CHAPTER I

GENERAL PROVISIONS ON RISK MANAGEMENT PROCEDURES
SECTION 1

Definitions and general requirements

Definitions
Article 1
For the purposes of this Regulation, the following definitions apply:
1. ‘initial margin’ means the collateral collected by a counterparty to cover its current and potential future exposure in the interval between the last collection of margin and the liquidation of positions or hedging of market risk following a default of the other counterparty;
2. ‘variation margin’ means the collateral collected by a counterparty to reflect the results of the daily marking-to-market or marking-to-model of outstanding contracts referred to in Article 11(2) of Regulation (EU) No 648/2012;
3. ‘netting set’ means a set of non-centrally cleared over-the-counter (‘OTC’) derivative contracts between two counterparties that is subject to a legally enforceable bilateral netting agreement.

General requirements
Article 2
1
Counterparties shall establish, apply and document risk management procedures for the exchange of collateral for non-centrally cleared OTC derivative contracts.
2
The risk management procedures referred to in paragraph 1 shall include procedures providing for or specifying the following:
a
the eligibility of collateral for non-centrally cleared OTC derivative contracts in accordance with Section 2;
b
the calculation and collection of margins for non-centrally cleared OTC derivative contracts in accordance with Section 3;
c
the management and segregation of collateral for non-centrally cleared OTC derivative contracts in accordance with Section 5;
d
the calculation of the adjusted value of collateral in accordance with Section 6;
e
the exchange of information between counterparties and the authorisation and recording of any exceptions to the risk management procedures referred to in paragraph 1;
f
the reporting of the exceptions set out in Chapter II to senior management;
g
the terms of all necessary agreements to be entered into by counterparties, at the latest, at the moment in which a non-centrally cleared OTC derivative contract is concluded, including the terms of the netting agreement and the terms of the exchange of collateral agreement in accordance with Article 3;
h
the periodic verification of the liquidity of the collateral to be exchanged;
i
the timely re-appropriation of the collateral in the event of default by the posting counterparty from the collecting counterparty; and
j
the regular monitoring of the exposures arising from OTC derivative contracts that are intragroup transactions and the timely settlement of the obligations resulting from those contracts.
For the purposes of point (g) of the first subparagraph, the terms of the agreements shall comprise all aspects concerning the obligations arising from any non-centrally cleared OTC derivative contract to be concluded, and at least the following:
a
any payment obligations arising between counterparties;
b
the conditions for netting payment obligations;
c
events of default or other termination events of the non-centrally cleared OTC derivative contracts;
d
all calculation methods used in relation to payment obligations;
e
the conditions for netting payment obligations upon termination;
f
the transfer of rights and obligations upon termination;
g
the governing law of the transactions of the non-centrally cleared OTC derivative contracts.
3
Where counterparties enter into a netting or an exchange of collateral agreement, they shall perform an independent legal review of the enforceability of those agreements. That review may be conducted by an internal independent unit or by an independent third party.
The requirement to perform the review referred to in the first subparagraph shall be considered to be satisfied in relation to the netting agreement where that agreement is recognised in accordance with Article 296 of Regulation (EU) No 575/2013.
4
Counterparties shall establish policies to assess on a continuous basis the enforceability of the netting and the exchange of collateral agreements that they enter into.
5
The risk management procedures referred to in paragraph 1 shall be tested, reviewed and updated as necessary and at least annually.
6
Upon request, counterparties using initial margin models in accordance with Section 4 shall provide the competent authorities with any documentation relating to the risk management procedures referred to in paragraph 2(b) at any time.

Exchange of collateral agreement
Article 3
The exchange of collateral agreement referred to in point (g) of the first subparagraph of Article 2(2) shall include at least the following terms:
1. the levels and type of collateral required;
2. the segregation arrangements;
3. the netting set to which the exchange of collateral refers;
4. the procedures for notification, confirmation and adjustment of margin calls;
5. the procedures for settlement of margin calls for each type of eligible collateral;
6. the procedures, methods, timeframes and allocation of responsibilities for the calculation of margins and the valuation of collateral;
7. the events that are considered to be default or termination events;
8. the law applicable to the non-centrally cleared OTC derivative contract;
9. the law applicable to the exchange of collateral agreement.
SECTION 2

Eligibility

Eligible collateral
Article 4
1
A counterparty shall only collect collateral from the following asset classes:
a
cash in the form of money credited to an account in any currency, or similar claims for the repayment of money, such as money market deposits;
b
gold in the form of allocated pure gold bullion of recognised good delivery;
c
debt securities issued by Member States' central governments or central banks;
d
debt securities issued by Member States' regional governments or local authorities whose exposures are treated as exposures to the central government of that Member State in accordance with Article 115(2) of Regulation (EU) No 575/2013;
e
debt securities issued by Member States' public sector entities whose exposures are treated as exposures to the central government, regional government or local authority of that Member State in accordance with Article 116(4) of Regulation (EU) No 575/2013;
f
debt securities issued by Member States' regional governments or local authorities other than those referred to in point (d);
g
debt securities issued by Member States' public sector entities other than those referred to in point (e);
h
debt securities issued by multilateral development banks listed in Article 117(2) of Regulation (EU) No 575/2013;
i
debt securities issued by the international organisations listed in Article 118 of Regulation (EU) No 575/2013;
j
debt securities issued by third countries' governments or central banks;
k
debt securities issued by third countries' regional governments or local authorities that meet the requirements of points (d) and (e);
l
debt securities issued by third countries' regional governments or local authorities other than those referred to in points (d) and (e);
m
debt securities issued by credit institutions or investment firms including bonds referred to in Article 52(4) of Directive 2009/65/EC of the European Parliament and of the Council ;
n
corporate bonds;
o
the most senior tranche of a securitisation, as defined in Article 4(61) of Regulation (EU) No 575/2013, that is not a re-securitisation as defined in Article 4(63) of that Regulation;
p
convertible bonds provided that they can be converted only into equities which are included in an index specified pursuant to point (a) of Article 197 (8) of Regulation (EU) No 575/2013;
q
equities included in an index specified pursuant to point (a) of Article 197(8) of Regulation (EU) No 575/2013;
r
shares or units in undertakings for collective investments in transferable securities (UCITS), provided that the conditions set out in Article 5 are met.
2
A counterparty shall only collect collateral from the asset classes referred to in points (f), (g) and (k) to (r) of paragraph 1 where all the following conditions apply:
a
the assets are not issued by the posting counterparty;
b
the assets are not issued by entities which are part of the group to which the posting counterparty belongs;
c
the assets are not otherwise subject to any significant wrong way risk, as defined in points (a) and (b) of paragraph 1 of Article 291 of Regulation (EU) No 575/2013.

Eligibility criteria for units or shares in UCITS
Article 5
1
For the purposes of point (r) of Article 4(1), a counterparty may only use units or shares in UCITS as eligible collateral where all the following conditions are met:
a
the units or shares have a daily public price quote;
b
the UCITS are limited to investing in assets that are eligible in accordance with Article 4(1);
c
the UCITS meet the criteria laid down in Article 132(3) of Regulation (EU) No 575/2013.
For the purposes of point (b), UCITS may use derivative instruments to hedge the risks arising from the assets in which they invest.
Where a UCITS invests in shares or units of other UCITS, the conditions laid down in the first subparagraph shall also apply to those UCITS.
2
By way of derogation from point (b) of paragraph 1, where a UCITS or any of its underlying UCITS do not only invest in assets that are eligible in accordance with Article 4(1), only the value of the unit or share of the UCITS that represents investment in eligible assets may be used as eligible collateral pursuant to paragraph 1 of this Article.
The first subparagraph shall apply to any underlying UCITS of a UCITS that has underlying UCITS of its own.
3
Where non-eligible assets of a UCITS can have a negative value, the value of the unit or share of the UCITS that may be used as eligible collateral pursuant to paragraph 1 shall be determined by deducting the maximum negative value of the non-eligible assets from the value of eligible assets.

Credit quality assessment
Article 6
1
The collecting counterparty shall assess the credit quality of assets belonging to the asset classes referred to in points (c), (d) and (e) of Article 4(1) that are either not denominated or not funded in the issuer's domestic currency and in points (f), (g), (j) to (n) and (p) of Article 4(1) using one of the following methodologies:
a
the internal ratings referred to in paragraph 3 of the collecting counterparty;
b
the internal ratings referred to in paragraph 3 of the posting counterparty, where that counterparty is established in the Union or in a third country where the posting counterparty is subject to consolidated supervision assessed equivalent to that governed by Union law in accordance with Article 127 of Directive 2013/36/EU;
c
a credit quality assessment issued by a recognised External Credit Assessment Institution (ECAI) as defined in Article 4(98) of Regulation (EU) No 575/2013 or a credit quality assessment of an export credit agency referred to in Article 137 of that Regulation.
2
The collecting counterparty shall assess the credit quality of assets belonging to the asset class referred to in point (o) of Article 4(1) using the methodology referred to in point (c) of paragraph 1 of this Article.
3
A counterparty permitted to use the Internal Rating Based (IRB) approach pursuant to Article 143 of Regulation (EU) No 575/2013 may use their internal ratings in order to assess the credit quality of the collateral collected for the purposes of this Regulation.
4
A counterparty using the IRB approach in accordance with paragraph 3 shall determine the credit quality step of the collateral in accordance with Annex I.
5
A counterparty using the IRB approach in accordance with paragraph 3 shall communicate to the other counterparty the credit quality step referred to in paragraph 4 associated to the assets to be exchanged as collateral.
6
For the purposes of paragraphs 1(c), the credit quality assessment shall be mapped to credit quality steps specified pursuant to Articles 136 or 270 of Regulation (EU) No 575/2013.

Specific requirements for eligible assets
Article 7
1
Counterparties shall only use the assets referred to in points (f), (g) and (j) to (p) of Article 4(1) as collateral where their credit quality has been assessed as credit quality steps 1, 2 or 3 in accordance with Article 6.
2
Counterparties shall only use the assets referred to in points (c), (d) and (e) of Article 4(1) that are not denominated or funded in the issuer's domestic currency as collateral where their credit quality has been assessed as credit quality steps 1, 2, 3 or 4 in accordance with Article 6.
3
Counterparties shall establish procedures for the treatment of assets exchanged as collateral in accordance with paragraphs 1 and 2 whose credit quality is subsequently assessed to be:
a
step 4 or beyond for assets referred to in paragraph 1;
b
beyond step 4 for assets referred to in paragraph 2.
4
The procedures referred to in paragraph 3 shall meet all of the following requirements:
a
they shall prohibit counterparties from exchanging additional assets assessed to be of the credit quality referred to in paragraph 3;
b
they shall establish a schedule by which assets assessed to be of the credit quality referred to in paragraph 3 and already exchanged as collateral are replaced over a period of time not exceeding 2 months;
c
they shall set a credit quality step that requires the immediate replacement of the assets referred to in paragraph 3;
d
they shall allow counterparties to increase the haircuts on the relevant collateral insofar as the collateral has not been replaced in accordance with the schedule referred to in point (b).
5
Counterparties shall not use assets classes referred to in Article 4(1) as collateral where they have no access to the market for those assets or where they are unable to liquidate those assets in a timely manner in case of default of the posting counterparty.

Concentration limits for initial margin
Article 8
1
Where collateral is collected as initial margin in accordance with Article 13, the following limits shall apply for each collecting counterparty:
a
the sum of the values of the initial margin collected from the asset classes referred to in points (b), (f), (g), and (l) to (r) of Article 4(1) issued by a single issuer or by entities which belong to the same group does not exceed the greater of the following values:
1. 15 % of the collateral collected from the posting counterparty;
2. EUR 10 million or the equivalent in another currency;
b
the sum of the values of the initial margin collected from the asset classes referred to in points (o), (p) and (q) of Article 4(1), where the asset classes referred to in points (p) and (q) of that Article are issued by institutions as defined in Regulation (EU) No 575/2013, does not exceed the greater of the following values:
1. 40 % of the collateral collected from the posting counterparty;
2. EUR 10 million or the equivalent in another currency.
The limits laid down in the first subparagraph shall also apply to shares or units in UCITS where the UCITS primarily invests in the asset classes referred to in that subparagraph.
2
Where collateral is collected as initial margin in accordance with Article 13 in excess of EUR 1 billion and each of the counterparties belong to one of the categories listed in paragraph 3, the following limits to the amount of initial margin in excess of EUR 1 billion collected from a counterparty shall apply:
a
the sum of the values of the initial margin collected from the asset classes referred to in points (c) to (l) of Article 4(1) issued by a single issuer or by issuers domiciled in the same country shall not exceed 50 % of the initial margin collected from that counterparty;
b
Where initial margin is collected in cash, the 50 % concentration limit referred to in point (a) shall also take into account the risk exposures arising from the third-party holder or custodian holding that cash.
3
The counterparties referred to in paragraph 2 shall be one of the following:
a
institutions identified as G-SIIs in accordance with Article 131 of Directive 2013/36/EU;
b
institutions identified as O-SIIs in accordance with Article 131 of Directive 2013/36/EU;
c
counterparties which are not pension scheme arrangements and for which the sum of the values of the collateral to be collected exceeds EUR 1 billion.
4
Where collateral is collected as initial margin in accordance with Article 13 in excess of EUR 1 billion by or from a pension scheme arrangement, the collecting counterparty shall establish procedures to manage concentration risk with respect to collateral collected from the asset classes referred to in points (c) to (l) of Article 4(1), including adequate diversification of that collateral.
5
Where institutions referred to in points (a) and (b) of paragraph 3 collect initial margin in cash from a single counterparty that is also an institution referred to in those points, the collecting counterparty shall ensure that not more than 20 % of that initial margin is held by a single third-party custodian.
6
Paragraphs 1 to 4 shall not apply to collateral collected in the form of financial instruments that are the same as the underlying financial instrument of the non-centrally cleared OTC derivative contract.
7
The collecting counterparty shall assess compliance with the conditions laid down in paragraph 2 of this Article at least every time that initial margin is calculated in accordance with Article 9(2).
8
By way of derogation from paragraph 7, a counterparty referred to in points (a), (b) and (c) of Article 2(10) of Regulation (EU) No 648/2012 may assess compliance with the conditions laid down in paragraph 2 quarterly, provided that the amount of initial margin collected from each individual counterparty is at all times below EUR 800 million during the quarter preceding the assessment.
SECTION 3

Calculation and collection of margins

Frequency of calculation and determination of the calculation date
Article 9
1
Counterparties shall calculate variation margin in accordance with Article 10 at least on a daily basis.
2
Counterparties shall calculate initial margin in accordance with Article 11 no later than the business day following one of these events:
a
where a new non-centrally cleared OTC derivative contract is executed or added to the netting set;
b
where an existing non-centrally cleared OTC derivative contract expires or is removed from the netting set;
c
where an existing non-centrally cleared OTC derivative contract triggers a payment or a delivery other than the posting and collecting of margins;
d
where the initial margin is calculated in accordance with the standardised approach referred to in Article 11(1) and an existing contract is reclassified in terms of the asset category referred to in paragraph 1 of Annex IV as a result of reduced time to maturity;
e
where no calculation has been performed in the preceding 10 business days.
3
For the purpose of determining the calculation date for initial and variation margin, the following shall apply:
a
where two counterparties are located in the same time-zone, the calculation shall be based on the netting set of the previous business day;
b
where two counterparties are not located in the same time-zone, the calculation shall be based on the transactions in the netting set which are entered into before 16.00 of the previous business day of the time zone where it is first 16.00.

Calculation of variation margin
Article 10
The amount of variation margin to be collected by a counterparty shall be the aggregation of the values calculated in accordance with Article 11(2) of Regulation (EU) No 648/2012 of all contracts in the netting set, minus the value of all variation margin previously collected, minus the net value of each contract in the netting set at the point of entry into the contract, and plus the value of all variation margin previously posted.

Calculation of initial margin
Article 11
1
Counterparties shall calculate the amount of initial margin to be collected using either the standardised approach set out in Annex IV or the initial margin models referred to in Section 4 or both.
2
The collection of initial margin shall be performed without offsetting the initial margin amounts between the two counterparties.
3
Where counterparties use both the standardised approach set out in Annex IV and the initial margin models referred to in Section 4 in relation to the same netting set, they shall use them consistently for each non-centrally cleared OTC derivative contract.
4
Counterparties calculating the initial margin in accordance with Section 4 shall not take into account any correlations between the value of the unsecured exposure and the collateral in that calculation.
5
Counterparties shall agree on the method each counterparty uses to determine the initial margin it has to collect but are not required to use a common methodology.
6
Where one or both counterparties rely on an initial margin model they shall agree on the model developed pursuant to Section 4.

Provision of variation margin
Article 12
1
The posting counterparty shall provide the variation margin as follows:
a
within the same business day of the calculation date determined in accordance with Article 9(3);
b
where the conditions in paragraph 2 are met, within 2 business days of the calculation date determined in accordance with Article 9(3).
2
The provision of variation margin in accordance with paragraph 1(b) may only be applied to the following:
a
netting sets comprising derivative contracts not subject to initial margin requirements in accordance with this Regulation, where the posting counterparty has provided, at or before the calculation date of the variation margin, an advance amount of eligible collateral calculated in the same manner as that applicable to initial margins in accordance with Article 15, for which the collecting counterparty has used a margin period of risk (‘MPOR’) at least equal to the number of days in between and including the calculation date and the collection date;
b
netting sets comprising contracts subject to initial margin requirements in accordance with this Regulation, where the initial margin has been adjusted in one of the following ways:
1. by increasing the MPOR referred to in Article 15(2) by the number of days in between, and including, the calculation date determined in accordance with Article 9(3) and the collection date determined in accordance with paragraph 1 of this Article;
2. by increasing the initial margin calculated in accordance with the standardised approach referred to in Article 11 using an appropriate methodology taking into account a MPOR that is increased by the number of days in between, and including, the calculation date determined in accordance with Article 9(3) and the collection date determined in accordance with paragraph 2 of this Article.
For the purposes of point (a), in case no mechanism for segregation is in place between the two counterparties, those counterparties may offset the amounts to be provided.
3
In the event of a dispute over the amount of variation margin due, counterparties shall provide, in the same time frame referred to in paragraph 1, at least the part of the variation margin amount that is not being disputed.

Provision of initial margin
Article 13
1
The posting counterparty shall provide the initial margin in accordance with Section 5.
2
The posting counterparty shall provide the initial margin within the same business day of the calculation date determined in accordance with Article 9(3).
3
In the event of a dispute over the amount of initial margin due, counterparties shall provide at least the part of the initial margin amount that is not being disputed within the same business day of the calculation date determined in accordance with Article 9(3).
SECTION 4

Initial margin models

General requirements
Article 14
1
Where a counterparty uses an initial margin model, that model may be developed by any of, or both, counterparties or by a third-party agent.
Where a counterparty uses an initial margin model developed by a third-party agent, the counterparty shall remain responsible for ensuring that that model complies with the requirements referred to in this Section.
2
Initial margin models shall be developed in a way that captures all the significant risks arising from entering into the non-centrally cleared OTC derivative contracts included in the netting set, including the nature, scale, and complexity of those risks and shall meet the following requirements:
a
the model incorporates risk factors corresponding to the individual currencies in which those contracts in the netting set are denominated;
b
the model incorporates interest rate risk factors corresponding to the individual currencies in which those contracts are denominated;
c
the yield curve is divided into a minimum of six maturity buckets for exposures to interest-rate risk in the major currencies and markets;
d
the model captures the risk of movements between different yield curves and between different maturity buckets;
e
the model incorporates separate risk factors at least for each equity, equity index, commodity or commodity index which is significant for those contracts;
f
the model captures the risk arising from less liquid positions and positions with limited price transparency within realistic market scenarios;
g
the model captures the risk, otherwise not captured by other features of the model, arising from derivative contracts where the underlying asset class is credit;
h
the model captures the risk of movements between similar, but not identical, underlying risk factors and the exposure to changes in values arising from maturity mismatches;
i
the model captures main non-linear dependencies;
j
the model incorporates methodologies used for back-testing which include statistical tests of the model's performance;
k
the model determines which events trigger a model change, calibration or other remedial action.
3
The risk management procedures referred to in Article 2(1) shall ensure that the performance of the model is monitored on a continuous basis including by back-testing the model at least every 3 months.
For the purposes of the first subparagraph, back testing shall include a comparison between the values produced by the model and the realised market values of the non-centrally cleared OTC derivative contracts in the netting set.
4
The risk management procedures referred to in Article 2(1) shall outline the methodologies used for undertaking back-testing, including statistical tests of performance.
5
The risk management procedures referred to in Article 2(1) shall describe what results of the back-testing would lead to a model change, recalibration or other remediation action.
6
The risk management procedures referred to in Article 2(1) shall ensure that counterparties retain records of the results of the back-testing referred to in paragraph 3 of this Article.
7
Counterparties shall provide all the information necessary to explain the calculation of a given value of the initial margin model to the other counterparty in a way that a knowledgeable third party would be able to verify that calculation.
8
The initial margin model shall reflect parameter uncertainty, correlation, basis risk and data quality in a prudent manner.

Confidence interval and MPOR
Article 15
1
The assumed variations in the value of the non-centrally cleared OTC derivative contracts within the netting set for the calculation of initial margins using an initial margin model shall be based on a one-tailed 99 percent confidence interval over a MPOR of at least 10 days.
2
The MPOR for the calculation of initial margins using an initial margin model referred to in paragraph 1 shall include:
a
the period that may elapse from the last margin exchange of variation margin to the default of the counterparty;
b
the estimated period needed to replace each of the non-centrally cleared OTC derivative contracts within the netting set or hedge the risks arising from them, taking into account the level of liquidity of the market where those types of contracts are traded, the total volume of the non-centrally cleared OTC derivative contracts in that market and the number of participants in that market.

Calibration of the parameters of the model
Article 16
1
Parameters used in initial margin models shall be calibrated, at least annually, based on historical data from a time period with a minimum duration of 3 years and a maximum duration of 5 years.
2
The data used for calibrating the parameters of initial margin models shall include the most recent continuous period from the date on which the calibration referred to in paragraph 1 is performed and at least 25 % of those data shall be representative of a period of significant financial stress (‘stressed data’).
3
Where stressed data referred to in paragraph 2 does not constitute at least 25 % of the data used in the initial margin model, the least recent data of the historical data referred to in paragraph 1 shall be replaced by data from a period of significant financial stress, until the overall proportion of stressed data is at least 25 % of the overall data used in the initial margin model.
4
The period of significant financial stress used for calibration of the parameters shall be identified and applied separately at least for each of the asset classes referred to in Article 17(2).
5
The parameters shall be calibrated using equally weighted data.
6
The parameters may be calibrated for shorter periods than the MPOR determined in accordance with Article 15. Where shorter periods are used, the parameters shall be adjusted to that MPOR by an appropriate methodology.
7
Counterparties shall have written policies setting out the circumstances triggering a more frequent calibration.
8
Counterparties shall establish procedures for adjusting the value of the margins to be exchanged in response to a change in the parameters due to a change in market conditions. Those procedures shall provide for counterparties to be able to exchange the additional initial margin resulting from that change of the parameters over a period that ranges between 1 and 30 business days.
9
Counterparties shall establish procedures regarding the quality of the data used in the model in accordance with paragraph 1, including the selection of appropriate data providers and the cleaning and interpolation of that data.
10
Proxies for the data used in initial margin models shall be used only where both of the following conditions are met:
a
available data is insufficient or is not reflective of the true volatility of an OTC derivative contract or portfolio of OTC derivative contracts within the netting set;
b
the proxies lead to a conservative level of margins.

Diversification, hedging and risk offsets across underlying classes
Article 17
1
Initial margin models shall only include non-centrally cleared OTC derivative contracts within the same netting set. Initial margin models may provide for diversification, hedging and risk offsets arising from the risks of the contracts within the same netting set, provided that the diversification, hedging or risk offset is only carried out within the same underlying asset class as referred to in paragraph 2.
2
For the purposes of paragraph 1, diversification, hedging and risk offsets may only be carried out within the following underlying asset classes:
a
interest rates, currency and inflation;
b
equity;
c
credit;
d
commodities and gold;
e
other.

Qualitative requirements
Article 18
1
Counterparties shall establish an internal governance process to assess the appropriateness of the initial margin model on a continuous basis, including all of the following:
a
an initial validation of the model by suitably qualified persons who are independent from the persons developing the model;
b
a follow up validation whenever a significant change is made to the initial margin model and at least annually;
c
a regular audit process to assess the following:
1. the integrity and reliability of the data sources;
2. the management information system used to run the model;
3. the accuracy and completeness of data used;
4. the accuracy and appropriateness of volatility and correlation assumptions.
2
The documentation of the risk management procedures referred to in point (b) of Article 2(2) relating to the initial margin model shall meet all of the following conditions:
a
it shall allow a knowledgeable third party to understand the design and operational detail of the initial margin model;
b
it shall contain the key assumptions and the limitations of the initial margin model;
c
it shall define the circumstances under which the assumptions of the initial margin model are no longer valid.
3
Counterparties shall document all changes to the initial margin model. That documentation shall also detail the results of the validations, referred to in paragraph 1, carried out after those changes.
SECTION 5

Collateral management and segregation

Collateral management and segregation
Article 19
1
The procedures referred to in Article 2(2)(c) shall include the following:
a
a daily valuation of the collateral held in accordance with Section 6;
b
the legal arrangements and a collateral holding structure that allow access to the received collateral where it is being held by a third party;
c
where initial margin is held by the collateral provider, that the collateral is held in insolvency-remote custody accounts;
d
that non-cash initial margin is maintained in accordance with paragraphs 3 and 4;
e
that cash collected as initial margin is maintained in cash accounts at central banks or credit institutions which fulfil all of the following conditions:
1. they are authorised in accordance with Directive 2013/36/EU or are authorised in a third country whose supervisory and regulatory arrangements have been found to be equivalent in accordance with Article 142(2) of Regulation (EU) No 575/2013;
2. they are neither the posting nor the collecting counterparties, nor part of the same group as either of the counterparties;
f
the availability of unused collateral to the liquidator or other insolvency official of the defaulting counterparty;
g
the initial margin is freely transferable to the posting counterparty in a timely manner in case of the default of the collecting counterparty;
h
that non-cash collateral is transferable without any regulatory or legal constraints or third-party claims, including those of the liquidator of the collecting counterparty or third-party custodian, other than liens for fees and expenses incurred in providing the custodial accounts and other than liens routinely imposed on all securities in a clearing system in which such collateral may be held;
i
that any unused collateral is returned to the posting counterparty in full, excluding costs and expenses incurred for the process of collecting and holding the collateral.
2
Any collateral posted as initial or variation margin may be substituted by alternative collateral where all of the following conditions are met:
a
the substitution is made in accordance with the terms of the agreement between the counterparties referred to in Article 3;
b
the alternative collateral is eligible in accordance with Section 2;
c
the value of the alternative collateral is sufficient to meet all margin requirements after applying any relevant haircut.
3
Initial margin shall be protected from the default or insolvency of the collecting counterparty by segregating it in either or both of the following ways:
a
on the books and records of a third-party holder or custodian;
b
via other legally binding arrangements;
4
Counterparties shall ensure that non-cash collateral exchanged as initial margin is segregated as follows:
a
where collateral is held by the collecting counterparty on a proprietary basis, it shall be segregated from the rest of the proprietary assets of the collecting counterparty;
b
where collateral is held by the posting counterparty on a non-proprietary basis, it shall be segregated from the rest of the proprietary assets of the posting counterparty;
c
where collateral is held on the books and records of a custodian or other third-party holder, it shall be segregated from the proprietary assets of that third-party holder or custodian.
5
Where non-cash collateral is held by the collecting party or by a third-party holder or custodian, the collecting counterparty shall always provide the posting counterparty with the option to segregate its collateral from the assets of other posting counterparties.
6
Counterparties shall perform an independent legal review in order to verify that the segregation arrangements meet the requirements referred to in paragraph 1(g) and paragraphs 3, 4 and 5. That legal review may be conducted by an independent internal unit, or by an independent third party.
7
Counterparties shall provide evidence to their competent authorities of compliance with paragraph 6 in relation to each relevant jurisdiction and, upon request by a competent authority, shall establish policies ensuring the continuous assessment of compliance.
8
For the purposes of paragraph 1(e), the counterparties shall assess the credit quality of the credit institution referred to therein by using a methodology that does not solely or mechanistically rely on external credit quality assessments.

Treatment of collected initial margins
Article 20
1
The collecting counterparty shall not rehypothecate, repledge nor otherwise reuse the collateral collected as initial margin.
2
Notwithstanding paragraph 1, a third-party holder may use the initial margin received in cash for reinvestment purposes.
SECTION 6

Valuation of collateral

Calculation of the adjusted value of collateral
Article 21
1
Counterparties shall adjust the value of collected collateral in accordance with either the methodology set out in Annex II or a methodology using own volatility estimates accordance with Article 22.
2
When adjusting the value of collateral pursuant to paragraph 1, counterparties may disregard the foreign exchange risk arising from positions in currencies which are subject to a legally binding intergovernmental agreement limiting the variation of those positions relative to other currencies covered by the same agreement.

Own estimates of the adjusted value of collateral
Article 22
1
Counterparties shall adjust the value of collected collateral using own volatility estimates in accordance with Annex III.
2
Counterparties shall update their data sets and calculate the own volatility estimates referred to in Article 21 whenever the level of market prices' volatility changes materially and at least quarterly.
3
For the purposes of paragraph 2, counterparties shall pre-determine the levels of volatility that trigger a recalculation of the haircuts as referred to in Annex III.
4
The procedures referred to in Article 2(2)(d) shall include policies to monitor the calculation of the own volatility estimates and the integration of those estimates into the risk management process of that counterparty.
5
The policies referred to in paragraph 4 shall be subject to an internal review that includes all of the following:
a
the integration of the estimates into the risk management process of the counterparty, which shall take place at least annually;
b
the integration of estimated haircuts into daily risk management;
c
the validation of any significant change in the process for the calculation of the estimates;
d
the verification of the consistency, timeliness and reliability of data sources used to calculate the estimates;
e
the accuracy and appropriateness of the volatility assumptions.
6
The review referred to in paragraph 5 shall be carried out regularly within the internal auditing process of the counterparty.
Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (OJ L 302, 17.11.2009, p. 32).
Art. 8(3) (as previously modified by the Technical Standards (European Market Infrastructure) (EU Exit) (No. 3) Instrument 2019 ("EMIR No.3") made by the PRA on 9.4.2019) amended (30.11.2025) by The Financial Services and Markets Act 2023 (Capital Buffers and Macro-prudential Measures) (Consequential Amendments) Regulations 2025 (S.I. 2025/1023), regs. 1(2), 10