Physically-settled FX forwards: margin requirement expected to be lifted for some end-users

Recent statements by the European Supervisory Authorities (ESAs) and the Financial Conduct Authority (FCA) propose to exempt certain users of physically-settled FX forwards from the obligation to provide variation margin. The precise scope of the exemption is not yet clear, but based on these statements it is expected to cover insurance and re-insurance firms, pension funds, alternative investment funds (AIFs), UCITS and non-financial counterparties above the clearing threshold (NFC+).

This briefing discusses the ESA and FCA statements, next steps with regard to legislative implementation and some uncertainties that may exist in the meantime. The briefing also suggests options for managing communications with counterparties about your intentions with regards to the proposed exemption.