Financial regulators release proposed margin rules for derivatives

The Basel Committee on Banking Supervision and the International Organisation of Securities Commissions (IOSCO) have released a near-final proposal on margin requirements for non-centrally cleared derivatives.

In a statement from the IOSCO Secretariat, the two global financial markets regulatory bodies stated that several features of the near-final proposal are intended to manage the liquidity impact of the margin requirements on financial market participants.

They noted that the proposed requirements would allow for the introduction of a universal initial margin threshold of €50 million.

According to the statement, the results of a quantitative impact study (QIS) conducted in 2012 indicate that application of the threshold could reduce the total liquidity costs by 56 per cent relative to a margining framework with a zero initial margin threshold, which was initially proposed in the July 2012 consultative paper on margin requirements for non-centrally cleared derivatives.

The proposal also envisaged a gradual phase-in to provide market participants with sufficient time to adjust to the requirements.

The requirement to collect and post initial margin on non-centrally cleared trades is proposed to be phased in over a four-year period beginning from 2015 while this initial phase will start with the largest, most active and most systemically risky derivative market participants.

These policy proposals are articulated through a set of key principles that primarily seek to ensure that appropriate margining practices will be established for all non-centrally cleared over-the-counter (OTC) derivative transactions. These principles will apply to all transactions that involve either financial firms or systemically important non-financial entities.

The proposal takes into account the results of the last year’s QIS, which was conducted to quantify the liquidity costs associated with margin requirements for non-centrally cleared derivatives, as well as comments received in connection with the first consultative paper.

The Basel Committee and IOSCO would be taking public comments on the near-final proposal up till March 15, 2013. Specifically, stakeholders in the global financial industry are expected to provide inputs on the treatment of physically-settled foreign exchange forwards and swaps under the framework, ability to engage in limited re-hypothecation of collected initial margin, proposed phase-in framework, and the adequacy of the conducted quantitative impact study (QIS).

Stakeholders’ comments on the near-final proposal would be considered in formulating the final joint proposal on margin requirements on non-centrally cleared derivatives.

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