Margin requirements for non-centrally cleared derivatives

In February 2013, the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO) published a second consultative document on margin requirements for non-centrally cleared derivatives, setting out proposals aimed at (i) reducing systemic risk and (ii) promoting the central clearing of derivatives transactions. The consultation closed for comment on 15 March 2013. The proposals are important as they will set the global standard for margin requirements for non-centrally cleared derivatives and the document is stated to reflect ‘near-final policy’.

The proposals are important as they will set the global standard for margin requirements for non-centrally cleared derivatives and the document is stated to reflect “near-final policy”. It provides, in summary, that:

— It will be mandatory for financial firms and systemically important non-financial entities who enter into non-centrally cleared derivatives (other than, possibly, physically settled FX forwards and swaps) to have appropriate margining practices in place in the form of the exchange of initial margin (IM) and variation margin (VM) (although intercompany transactions should be treated differently as deemed appropriate by the relevant regulator).

— The method of calculating IM and VM should be consistent, should reflect all counterparty risk exposures and collateral posted should be “highly liquid” and hold its value “in a time of financial stress”…

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