Inside this Topic Guide
In November 2011 the G20 called on the BCBS and IOSCO to develop consistent global standards on margin for non-centrally cleared derivatives. BCBS and IOSCO formed the Working Group on Margin Requirements (WGMR) to develop a proposal for consultation. Following consultations in mid 2012 and early 2013 the BCBS published a policy framework in September 2013 setting out eight key principles. The framework was revised in March 2015. The changes reflect an amended timetable for the introduction of margin requirements, delaying the start date from December 2015 to September 2016.
BCBS-IOSCO 8 Key Principles
1. Appropriate margining practices should be in place with respect to all derivative transactions that are not cleared by CCPs.
2. All financial firms and systemically-important non-financial entities (“covered entities”) that engage in non-centrally cleared derivatives must exchange initial and variation margin as appropriate to the counterparty risks posed by such transactions.
3. The methodologies for calculating initial and variation margin that must serve as the baseline for margin that is collected from a counterparty should (i) be consistent across entities covered by the requirements and reflect the potential future exposure (initial margin) and currentexposure (variation margin) associated with the portfolio of non-centrally cleared derivatives at issue and (ii) ensure that all counterparty risk exposures are covered fully with a high degree of confidence.
4. To ensure that assets collected as collateral for initial and variation margin purposes can be liquidated in a reasonable amount of time to generate proceeds that could sufficiently protect collecting entities covered by the requirements from losses on non-centrally cleared derivatives in the event of a counterparty default, these assets should be highly liquid and should, after accounting for an appropriate haircut, be abletohold their value in a time of financial stress.
5. Initial margin should be exchanged by both parties, without netting of amounts collected by each party (ieon a gross basis), and held in such a way as to ensure that (i) the margin collected is immediately available to the collecting party in the event of the counterparty’s default; and (ii) the collected margin must be subject to arrangements that fully protect the posting party in the event that the collecting party enters bankruptcy to the extent possible under applicable law.
6. Transactions between a firm and its affiliates should be subject to appropriate regulation in a manner consistent with each jurisdiction’s legal and regulatory framework.
7. Regulatory regimes should interact so as to result in sufficiently consistent and non-duplicative regulatory margin requirements for non-centrally cleared derivatives across jurisdictions.
8. Margin requirements should be phased-in over an appropriate period of time to ensure that the transition costs associated with the new framework can be appropriately managed. Regulators should undertake a coordinated review of the margin standards once the requirements arein place and functioning to assess the overall efficacy of the standards and to ensure harmonisation across national jurisdictions as wellasacross related regulatory initiatives.
On the documentation front, the International Swaps and Derivatives Association (ISDA) published proposals in 2013 for a standard methodology for the calculation of initial margin (standard initial margin model, or SIMM) that aims to comply with rules under development in the US, EU and Japan.
US: The US Federal Reserve Board, together with four other US prudential regulators, adopted a final rule on margining for uncleared swaps on 22 October 2015. The equivalent CFTC rules were finalised in December 2015. The SEC finalised its rules for risk mitigation techniques for uncleared security based swaps in December 2019 and entered into effect on 14 February 2020.
Phase in of initial margin requirements continuing in accordance with BCBS-IOSCO timetable (below). The phase in is staggered according to the size of firms' aggregate month end notional positions in uncleared derivatives, with the rules applying soonest to the firms with the largest positions.
The Joint Committee of the ESAs' draft RTS amending the EMIR RTS with regard to VM for physically settled FX forwards were submitted to the EU Commission in December 2017. In the ESAs' December 2019 Final Report on RTS on various amendments to the bilateral margin requirements in view of the international framework it was confirmed that the draft amendment submitted by the ESAs in December 2017 would be replaced by a new amendment covering a broader scope, i.e. not only covering physically settled FX forwards, but covering both physically settled FX forwards and swaps, with the same exemption for both, as such amendment is contained in the draft RTS of December 2019.
The draft RTS of December 2019 are now subject to endorsement by the European Commission and following such endorsement, they are then subject to non-objection by the European Parliament and the Council.Under EMIR Refit, the ESAs are also required to submit draft RTS to the Commission by 30 June 2020 setting out supervisory procedures for initial and ongoing validation of firms' risk-management procedures under the existing RTS on risk mitigation techniques.
BCBS IOSCO phase in for VM/IM according to notional - March 2015 and April 2020 revisions
*Phase 5 extension and introduction of an additional implementation phase:
- On 3 April 2020, BCBS and IOSCO announced an extension by one year of the final two implementation phases of the IM margin requirements in order to provide operational capacity for firms to respond to the immediate impact of Covid-19 and at the same time, facilitate covered entities to act diligently to comply with the requirements by the revised deadline.
- On 23 July 2019, BCBS and IOSCO announced that there would be a one year extension for the implementation of IM requirements for covered entities with an aggregate average notional amount (AANA) of noncentrally cleared derivatives greater than €8 billion but less than €50 billion. This effectively splits Phase 5 counterparties into two implementation phases.
- This followed a BCBS / IOSCO statement from March 2019, indicating that Phase 5 counterparties may not be required to put in place documentation, custodial or operational requirements to facilitate the exchange of IM if a covered entity's bilateral initial margin amount does not exceed the framework's €50 million IM threshold.
|Covered entities belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives exceeds €3 trillion||1 September 2016|
|All other covered entities||
1 March 2017
Although they have not extended the compliance deadline, a number of international and national regulators published statements on 23 February 2017 recognising the practical challenges that some market participants face in completing the necessary documentation and processes to be in full compliance with the VM standards by 1 March 2017. IOSCO | European Supervisory Authorities | UK FCA | US Federal Reserve Board and OCC | Canada OSFI | Japanese FSA. The US CFTC had earlier published a no-action letter providing relief up to 8 May 2017 with respect to certain aspects of its margin rules.
|Chris Bates (London)||Jessica Littlewood (London)|
|Marc Benzler (Frankfurt)||Habib Motani (London)|
|Caroline Dawson (London)||Masayuki Okamoto (Tokyo)|
|Francis Edwards (Hong Kong)||Gareth Old (New York)|
|David Felsenthal (New York)||Nelda Turnbull (Sydney)|
|Frank Graaf (Amsterdam)||Terry Yang (Hong Kong)|
|Paul Landless (Singapore)|