The European Supervisory Authorities (ESAs) have been made aware of challenges for certain counterparties to exchange variation margin for physically-settled FX forwards by 3 January 2018. Based on the material presented to the ESAs, the implementation appears to mainly pose a challenge regarding transactions with certain end-users.
The requirement to exchange variation margin for physically-settled FX forwards is part of a globally agreed framework ('the international standards'), which aims at ensuring safer derivatives markets by limiting the counterparty risk from derivatives trading partners. The international standards state that variation margining of physically-settled FX forwards is both an established practice among significant market participants and that it is a prudent risk management tool that limits the build-up of systemic risk, and thus that variation margining should apply to physically-settled FX forwards.
The international standards recommend implementing this requi
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