The Basel Committee and IOSCO have published the final framework for margin requirements for non-centrally cleared derivatives. The standards will require all financial firms and systemically important non-financial entities dealing in non-centrally cleared derivatives to exchange initial and variation margin appropriate for the counterparty risks they face. There are some changes from the previous near-final version:
- physically settled foreign exchange forwards and swaps will have no initial margin requirements, but variation margin will apply and will be calculated in line with the Basel Committee guidance for managing settlement risk in foreign exchange (FX) transactions;
- fixed, physically settled FX transactions associated with the exchange of principal of cross-currency swaps will also attract no initial margin. The variation margin requirements will apply to all components of cross-currency swaps;
- the framework allows "one-time" rehypothecation of initial margin collateral subject to a number of strict conditions; and
- there will be a universal initial margin threshold of €50 million below which a firm could choose not to collect initial margin, and which allows for a number of forms of eligible collateral to satisfy initial margin requirements.
The framework envisages a four-year phase-in period for collecting and posting initial margin on non-centrally cleared trades from December 2015. The requirements will apply first to the largest, most active and most systemically important derivatives market participants. (Source: Basel and IOSCO Publish Margin Requirements for OTC Derivatives)