The Basel Committee on Banking Supervision (BCBS) and the International
Organisation of Securities Commissions (IOSCO) have published a report
containing the final framework for margin requirements for non-centrally
cleared derivatives. Under these globally agreed standards, all financial
firms and systemically important non-financial entities that engage in
non-centrally cleared derivatives will have to exchange initial and variation
margin commensurate with the counterparty risks arising from the transactions.
The framework envisages a gradual phase-in period to provide market participants
with sufficient time to adjust to the requirements. The requirement to
collect and post initial margin on non-centrally cleared trades will be phased
in over a four year period, beginning in December 2015 with the largest, most
active and most systemically important derivatives market participants.
A monitoring group is to be established to evaluate the margin standards in 2014
and it will review:
- the extent to which initial margin collateral is rehypothecated;
- which entities are electing to have their initial margin collateral re-hypothecated,
- which entities have been allowed to re-hypothecate the initial margin collateral that they collect;
- how jurisdictions and market participants are implementing the above conditions and giving protection to assets re-hypothecated;
- how re-hypothecation works in practice;
- whether the above conditions have created level playing field issues; and
- how reporting on re-hypothecation can be enhanced.
The monitoring group is to formulate recommendations to the BCBS and IOSCO about whether to continue to permit re-hypothecation of collateral under these
conditions, permit re-hypothecation for only a subset of non-centrally cleared
derivative products, prohibit re-hypothecation altogether, or whether to
otherwise modify the conditions.