Article: Summary Of The Proposals for Margin on Uncleared OTC Derivatives

02 September 2013 | Bill Hodgson

After a quick read through, the main points of the BIS IOSCO proposals for margin on uncleared OTC derivatives appear to be:

  • FX spot and forwards are exempt
  • The FX parts of a Currency Swap are exempt
  • Variation Margin to be exchanged with a zero threshold
  • Minimum transfer capped at €500,000
  • Threshold capped at €50m, on a Corporate Group basis
  • Initial margin to be either a schedule based approach (see below) or a statistical approach using 99% confidence (or nervousness), 10 day holding period
    • Each asset class considered separately for IM (but see footnotes 15 and 16 on page 12 which provide exceptions)
    • Each historic scenarios period to  include a period of 'financial stress' which is identified to regulators
    • Historic period capped at 5 years? (why?) (or is the financial stress period?)
    • The scenarios in the financial stress period to be equally weighted
    • Model to be approved by regulators (whether provided in-house, or externally)
    • The total IM across the major asset classes will be the sum of the IM per asset class (much like an Omnibus Gross Account)
    • The proposals make plain that the lack of correlation across asset classes means IM must be siloed per asset class
  • The establishment of eligible collateral rules must involve regulators, including any haircuts applied
  • IM to be paid gross without netting between parties
  • IM to be held in such a way as to make it readily accessible to a non-defaulting party
  • Re-hypothecation allowed, but with a long list of conditions, and if I understand it right, only by providing the assets to "buy-side" firms
    • And only once - the receiver of a rehyped asset cannot themselves rehyp the assets
  • Phasing
    • 1st Dec 2015 VM on new trades must meet these rules, VM on old trades not changed
    • 1st Dec 2015 IM approach applies to new trades, IM on old trades unaffected
    • 1st Dec 2015 to 30th Nov 2016: Any firm with a portfolio over €3trn to exchange IM (measured during June - Aug 2015)
    • 1st Dec 2016 to 30th Nov 2017: Inclusion threshold down to €2.25trn
    • 1st Dec 2017 to 30th Nov 2018: Inclusion threshold down to €1.5trn
    • 1st Dec 2018 to 30th Nov 2019: Inclusion threshold down to €750bn
    • 1st Dec 2019 onwards, inclusion threshold down to €8bn

Firms choosing a schedule based approach to IM will use this schedule:


The BIS proposal is attached below.




Ive also added a summary of theMargin requirements for non-centrally cleared derivatives

Phasing: 1st Dec 2015 for VM on new trades, rather than 1st Jan 2015.

text of footnote 15 (page 12) in the Summary Of The Proposals for Margin on Uncleared OTCDerivativesreads

and IOSCO on how to margin non-centrally-cleared derivatives is out. Highlights can be found onThe OTC Spaceand onRegulatory

Summary of the Proposals for Margin on Uncleared Trades