Shearman & Sterling LLP | Financial Regulatory Developments Focus | International Bodies Issue Statement on Margin Requirements for Uncleared Derivatives
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  • International Bodies Issue Statement on Margin Requirements for Uncleared Derivatives
    03/05/2019
    The Basel Committee on Banking Supervision and the International Organization of Securities Commissions have published a joint statement on the final implementation of the margin requirements for derivatives not cleared through a CCP. In March 2015, the Basel Committee and IOSCO published a revised version of their policy framework for the exchange of margin for uncleared derivatives. The main revisions were to delay the phase-in period for the obligations relating to both initial margin and variation margin and were aimed at harmonizing the key principles across jurisdictions.

    The phase in of the requirements to post and collect initial margin for covered entities belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives exceeds €1.5 trillion began on September 1, 2018 and will run to August 31, 2019. The phase-in period for covered entities belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives exceeds €0.75 trillion will run from September 1, 2019 to August 31, 2020. The obligations will also apply to covered entities belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives exceeds €8 billion from September 1, 2020. Covered entities are financial firms and systemically important non-financial entities, the definitions for which are determined by national regulation.

    In their latest statement, the Basel Committee and IOSCO note that the initial margin requirements will apply to a large number of entities for the first time, but highlight that the documentation, custodial and operational requirements do not apply unless the bilateral initial margin amount exceeds the €50 million initial margin threshold. However, covered entities are expected to take steps to ensure that they can comply when their exposure reaches the €50 million threshold.

    The Basel Committee and IOSCO provide some comfort for firms that may need to amend their derivative contracts due to interest rate benchmark reforms by stating that amendments to legacy derivative contracts pursued solely for the purpose of addressing interest rate benchmark reforms do not require the application of the margin requirements for the purposes of the BCBS/IOSCO framework. However, firms are advised to consider whether the same derogation is available under relevant national implementing laws. The Basel Committee and IOSCO have no power to impose any mandatory requirements on regulatory authorities, but rather serve as a reference for national regulators as they adopt their respective margin regimes.

    View the statement.

    View the Basel Committee/IOSCO summary implementation timetable.

    View details of the delay to the implementation timetable.
     
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    TOPIC: Derivatives