The UK’s Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have jointly published a consultation paper on margin requirements for non-centrally cleared derivatives. The paper seeks to develop a UK framework for two products that are currently exempted from these requirements: single-stock equity options and index options.
The margin requirements for non-centrally cleared derivatives, implemented in the UK under the onshored European Market Infrastructure Regulation (EMIR), requires counterparties to exchange initial margin (IM) and variation margin (VM) on non-centrally cleared derivatives. A temporary exemption from these requirements was made for single-stock equity options and index options until 4 January 2026. The aim was to give time for the PRA and FCA to undertake deeper analysis to develop a permanent approach for these products.
Two issues
The analysis found two issues. Under the current framework, firms are in scope of IM requirements when both counterparties’ average aggregate notional amount (AANA) exceeds an €8 billion threshold. However, due to the way the AANA is calculated, firms under the €8 billion threshold might fall in scope. Even though the binding technical standards (BTS) under the UK’s EMIR doesn’t require such firms to exchange IM on new contracts they enter into with their counterparties, they must continue to do so for legacy contracts for the life of the trade. Industry insiders have argued that this “makes it uneconomical for the sell-side to continue servicing these smaller clients, due to the loss of netting benefits, and complexity in retaining the operational infrastructure for margin requirements for a small volume of trades”.
The second issue has to do with cross-border operational friction – “firms may be in scope of IM according to one jurisdiction’s methodology but not the other’s or come into or out of scope in a different calendar month across jurisdictions. This complicates cross-border transactions.”
Three proposals
The consultation paper sets out three proposals. The first is to “indefinitely exempt single-stock equity and index options from the UK bilateral margining requirements”. With these products remaining out of scope in most jurisdictions, any requirements cannot be implemented consistently internationally and would have limited effectiveness.
The second is to “remove the requirement to exchange IM for legacy contracts once a counterparty subsequently falls out of scope of the margin requirements”. This would address the burden of maintaining margining requirements for legacy contracts.
The third is to “permit UK firms, when transacting with a counterparty subjected to the margin requirements in another jurisdiction, to use that jurisdiction’s threshold assessment calculation periods and dates of dates of entry into scope of IM requirements to determine whether those transactions are subject to IM requirements”. This would address cross-border operational frictions.
The deadline for responses is 27 June 2025
