On September 2, the Basel Committee on Banking Supervision of the Bank for International Settlements (BIS) and the Board of the International Organization of Securities Commissions (IOSCO) jointly published a document entitled “Margin Requirements for Non-Centrally Cleared Derivatives” that sets out globally agreed minimum standards for the collateralization of uncleared over-the-counter swaps. Under these standards, all financial firms and systemically important non-financial entities that engage in non-centrally cleared derivatives will have to exchange initial and variation margin commensurate with the counterparty risks arising from such transactions. It is expected that the Commodity Futures Trading Commission, Securities and Exchange Commission and banking regulators in the United States will adopt these margin standards for swaps in lieu of the ones that they have previously proposed as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Among the highlights of the new margin framework are the following points:
- Variation margining will commence December 1, 2015. Initial margining will be phased in starting on that date for the largest market participants, with full initial margining coming into effect on December 1, 2019.
- Initial margin can be calculated using percentages from a standard schedule or an approved model.
- Initial margin must be exchanged on a gross basis and must generally be held at an independent custodian.
- National regulators will determine eligible collateral based on general guidance from BIS and IOSCO.
- Collateral haircuts can be set by reference to percentages from a standard schedule or an approved model.
- Variation margin must be exchanged on a zero threshold basis; initial margin can have a threshold of up to €50 million applied on a consolidated basis across all entities in the same corporate family.
- Rehypothecation is permitted for variation margin but not for initial margin (except under limited circumstances).
- Variation margin calculations can take into account legally enforceable netting arrangements.