On 2 September 2013, the Bank for International Settlements (BIS) published a final policy framework establishing minimum standards for margin requirements for non-centrally cleared derivatives, (produced jointly by the International Organization of Securities Commissions (IOSCO) and the Basel Committee on Banking Supervision (BCBS), at the request of G20.
The framework requires the exchange of initial and variation margin between financial firms and systemically important non-financial entities (Covered Entities) that engage in non-centrally cleared derivatives. Initial margin should be exchanged without netting and held in such a way as to ensure that the margin is both immediately available to the collecting party in the event of a counterparty default and that the posting party is protected to the extent possible under applicable law in the event of insolvency. Margin requirements for such derivatives should reduce systematic risk by ensuring the availability of collateral to offset losses caused by a counterparty default, and should encourage central clearing by reducing any cost benefits of engaging in uncleared derivatives transactions. Usefully, the framework includes a standard schedule of initial margin requirements (as a percentage of notional exposure) and a standard haircut schedule (as a percentage of market value).
The requirement to collect and post initial margin on non-centrally cleared trades is to be phased in over a four year period, beginning in December 2015 with the largest, most active and most systemically important derivatives market participants. EU regulation of this area was postponed pending release of the framework.