How must uncleared OTC derivatives be confirmed, reconciled and collateralised?

Article 11 applies to every OTC derivative that no CCP clears. The exam material lists five techniques: exchanging collateral, confirming terms promptly, reconciling and compressing portfolios, and resolving disputes. Central clearing is not on the list: it is the alternative the techniques stand in for. Delegated Regulation (EU) No 149/2013 sets the details. Terms must be confirmed, electronically where available, by the end of the next business day between FCs and NFC+s, or of the second business day where an NFC- is involved, and FCs report to their competent authority each month the trades unconfirmed after five business days.

Portfolios are reconciled with each counterparty to spot mismatched terms and valuations early: by FCs and NFC+s every business day with 500 or more trades outstanding with that counterparty, weekly with 51 to 499 and quarterly with 50 or fewer; by NFC-s quarterly above 100 trades and yearly otherwise. With 500 or more uncleared trades outstanding with a counterparty, a firm analyses at least twice a year whether compression would cut its counterparty risk (for MiFIR's treatment of compression, see Where must derivatives be traded and cleared, and how is portfolio compression treated?). Dispute procedures need a specific process for disputes unresolved after five business days, and FCs report disputes over €15 million outstanding for at least 15 business days. The Regulation adds two duties the exam material's list omits: FCs and NFC+s value outstanding contracts daily, at market prices or, where markets prevent that, by a prudent model; and FCs hold capital against risk that collateral does not cover.

FCs must have risk-management procedures for collateral exchange that is timely, accurate and appropriately segregated. NFCs need them only for contracts concluded after they exceed a clearing threshold, and since 24 December 2024 a new NFC+ has four months from its notification to comply. Refit narrowed an NFC+'s clearing duty to the asset classes it exceeds, but an NFC over any one threshold exchanges collateral on its uncleared trades in every class. An FC below every threshold, which Refit's recitals call a small financial counterparty, is exempt from clearing but still exchanges collateral.

The margin rules are in Delegated Regulation (EU) 2016/2251. The exam material says counterparties exchange both initial and variation margin, which reduces counterparty credit and systemic risk and matches international standards. Initial margin covers the potential future exposure if a counterparty defaults; variation margin covers changes in current value. The Regulation adds limits. Variation margin is calculated at least daily between FCs and NFC+s. Initial margin applies only where both parties, or the groups they belong to, have an average notional of uncleared derivatives above €8 billion, the level since 1 September 2022; even then up to €50 million (€10 million within a group) may go uncollected, and the minimum transfer amount may be up to €500,000. Initial margin need not be collected on physically settled FX forwards and swaps. The Regulation also lists eligible collateral, with credit-quality and concentration limits, a bar on significant wrong-way risk, and haircuts; requires the collateral agreement's terms to be agreed by the time the trade is concluded, an independent legal review of its enforceability, and segregation; sets deadlines for exchange; and sets procedures for intragroup exemptions.

Since 24 December 2024, uncleared single-stock options and equity index options have been exempt from collateral exchange with no end date, although the Commission may revoke the exemption after an adaptation period of up to two years. FCs and NFC+s also need their competent authority's authorisation before using or changing an initial margin model; the authority decides within six months, or three for a change, and an industry-developed (pro forma) model also needs EBA validation. CySEC asked firms using such models to submit data by 16 January 2026 (Circulars C740 and C747).

Intragroup trades need no collateral where both parties are in the same Member State and there is no current or foreseen practical or legal obstacle to promptly transferring own funds or repaying liabilities between them. Across Member States, two FCs need a positive decision of both competent authorities. Two NFCs notify their authorities, and the exemption stands unless one disagrees within three months. Where an FC trades with an NFC, the FC's authority decides and notifies the NFC's authority, which may disagree. With a group entity in a third country, an EU FC needs its own authority's positive decision, while an EU NFC notifies its authority, which may disagree within three months. The exam material says the exemption may apply in part or in full where one party is based in a third country whose rules are 'equivalent'. Since 24 December 2024 no equivalence is needed; what matters is whether the country is an AML high-risk third country, on the EU list of non-cooperative tax jurisdictions or identified by the Commission.

According to the exam material, Refit extended the FC definition to 'Investment Funds' and to central securities depositories (CSDs), and introduced a 'small financial counterparty'. More precisely, UCITS and AIFs with an authorised or registered manager were FCs from 2012; from 17 June 2019 Refit covered all AIFs established in the EU, added CSDs, and excluded employee share plan funds and securitisation vehicles. The small FC label gives proportionate treatment to firms whose volumes are too low for clearing to be economically viable.