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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.
For a full set of relevant disclosures, please visit the link below.
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