EU May Exclude Initial Margin Haircuts from Resolution Tools

The Council of the European Union approved on November 27, 2019, its proposal for the regulation of recovery and resolution of central counterparties. In words of the Finnish Minister of Finance, the Council’s position is to set out EU-wide rules to address interconnectedness and contagion risks while encouraging less risky behaviour by market participants.

One of the major amends with respect to earlier versions of the proposal is the Article 33(4), where initial margin accounts are included in the list of liabilities that resolution authorities are not allowed to write down. This position contrasts the international standards set on July 5, 2017, by the FSB and CPMI-IOSCO, in favour of allowing all of the possible tools available to use in a crisis, the proposal from the European Parliament on January 24, 2018, and opinions in favour of initial margin haircutting as a fairer way to distribute losses compared to other tools[1].

Negotiations with the European Parliament and the European Commission for a final text are set to start as soon as possible.

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