EUROPE – Buy-side users of bilateral derivatives trades, including pension funds, should be more "vocal" about the need to introduce a two-way margining approach in the EMIR regulation, the European Securities and Markets Authority (ESMA) has said.

Speaking at the recent ICI global trading and market structure conference in London, Verena Ross, executive director at ESMA, argued in favour of a universal two-way system under EMIR, in which the sell-side would also be obliged to exchange collateral.

"Today, counterparties do already exchange collateral, but buy-side clients more often post than receive collateral," she said.

"However, we consider that clients should also be covered in the case of a default of their bigger counterparties."

Ross conceded that the implementation of a two-way margining approach might prove difficult since it could have an impact in terms of collateral availability.

But she went on to argue that it would "enhance" the level of protection of the overall financial system, in particular for the buy-side industry.

"We would, therefore, encourage you to be more vocal in supporting this 'universal two-way margining'," she said.

Ross also recognised in her keynote speech that the EMIR and other similar regulations worldwide would not come without costs for market participants.

"But the benefits of having safer infrastructures (such as CCPs), more transparent markets (with TRs) and less counterparty credit risks (with central clearing and bilateral collateralisation) surely more than offset those costs," she added.

ESMA has been working on the implementation of EMIR – the European Market Infrastructure Regulation – on behalf of the European Commission.

The new regulation, which aims to drive all standardised OTC derivatives trades through central clearing, with the view to reducing counterparty risk, is expected to come into force as soon as January 2013.

However, for now, only plain-vanilla derivatives trades will be clearable, and more complex tools such as inflation swaps commonly used by pension funds will remain in the bi-lateral system.

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