INSIGHT: UNCLEARED OTC DERIVATIVES
MARGIN REFORMS AND IMPLICATIONS FOR COUNTERPARTIES
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FOREWORD
RULES FOR THE EXCHANGE OF MARGINS ON UNCLEARED DERIVATIVE TRANSACTIONS ARE HIGHLY TOPICAL ACROSS THE INDUSTRY. WITH THIS IN MIND, IT MAY BE WISE TO CONSIDER THE NEW DRAFT RULES ISSUED BY THE BASEL COMMITTEE ON BANKING SUPERVISION (BCBS) AND THE INTERNATIONAL ORGANISATION OF SECURITIES COMMISSIONS (IOSCO) TO REDUCE SYSTEMIC RISK.
In March 2015, the Basel Committee on Banking Supervision (BCBS) and International Organisation of Securities Commissions (IOSCO) finalised a framework to reduce systemic risk by establishing a consistent global standard for margining non-centrally-cleared derivatives.
The uncleared margin rules will require most financial firms, and systemically important non-financial firms subject to the rules, to exchange Initial Margin (IM) and Variation Margin (VM) when entering into uncleared OTC derivative transactions with other covered entities.
These changes will apply from around 1 March 2017 onwards for VM and from 1 September 2017 onwards for IM.*
In this insight we consider the margin requirements, credit support annex (CSA) considerations and the impact on counterparties.
KEY TAKEAWAYS
- The definitions used for determining what transactions are captured by the margin rules (i.e. covered transactions) differ between jurisdictions.
- The rules in each jurisdiction distinguish two different types of margin, Variation Margin and Initial Margin,
- When putting in place VM and IM CSAs, the relevant rules in each jurisdiction prescribe, among other things, which types of collateral are eligible, minimum transfer amounts, thresholds, frequency of margining, settlement timings and impact of FX haircuts on collateral.
- For counterparties who do not currently post margin, the new rules will have funding implications.
- Counterparties will need to put in place operational and risk management processes necessary to comply with the margin rules.
- Counterparties will be asked by ANZ to provide information confirming their regulatory status and aggregate notional amount of uncleared OTC derivatives.
- Captured counterparties may need to bilaterally negotiate new documentation with ANZ.
FIGURE 1
Initial Margin and Variation Margin thresholds
AUTHORS
Rohit Harjani, Rates Investor Sales, ANZ
Niamh Targett, Associate Director, Financial Institutions Group, ANZ
Robert Fievez, OTC Reform Project, ANZ
For any comments or feedback please contact the authors at GlobalFIGInsights@anz.com
PUBLISHED NOVEMBER 2016
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*The US PR and CFTC rules and Japanese rules started to apply to Phase 1 entities captured under those rules from 1 September 2016 for both IM and VM. Implementation of the EU, Hong Kong, Singapore and Australian rules have recently been delayed. For most captured counterparties this may potentially mean a very slight delay for implementation of VM beyond 1 March but the IM schedule is likely to proceed as planned.
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