Yesterday, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) gave welcome guidance that should reduce the anticipated burden regarding the mandatory exchange of initial margin (the statement is available here).
A number of industry bodies, led by ISDA and SIFMA, had raised concerns that if in-scope parties were obliged to enter into documentation for every uncleared OTC derivative relationship between them, this would mean a need to document in the region of 19,000 bilateral relationships for the exchange of initial margin. This burden appeared excessive, given that the framework published by BCBS/IOSCO (on which the implementing G-20 national legislation is based) provided that parties could agree that no initial margin was to be exchanged until a €50m exposure threshold (calculated at group level) had been breached. However, the industry had assumed that parties still had to document all of their relationships, even with counterparties with which initial margin would never reach the €50m threshold and whose initial margin documents would therefore never be used.
The BCBS/IOSCO statement notes that its framework “does not specify documentation, custodial or operational requirements if the bilateral initial margin amount does not exceed the framework's €50 million initial margin threshold. It is expected, however, that covered entities will act diligently when their exposures approach the threshold to ensure that the relevant arrangements needed are in place if the threshold is exceeded.”
It remains a matter of interpretation of G-20 national law as to whether full documentation does need to be put in place where the initial margin calculation is under the €50m threshold (and arguably in the EU at least, it is an excessive interpretation of the EU requirements to suggest that this is the case). We expect that the clear statement by BCBS/IOSCO will be taken by national authorities as guidance on how national laws should be applied.
Parties subject to the obligation to exchange initial margin should at a minimum still put in place arrangements for the calculation of initial margin, to determine whether the €50m threshold is close to being breached for bilateral relationships with relatively low volumes of OTC derivatives.
BCBS/IOSCO also helpfully clarified that amendments in respect of benchmark reforms to transactions not currently subject to initial margin requirements should not be treated as creating a new transaction to which initial margin requirements apply.
Macfarlanes’ publication on the requirements for the exchange of margin on uncleared OTC derivatives is here.