EBA Proposes Standards on Initial Margin Model Validation under EMIR

The deadline for comments on the consultation paper ended on February 4, 2022.

On November 4, 2021 the EBA published a consultation paper on a draft regulatory technical standard (RTS EBACP/2021/33) on the Initial Margin Model Validation (IMMV) of over-the-counter (OTC) derivatives’ initial margin models for institutions under the European Markets Infrastructure Regulation (EMIR).

The deadline for comments on the consultation paper ended on February 4, 2022.

The current regulation on the use of internal models for initial margin for non-centrally cleared OTC derivatives does not foresee a supervisory approval, but prescribes several requirements for the margin framework. This allowed many institutions to benefit from a simple onboarding of internal models for initial margin (e.g., ISDA SIMM). The new draft RTS, however, requires both an individual validation and a supervisory approval process for the internal model on initial margin for all institutions.

During the planned three-staged implementation phase, institutions in scope of EMIR will need to undergo an initial validation of their internal model for initial margin of non-centrally cleared OTC derivatives to obtain supervisory approval. This is independent of the model being internally developed or the model being purchased, as in the case of ISDA SIMM.

The draft RTS outlines a variety of requirements regarding governance, policies and documentation as well as methodological confirmation, backtesting and IT implementation.

Interestingly, the draft RTS presents institutions with the prospect of outsourcing some requirements, such as model validation or model development. On the Competent Authority’s side, there is the possibility to leverage previous approvals regarding the same model. With our benchmarking experience and expert knowledge, we are happy to support you in successfully preparing and implementing the draft RTS on Initial Margin Model Validation.

If you have any questions, please do not hesitate to contact us. We are looking forward to hearing from you!

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Philipp Schröder

Philipp Schröder

Frankfurt am Main

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