No Mandatory Variation Margin for FX Forwards? 

Many buy-side and sell-side entities will be relieved to know that the EU Council is proposing to take most physically settled forward FX transactions (“FFX”) out of scope for mandatory variation margin under the European Market Infrastructure Regulation (“EMIR”).  The proposal is set out in the latest version of a revised draft of a proposed Regulation to amend EMIR.

EMIR sets out requirements for the clearing of OTC derivatives through authorised central counterparties (“CCPs”), collateral exchange and risk mitigation requirements for non-cleared derivatives, as well as post-trade reporting requirements for all OTC derivatives.

The risk management procedures include the requirement to collect variation margin in respect of over-the-counter (“OTC”) derivative transactions that are not centrally cleared.  This requirement started to apply on a phased-in basis from 4 February 2017.  It will first apply to FFX from 3 January 2018, the date the Markets in Financial Instruments Directive enters into effect. For further information see our earlier briefing here.

In May 2017 the European Commission published a proposed Regulation to amend EMIR in several respects ("Regulation"). See our related briefing here. The EU’s Council of Ministers is now proposing to amend the Regulation to take FFX out of scope of EMIR’s mandatory variation margin requirements, with the exception of transactions concluded between credit institutions.  According to the Regulation's recitals, this is in recognition of their “specific risk profile” which makes it appropriate:

“to restrict the mandatory exchange of variation margins on physically settled FX forwards to transactions between the most systemic counterparties in order to limit the build-up of systemic risk.”

The EU Council is also proposing a number of other amendments to the Regulation. In particular, the previously proposed expansion of the definition of “financial counterparty” to encompass Securitisation Special Purpose Entities has been removed.


Many firms have typically traded FFX on an undocumented and uncollateralised basis and have struggled to put in place the contractual and operational measures necessary to comply with the variation margin requirements.

While the latest proposals will come as a relief to such firms, they are unlikely to be in place before 3 January 2018, the date the requirement to collect variation margin starts to apply to FFX. If, therefore, the proposed change is to benefit FFX transacted on or after that date, regulatory forbearance regarding compliance with the EMIR variation margin requirement in respect thereof will be required, pending the adoption of the proposals. There is precedent for such an approach (see here) and relevant market participants will be keen to see an equivalent approach taken here, if the proposed changes are to be of practical benefit to their arrangements.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.