The rules are designed to reduce counterparty credit risk and mitigate potential systemic risk by requiring certain “qualifying counterparties” to post initial margin (“IM”) and variation margin (“VM”) in respect of their non-cleared OTC derivative positions when trading with each other. Financial counterparties and NFC+s1 counterparty if established in the EU. The requirements will also apply to trades between two non-EU counterparties where the contract has a direct, substantial and foreseeable effect in the EU.
If adopted by the European Commission, the rules will apply from 1 September 2016, subject to certain threshold tests and phase-in periods. For example, the requirements for IM will, at the outset, apply only to the largest counterparties.