The long-awaited final framework for margin requirements for non-centrally cleared derivatives has been published. These recommendations are intended to apply where there is an obligation to clear centrally but where this can not be done, perhaps because no clearing house will accept the transaction. A non-financial counterparty that is not systemically important will thus not be obliged to put up bilateral margin by these proposals.
A number of modifications have been made to the framework, which was released this month by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO).
The framework now exempts physically settled FX forwards and swaps from initial margin requirements. Variation margin on these derivatives should be exchanged in accordance with standards developed after considering the Basel Committee supervisory guidance for managing settlement risk in FX transactions.
The framework also exempts from initial margin requirements the fixed, physically settled FX transactions that are associated with the exchange of principal of cross-currency swaps. But the variation margin requirements that are described in the framework apply to all components of cross-currency swaps.
Meanwhile, a ‘one-time’ re-hypothecation of initial margin collateral is permitted subject to a number of strict conditions. This is intended to mitigate the liquidity impact associated with the requirements.
The final requirements have been developed following two rounds of consultation in July 2012 and February 2013.
To see the final framework, visit: www.bis.org/publ/bcbs261.htm
Sally Percy is editor of The Treasurer