notional amount of non-centrally cleared OTC derivatives of at least EUR 750 billion, calculated in accordance with the regulatory technical standards to be developed by the ESAs in accordance with this paragraph.

(b) the procedures for the counterparties and the relevant competent authorities to be followed when applying exemptions under paragraphs 6 to 10;

(c) the applicable criteria referred to in paragraphs 5 to 10 including in particular what is to be considered as a practical or legal impediment to the prompt transfer of own funds and repayment of liabilities between the counterparties.

The level and type of collateral required with respect to OTC derivative contracts that are concluded by covered bond entities in connection with a covered bond, or by a securitisation special purpose entity in connection with a securitisation within the meaning of this Regulation and meeting the conditions of Article 4(5) of this Regulation and the requirements set out in Article 18, and in Articles 19 to 22 or 23 to 26 of Regulation (EU) 2017/2402 (the Securitisation Regulation) shall be determined taking into account any impediments faced in exchanging collateral with respect to existing collateral arrangements under the covered bond or securitisation.

The ESAs shall submit those draft regulatory technical standards, except for those referred to in point (aa) of the first subparagraph, to the Commission by 18 July 2018.

EBA, in cooperation with ESMA, shall submit the draft regulatory technical standards referred to in the first subparagraph, point (aa), to the Commission by 25 December 2025..

Depending on the legal nature of the counterparty, power is delegated to the Commission to adopt the regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulations (EU) No 1093/2010, (EU) No 1094/2010 or (EU) No 1095/2010