The Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO) jointly have published a
consultative paper on margin requirements for non-centrally-cleared derivatives. The paper
presents the initial policy proposals emerging from the Basel Committee and
IOSCO joint Working Group on Margining Requirements.
The new margin requirements contemplated by the consultative paper are intended to articulate with other G-20 measures to reduce the systemic risk posed by the growing OTC derivatives market. Similar to the swaps and OTC
rules recently adopted by the SEC and CFTC in the United States, these Basel and IOSCO proposals include mandatory central clearing and electronic trading of standardised OTC derivatives, and trade reporting of all OTC derivatives contracts.
The key elements of the margining reforms proposed in the paper are:
1. Appropriate margining practices should be in place with respect to all derivative transactions that are not cleared by CCPs.
2. All financial firms and systemically-important non-financial entities (“covered entities”) that engage in non-centrally-cleared derivatives must exchange initial and variation margin as appropriate to the risks posed by such transactions.
3. The methodologies for calculating initial and variation margin that must serve as the baseline for margin that is collected from a counterparty should (i) be consistent across entities covered by the proposed requirements and reflect the potential future exposure (initial margin) and current exposure (variation margin) associated with the portfolio of non-centrally-cleared derivatives at issue and (ii) ensure that all exposures are covered fully with a high degree of confidence.
4. To ensure that assets collected as collateral for initial and variation margin purposes can be liquidated in a reasonable amount of time to generate proceeds that could sufficiently protect collecting entities covered by the proposed requirements from losses on non-centrally-cleared derivatives in the event of a counterparty default, these assets should be highly liquid and should, after accounting for an appropriate haircut, be able to hold their value in a time of financial stress.
5. Initial margin should be exchanged by both parties, without netting of amounts collected by each party (ie on a gross basis), and held in such a way as to ensure that (i) the margin collected is immediately available to the collecting party in the event of the counterparty’s default; and (ii) the collected margin must be subject to arrangements that fully protect the posting party in the event that the collecting party enters bankruptcy to the extent possible under applicable law.
6. Transactions between a firm and its affiliates should be subject to appropriate variation margin arrangements to prevent the accumulation of significant current exposure to any affiliated entity arising out of non-centrally-cleared derivatives.
7. Regulatory regimes should interact so as to result in sufficiently consistent and nonduplicative regulatory margin requirements for non-centrally-cleared derivatives
across jurisdictions.
Cognizant of the potential effects these margining requirements could have on liquidity, the BCBS and IOSCO plan to conduct a quantitative impact study in order to gauge the impact of the margin proposals. The study will be conducted during the consultation period, and its results will inform the BCBS’s and IOSCO’s joint final proposal.
Comments on the consultation paper are due by September 28, 2012.