Regulatory Developments: BCBS-IOSCO’s Margin Requirements for Non-Centrally Cleared Derivatives


Background -

On September 2, 2013, the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (“BCBS-IOSCO”), in consultation with the Committee on Payment and Settlement Systems and the Committee on the Global Financial System, published the final policy framework (the “Framework”) for the initial margin and variation margin requirements for derivatives that are not cleared through a central counterparty (“non-centrally cleared derivatives”). The Framework consists of eight key principles (as further discussed below) and is anticipated to be the base framework for the regulatory technical standards to be promulgated by the European Securities and Markets Authority. The Framework will likely also influence regulators in the United States as they prepare their final regulations.

Principle 1: Instruments Subject to the Framework -

The Framework applies to all non-centrally cleared derivatives except for (1) indirectly cleared derivatives transactions that are intermediated through a clearing member on behalf of a non-member customer so long as (a) the non-member customer is subject to the margin requirements of the clearing house or (b) the non-member customer provides margin consistent with the relevant clearing house’s margin requirements, and (2) physically settled foreign exchange (“FX”) forwards and swaps (including, in respect of initial margin, those associated with the exchange of principal of cross-currency swaps). The BCBS IOSCO has issued updated supervisory guidance, consistent with the Framework, regarding appropriate variation margin standards for physically settled FX forwards and swaps.

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