HSBC entities exchange variation margin (VM) with many clients; as well as being a regulatory requirement in certain cases, collateralisation is a widely adopted practice in the OTC derivatives market. The daily exchange of variation margin (VM) reflects the profit or loss of each counterparty compared to the previous valuation of the financial instrument they trade, which reduces counterparty risk. These daily valuations also known as 'mark-to-market' follow transparent and well recognised industry methodologies.
Variation margin may not be a new process but now:
- it is mandatory for all in-scope entities;
- regulatory requirements apply to in-scope relationships; and
- regulatory compliant documentation needs to be completed where rules apply.
Daily exchange of variation margin became mandatory for major market participants from 1 September 2016 and for all other in-scope entities since 1 March 2017 (subject to jurisdictions' implementation schedules)
From 1 March 2017, all in-scope entities in certain jurisdictions were required to exchange VM. This requirement only applies to new contracts entered into on or after 1 March 2017. An extensive list of lifecycle events may however, bring legacy trades into scope for the new requirements. This list includes but is not limited to amendments and cancellations, partial termination, allocation, partial novation, etc.
|Region||AANA of non-centrally cleared derivatives over EUR3tr or USD3tr*||All other in-scope entities|
|Australia||1 March 2017†‡||1 March 2017†‡|
|Canada||1 September 2016||1 March 2017†|
|EU||4 February 2017||1 March 2017†‡|
|Hong Kong||1 March 2017†||1 March 2017†|
|Japan||1 September 2016||1 March 2017†|
|Singapore||1 March 2017†||1 March 2017†|
|Switzerland||1 September 2016||1 March 2017†‡|
|US||1 September 2016||1 March 2017†‡|
* Or equivalent in the currency of the relevant margin regime
† Transitional period, relief available subject to certain conditions.
‡ Retroactive application of VM.
Variation margin transfer is not required below a certain amount
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. It may all be allocated to VM if IM is not applicable. 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.
Eligible Collateral and Haircuts
Eligible forms of collateral that may be used as variation margin are generally broad, although certain rules do require VM to be cash only in certain circumstances. HSBC will continue to have its own requirements and policies with regard to the collateral it can accept.
Important: National supervisors will generate their own list of eligible collateral assets and applicable haircuts 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 only applies if the non-cash collateral is different to a cash or non-cash currency that is agreed in the relevant credit support annex. 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 in-scope entities expected to do to comply?
- Self-Disclosure to assess if variation margin rules apply
HSBC counterparties may 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 variation margin regimes will apply to their transactions with HSBC.
- 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 variation margin regimes and eligible collateral.
Last updated: 21 December 2020