Four trade associations, the International Swaps and Derivatives Association (ISDA, the Association for Financial Markets in Europe (AFME), the Alternative Investment Management Association and the American Council of Life Insurers, have called on the UK’s Financial Conduct Authority to grant equity options exemption from margin rules.
The associations outlined how single stock equity and index options should be exempted from plans to introduce margin requirements on non-centrally cleared derivatives, arguing the exemption would bring the UK in line with the US and European regimes, and protect smaller firms trading the contracts.
“The associations believe a permanent exemption of equity options from the margin regulatory technical standards is warranted. Imposing margin requirements in relation to equity options will also have a disproportionate impact for smaller counterparties, potentially leading UK entities that currently use equity options for hedging and risk mitigation purposes to cease trading these products due to the funding cost increase, and – in the case of non-UK clients – discouraging them from entering into equity options transactions with UK dealers,” the trade bodies said.
The case has been made in response to the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) consultation on margin requirements for non-cleared derivatives. The associations welcome the proposal to extend the temporary exemption from UK margining requirements under BTS 2016/2251 for single-stock equity and index options from 4 January 2024 until 4 January 2026, allowing the PRA and FCA to gather the evidence necessary to create a permanent regime.
The associations also welcomed the proposal to rely on existing supervisory powers and the current supervisory framework for assessing initial margin (IM) models and risk management rather than introduce a formal pre-approval requirement.
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