Further to the publication of two consultative documents on this topic, the Basel Committee, in conjunction with the International Organisation of Securities Commissions (IOSCO), has published the final version of its document entitled Margin Requirements for Non-Centrally Cleared Derivatives, which sets out the final regulatory policy on margin requirements for derivatives that are not subject to central clearing. These rules will apply an initial margin requirement plus variation margin to derivatives trades not subject to central clearing, depending on the asset class. The final policy is expressed in terms of 8 key principles: appropriate margining practices should be in place for all derivative transactions that are not cleared by CCPs; all "covered entities" must exchange initial and variation margin as appropriate; consistent methodologies should be used to calculate initial and variation margin; assets used as collateral for initial and variation margin should be highly liquid (examples given are cash, government/central bank securities, corporate bonds, covered bonds, equities and gold); initial margin should be exchanged by both parties and held in a way that ensures it is both immediately available and protected on bankruptcy; transactions between a firm and its affiliates should be subject to appropriate regulation; national regimes should be harmonised so as not to be duplicative; and margin requirements should be phased in over time to ensure appropriate transition. The Basel Committee notes that some modifications have been made to the near-final framework, as follows: physically-settled foreign exchange forwards and swaps are now exempt from the initial margin requirements, as are the fixed, physically-settled FX transactions that are associated with the exchange of principal of cross-currency swaps; and "one-time" re-hypothecation of initial margin collateral is permitted subject to a number of strict conditions. In addition, the rules allow for the introduction of a universal initial margin threshold of €50 million, below which a firm would have the option of not collecting initial margin. The framework now allows for a wide range of eligible collateral to satisfy the initial margin requirements. In addition, the framework envisages a four-year phase-in of the requirements starting from December 2015. In terms of the impact on securitisation, the Final Document helpfully notes that the margin requirements "…need not apply to non-centrally cleared derivatives to which non-financial entities that are not systemically-important are a party, given that (i) such transactions are viewed as posing little or no systemic risk and (ii) such transactions are exempt from central clearing mandates under most national regimes….". This may serve to provide an exemption from the margin requirements for SPVs involved in securitisation transactions. The Basel Committee and IOSCO will monitor the impact of the margin standards during 2014 and evaluate their consistency with other regulatory initiatives.

Useful links

Margin Requirements for Non-Centrally Cleared Derivatives