SECTION 2 Exemptions in calculating levels of initial margin

By way of derogation from Article 2(2), counterparties may provide in their risk management procedures that initial margins are not collected with respect to:

1. (a)

   physically settled OTC derivative contracts that solely involve the exchange of two different currencies on a specific future date at a fixed rate agreed on the trade date of the contract covering the exchange ("foreign exchange forwards");

2. (b)

   physically settled OTC derivative contracts that solely involve an exchange of two different currencies on a specific date at a fixed rate that is agreed on the trade date of the contract covering the exchange, and a reverse exchange of the two currencies at a later date and at a fixed rate that is also agreed on the trade date of the contract covering the exchange ("foreign exchange swaps");

3. (c)

   the exchange of principal of non-centrally cleared OTC derivative contracts under which counterparties exchange solely the principal amount and any interest payments in one currency for the principal amount and any interest payments in another currency, at specified points in time according to a specified formula ("currency swap").

1. (1) By way of derogation from Article 2(2), counterparties may provide in their risk management procedures that initial margins are not collected for all new OTC derivative contracts entered into within a calendar year where one of the two counterparties has an aggregate month-end average notional amount of non-centrally cleared OTC derivatives for the months March, April and May of the preceding year of below EUR 8 billion.
2. (1A) By way of derogation from Article 2(2), counterparties may provide in their risk management procedures that initial margins already collected are released and no further initial margins are collected for all outstanding OTC derivative contracts between two counterparties from the start of a calendar year where one of the two counterparties has an aggregate month-end average notional amount of non-centrally cleared OTC derivatives for the months March, April and May of the preceding year of below EUR 8 billion.

3. (1B) By way of derogation from Article 2(2), counterparties may make the provision in their risk management procedures described in subparagraph (1C) in relation to OTC derivative contracts where:

   1. (a) one of the two counterparties has its registered office, or if it has no registered office, its head office, outside the UK;
   2. (b) the counterparty referred to in (a) is subject to margining requirements in the jurisdiction where it has its registered office, or if it has no registered office, its head office; and
   3. (c) the margining requirements in the jurisdiction referred to in (b) provide the option not to collect initial margins for all new OTC derivative contracts entered into in a specified period after one of the two counterparties has an aggregate month-end average notional amount of non-centrally cleared OTC derivatives that is below the threshold for three consecutive months as specified in the margining requirements of that jurisdiction.
4. (1C) Where (1B) applies, counterparties may provide in their risk management procedures that initial margins are not collected for all new OTC derivative contracts entered into between these two counterparties within the relevant period where one of the two counterparties has an aggregate month-end average notional amount of non-centrally cleared OTC derivatives that is below EUR 8 billion for the three consecutive months specified in the margining requirements referred to in subparagraph (1B)(b) in the preceding 12 months. For the purpose of this subparagraph the relevant period is the period specified in the margining requirements referred to in subparagraph (1B)(b) up to a maximum of 12 months.
5. (1D) By way of derogation from Article 2(2), counterparties may make the provision in their risk management procedures described in (1E) in relation to OTC derivative contracts where:
   1. (a) one of the two counterparties has its registered office, or if it has no registered office, its head office, outside the UK;
   2. (b) the counterparty referred to in (a) is subject to margining requirements in the jurisdiction where it has its registered office, or if it has no registered office, its head office; and
   3. (c) the margining requirements in the jurisdiction referred to in (b) provide the option to release initial margin already collected and not collect further initial margins for all outstanding OTC derivative contracts between two counterparties after a specified date where one of the two counterparties has an aggregate month-end average notional amount of non-centrally cleared OTC derivatives that is below the threshold for three consecutive months as specified in the margining requirements of that jurisdiction.
6. (1E) Where (1D) applies, counterparties may provide in their risk management procedures that initial margins already collected are released and no further initial margins are collected for all outstanding OTC derivative contracts between these two counterparties after the date specified in the margining requirements referred to in (1D)(b) where one of the two counterparties has an aggregate month-end average notional amount of non-centrally cleared OTC derivatives that is below EUR 8 billion for the three consecutive months specified in the margining requirements referred to in subparagraph (1D)(b) in the preceding 12 months.
7. (1F) Counterparties shall keep a record of the dates they are using in accordance with (1C) and (1E) for their OTC derivative contracts.
8. (1G) The aggregate month-end average notional amount referred to in (1) to (1E) shall be calculated at the counterparty level or at the group level where the counterparty belongs to a group.
9. (2) Where a counterparty belongs to a group, the calculation of the group aggregate month-end average notional amount shall include all non-centrally cleared OTC derivative contracts of the group including all intragroup non-centrally cleared OTC derivatives contracts. For the purposes of the first subparagraph, OTC derivative contracts which are internal transactions shall only be taken into account once.
10. (3) UK UCITS and AIFs (as defined in regulation 3 of the Alternative Investment Fund Managers Regulation 2013) managed by AIFMs (as defined in regulation 4 of the Alternative Investment Fund Managers Regulation 2013) authorised or registered in accordance with the Alternative Investment Fund Managers Regulations 2013 shall be considered distinct entities and treated separately when applying the thresholds referred to in paragraph 1 where the following conditions are met:
    1. (a) the funds are distinct segregated pools of assets for the purposes of the fund's insolvency or bankruptcy;
    2. (b) the segregated pools of assets are not collateralised, guaranteed or otherwise financially supported by other investment funds or their managers.

1. (1)

   By way of derogation from Article 2(2), counterparties may provide in their risk management procedures that initial margin collected is reduced by an amount up to EUR 50 million in the case of points (a) and (b) of this paragraph or EUR 10 million in the case of point (c) where:

   1. (a)

      neither counterparty belongs to any group;

   2. (b)

      the counterparties are part of different groups;

   3. (c)

      both counterparties belong to the same group.

2. (2)

   Where a counterparty does not collect initial margins in accordance with paragraph 1(b), the risk management procedures referred to in Article 2(1) shall include provisions on monitoring, at group level, whether that threshold is exceeded and provisions for the retention of appropriate records of the group's exposures to each single counterparty in the same group.

3. (3)

   UK UCITS and AIFs (as defined in regulation 3 of the Alternative Investment Fund Managers Regulation 2013) managed by AIFMs (as defined in regulation 4 of the Alternative Investment Fund Managers Regulation 2013) authorised or registered in accordance with the Alternative Investment Fund Managers Regulations 2013 shall be considered distinct entities and treated separately when applying the thresholds referred to in paragraph 1 where the following conditions are met:

   1. (a)

      the funds are distinct segregated pools of assets for the purposes of the fund's insolvency or bankruptcy;

   2. (b)

      the segregated pools of assets are not collateralised, guaranteed or otherwise financially supported by other investment funds or their managers.