Initial margin (IM) is collateral collected and/or posted to reduce future exposure to a given counterparty as a result of non-cleared derivative activity. Whilst there is a recognised process within exchange traded and cleared derivatives, this is largely a new process for non-centrally cleared OTC derivatives.
Unlike variation margin:
- IM needs to be segregated from own funds (by example at a third-party custodian)
- IM cannot be cannot be rehypothecated and must be otherwise transferred by custodian
How is initial margin calculated?
The amount of IM that must be collected and posted will be calculated in accordance with approved margin models that meet defined criteria described within each jurisdiction's final regulatory rules.
Transfers below a Minimum Transfer Amount (MTA) are not required. For instance, under the EU regime, there is a minimum amount of EUR500,000 which may be shared across VM and IM. A lower MTA may be set where multiple jurisdictional rules apply in order to remove the inherent risks where the MTA is expressed in a different currency to that of the applicable rule.
Additionally, an in-scope entity is not required to post or receive initial margin until a consolidated threshold at a group level of EUR50 million IM is reached with its counterparty's group. In practice, counterparties' groups will each allocate this EUR50 million IM threshold across their group's entities and versus defined counterparties.
What are the AANA Thresholds and subsequent in-scope dates for initial margin?
IM has been being phased in since 2016 based on the amount of a counterparty's group Aggregate Average Notional Amount ("AANA") of uncleared OTC derivatives.
Please see below the BCBS-IOSCO phase-in calendar for initial margin. Please note that some jurisdictions may not adhere to the proposed schedule.
|AANA Threshold||IM start|
|> EUR 3tr / USD 3tr*||1 Sep 2016|
|> EUR 2.25tr/ USD 2.25tr*||1 Sep 2017|
|> EUR 1.5tr/ USD 1.5tr*||1 Sep 2018|
|> EUR 0.75tr/ USD 0.75tr*||1 Sep 2019|
|> EUR 0.50tr/ USD 0.50tr*||1 Sep 2021|
|> EUR 8bn/ USD 8bn*||1 Sep 2022|
*Or equivalent in the currency of the relevant margin regime
Eligible Collateral and Haircuts
Eligible forms of collateral that may be used as initial margin are generally broad from a regulatory perspective, although certain rules do impose limitations on cash and concentration limits may apply. HSBC will additionally continue to have its own requirements and policies with regard to the eligible collateral it can accept.
Important: National supervisors will generate their own list of eligible collateral assets taking into account the conditions of their own markets. HSBC will provide eligible collateral assets and haircuts details for each jurisdiction as and when regulators and national competent authorities (NCAs) release such information (see the Jurisdictions tab for more detail).
Certain forms of collateral are subject to a value "haircut" when determining the collateral's value for satisfying the margin requirements (e.g. highly liquid foreign currencies may be subject to appropriate haircuts to reflect the inherent FX risk involved). An additional 8% FX haircut will be applied to eligible collateral that is denominated in a currency that is not the same as the "Termination Currency" of the underlying master agreement. If the market value of the collateral declines or the collateral is no longer eligible, clients will be required to post additional eligible collateral as necessary to meet margin compliance.
What are most in-scope entities expected to do?
HSBC will communicate to all counterparties to ensure a smooth transition to the new regime. Initial margin rules will require a 2-step exchange of documentation:
- Self-Disclosure to assess if initial margin rules apply
HSBC counterparties will be required to provide a Regulatory Margin Self-Disclosure Letter detailing all information necessary to determine if and when compliance with one or more of the new initial margin regimes will be required.
- Additional legal documentation when the new margin rules apply
Where any of the new margin rules apply, HSBC and its counterparties will be required to agree to additional collateral documentation to reflect the requirements of the applicable initial margin regimes and eligible collateral as well as segregation arrangements (e.g., 3rd party custodian documentation).
Last updated: 18 December 2020