Global bank and securities regulators announced that they’ve agreed to margin requirements for non-centrally cleared derivatives.
The Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO) released their final framework for margin requirements for non-centrally cleared derivatives, which aims to reduce systemic risks from the over-the-counter (OTC) derivatives markets, and to provide firms with incentives to use central clearing.
The framework will require all financial firms and systemically important non-financial firms to post margin to account for the counterparty risks arising from trading in OTC derivatives markets.
The regulators say that certain features of the framework are intended to manage the liquidity impact of the margin requirements on financial market participants. Compared with the latest proposals released earlier this year, the final set of requirements exempts physically settled foreign exchange forwards and swaps from initial margin requirements; and, allows a ‘one-time’ re-hypothecation of initial margin collateral, subject to a number of strict conditions, which aims to mitigate the liquidity impact.
It also includes a phase-in period to provide firms with 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, the regulators say.
The Basel Committee and IOSCO say that the precise impact of the new requirements will depend on a number of factors and will only be realized over time as the requirements take effect.