Since 1 September 2016, new initial margin (IM) and variation margin (VM) requirements for non-centrally cleared over-the-counter (OTC) derivatives have been introduced and applied to jurisdictions globally.
These new margin rules originate from a global policy framework and timetable that was published by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (BCBS-IOSCO). They are a key part of the reform agenda put in place by the Group of Twenty (G20) as a response to the 2008 financial crisis and seek to reduce systemic risk in the non-centrally cleared OTC derivatives markets by ensuring appropriate collateral is available to offset losses caused by the default of a counterparty.
Important: Although the implementing jurisdictions' margin rules are based on the same global policy framework there will invariably be differences in each jurisdiction's requirements (see the Jurisdictions tab for more detail).
Variation margin in a nutshell
Variation margin reflects the daily change in market value of the financial instruments. Two counterparties must exchange VM to cover their current exposure based on the valuation of the financial instruments they are trading. These daily valuations (also known as 'mark-to-market') and the calculations follow transparent and well recognised industry methodologies.
The variation margin rules apply to trades between the largest market participants since 1 September 2016 (in the US, Canada and Japan). Since 1 March 2017, VM has applied to all other in-scope entities (subject to jurisdictions' implementation schedules). Please review the implementation schedule on the variation margin tab.
Initial margin in a nutshell
Initial margin (IM) is an amount of collateral that investors post to enable trading in financial instruments. Posting of IM aims to reduce the broker's exposure to the investor's credit risk. Whilst there is a common process for exchange traded and cleared derivatives, this is largely a new process for uncleared OTC derivatives.
The IM obligation started on 1 September 2016 in United States, Canada and Japan for a few of the largest market participants only. The IM obligation for the vast majority of the in-scope entities will follow a phased-in implementation calendar between 1 September 2017 and 1 September 2020.
Financial firms and systemically important non-financial entities are generally in-scope and may need to exchange VM on a bilateral basis or to post IM to a third-party custodian. Each jurisdiction will set forth detailed definitions of in-scope, out-of-scope and exempt entities.
Margin will not be required to be exchanged with all counterparties. For example, many jurisdictions' rules will not require the exchange of margin with certain types of non-financial entities (e.g. non-financial counterparties below the EMIR clearing threshold in the European Union). It is also expected that certain entities (e.g. sovereigns, and central banks) will be exempt.
We will provide entities scope details for each jurisdiction when they will release such information (see the Jurisdictions tab for more detail).
New margin requirements will apply to non-centrally cleared OTC derivatives, which are derivative transactions that are not cleared through central clearing counterparties (CCPs). There are some product exemptions, as well as exemptions for certain inter-affiliate transactions; however, these exemptions may vary across jurisdiction.
We will provide transactions scope details for each jurisdiction as and when final rules are released.
Last updated: 6 March 2017