EBA proposes common reporting for verifying the model used by companies in calculating guarantees for derivative instruments.

The European Banking Authority proposes a common reporting system for companies using the ISDA SIMM model to calculate the collateral required for over-the-counter derivatives. The information should allow the EBA to identify whether the model underestimates risks, produces persistent differences among participants, or requires additional adjustments for certain products and portfolios.

In short, the proposal targets financial and non-financial counterparties that must obtain authorization to use an initial margin model based on ISDA SIMM. Entities with significant activities in the over-the-counter derivatives market would report quarterly information regarding transactions, margin disputes, adjustments applied, and model test results. Companies with lower activity would only submit annual basic information about transactions and the data necessary to calculate the validation fee owed to the EBA. Formal disputes in which a company fails to collect the full requested margin would be reported, in principle, if the contested amount exceeds 500,000 euros and the situation lasts more than five working days. The consultation is open until November 2, 2026. The first reference date is scheduled for December 31, 2027, and the first reports are expected to be submitted in the first quarter of 2028.

Derivatives are financial contracts whose value depends on the evolution of an asset, a rate, a currency, an index, or another variable. They can be used to hedge against price fluctuations, but also for trading and taking market positions.

Some of these contracts are cleared through a central counterparty, which interposes between the buyer and seller and manages the risk of default. Other transactions are negotiated bilaterally, directly between the two companies, and do not go through such infrastructure.

For contracts that are not centrally cleared, parties may be required to post initial margin. This represents a guarantee meant to cover the loss that may accumulate between the moment a counterparty fails to meet its obligations and the moment positions can be closed or replaced.

The initial margin is not a fee nor a definitive payment to the other party. Assets or funds are set aside for the protection of the transaction and can be returned after the obligations cease, provided they are not needed to cover a loss.

The required value can be calculated using a standardized method or through a model that measures the portfolio risks in more detail. ISDA SIMM, the Standard Initial Margin Model, is currently the only common model developed by the market used for this purpose.

The model was created and is maintained by the International Swaps and Derivatives Association. It provides a standardized methodology through which companies convert portfolio sensitivities to interest rates, exchange rates, credit, equities, and commodities into an initial margin value.

A common model allows both counterparties to start from the same principles. However, the results may differ if companies use market data, valuation models, product classifications, or different assumptions.

EMIR 3 granted the EBA the role of central validator of standardized initial margin models. The function became operational on March 1, 2026, and companies wishing to use a model based on ISDA SIMM must enter the European validation and authorization system.

The EBA checks the general elements of the model, while national authorities authorize its use by each counterparty. Authorization can only be granted if the standard model on which the company's methodology is based has been validated at the European level.

The new responsibility requires information that current reports on derivatives do not provide. Transaction registers contain data about contracts but do not always show what method was used for margin, what adjustments were made, or why two counterparties reached different results.

For this reason, the EBA proposes a set of reports dedicated to the use and performance of ISDA SIMM. The data would be collected directly from companies in the validation system and could be made available to the national authorities that supervise them.

The first category of information would provide an overview of activities subject to initial margin. Companies would report the number of counterparties they trade with, the calculated margin, the margin actually collected, and the amounts calculated but not collected due to thresholds, exceptions, or disputes.

The information would be categorized based on the method used: standardized grid, a model based on ISDA SIMM, another common model developed by the market, or a model created entirely by the company.

The EBA could thus estimate the share of ISDA SIMM in the European market and could track whether the use of the model is concentrated in certain types of transactions or asset classes.

Companies with significant activity would provide monthly data through quarterly reports. They would also indicate the highest daily margin value from each month and the daily average, so that the authority does not rely on a single snapshot taken at the end of the period.

Operators with lower activity would report annually the existing data on the last working day of December. They would not need to calculate maximum values and monthly averages and would be exempt from the most detailed forms.

The proposal aims to differentiate companies based on the actual scale of their activity with derivatives, not just based on legal form or the size of the group they belong to.

A first filter would analyze whether the entity belongs to a group with an average notional value of centrally cleared derivatives of at least 750 billion euros.

A second filter would assess the activity of the reporting company. The exact level of the individual threshold has not yet been established and will be calibrated based on data collected by the EBA in 2026.

This approach avoids the situation where a company with very few transactions is required to submit extensive reports just because it is part of a large group. It also allows for the inclusion of non-financial entities that carry out significant activities, even if they are not banks or investment firms.

The EBA proposes a period of approximately six months for transitioning to full reporting after a company exceeds the threshold. Returning to simplified requirements could be allowed after the activity remains below the established level for a period between six and 12 months.

Another category concerns formal margin disputes. A dispute arises when the two counterparties do not agree on the value of the collateral, and one of them refuses to post the full requested amount.

The difference may arise from the list of transactions included in the portfolio, product classification, market data, sensitivity calculations, valuation models, or the placement of risk factors into different categories.

Sometimes, one party may consider that a significant risk is not covered by ISDA SIMM, while the other considers that the model addresses it adequately. The recurrence of such disputes may indicate a problem in the design or calibration of the model.

The EBA proposes a threshold of 500,000 euros for excluding disputes considered insignificant. Companies could apply a lower threshold, and conflicts indicating a possible deficiency in the model should be reported regardless of value.

Disputes resolved within a maximum of five working days could be omitted if they do not present indications of a significant problem. The most significant cases would be described individually, identifying the portfolio, duration, counterparty, cause, and the maximum contested value.

Reports would also cover adjustments made beyond the result produced by ISDA SIMM. A company may request additional margin if it believes that the model does not fully capture the risk of a product, a counterparty, or a market situation.

The adjustment can be a fixed amount, a percentage applied to the calculated margin, or a factor applied to the notional value of the transaction. It can be used on a case-by-case basis or systematically applied to certain products and portfolios.

The existence of an adjustment does not automatically prove that ISDA SIMM is deficient. It may reflect the specific risk of the counterparty, the conditions of a contract, or a bilateral decision of prudence.

The concentration of adjustments in a certain risk class may indicate, however, that the model does not include a relevant factor, uses insufficient weights, or does not accurately capture the characteristics of a product.

Large entities should report the number of adjusted portfolios, the margin value before adjustment, the size of the supplement, and the reasons for its application. The most important adjustments would be described individually.

Standardized reasons include the lack of a risk factor, absence of a correlation, weights that do not reflect the actual level of risk, characteristics insufficiently captured by the model, and counterparty-related reasons.

The EBA also wants information about situations in which a company deliberately decides not to use ISDA SIMM, even though the model is available and the transaction is, in principle, within its scope.

Non-use may be systematic for a class of products, a jurisdiction, or certain counterparties. It may also be a one-off decision or the consequence of an operational issue, such as lack of data, a programming error, or the inability to calculate a sensitivity.

Companies should also describe significant risks in their portfolios that ISDA SIMM is not designed to capture. This information could show where the model needs to be extended or where other calculation methods should be used.

The last major component concerns backtesting. Companies must periodically compare the margin estimated by the model with the observed changes in portfolio values.

An "overshooting" occurs when the observed loss exceeds the margin predicted by the model. A high number or a repeated pattern of exceedances may indicate that the risk is underestimated.

The EBA proposes reporting the number of tested portfolios and their classification into green, yellow, and red zones, based on the results of the verification.

For a subset of up to 30 portfolios, entities would submit more detailed data about the method used, the time horizon, the number of observations, exceedances, and the average margin shortfall.

Companies would add an analysis of common causes of poor results, distinguishing between issues with the standard model, local implementation, and specific characteristics of the portfolios.

Reports would also provide the information necessary to calculate the annual fee charged by the EBA for model validation. The amount owed will depend on the scale of the activities in which the company uses the common model.

The EBA is analyzing whether companies should report the equivalent notional value already calculated or more detailed data about the initial margins from which this value is derived.

The second option would request more granular information but could require fewer transformations in companies' systems and could produce better quality data.

The consultation includes 12 questions regarding thresholds, identifiers used to connect information with transaction registers, the cost of reporting, and the choice between aggregated data and granular data.

The EBA accepts observations until November 2, 2026. After analyzing the responses, the authority intends to adopt a directly applicable decision for the entities included in the validation system by the end of the year.

The first reference date is planned for December 31, 2027. Data would be submitted approximately six weeks after the end of the period, in the first quarter of 2028.

Annual reporting for calculating fees will have a different deadline, until March 31 of the following year, as the information directly creates a financial obligation for the company.

The requirements will be integrated into the EBA's technical reporting package, version 4.4, phase two. The publication of the final technical form is scheduled for March 2027.

Details regarding the IT system and the process by which data will be sent directly to the EBA will be communicated later to the companies registered on the validation platform.

The proposal does not currently change the value of the required margins and does not impose new obligations immediately. It is under consultation, and the final content may be changed based on participants' observations and the calibration of thresholds.

EMIR 3 has strengthened the oversight of models used for derivatives that are not cleared through central counterparties. Authorities may request modification, recalibration, or replacement of a model when deficiencies are identified.

The system proposed by the EBA aims to provide the same information in all member states and to allow the identification of problems that may affect multiple companies simultaneously. A common model reduces differences among participants, but a design or calibration error can transmit to a significant part of the European market.