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News: Double MPOR under Basle 3 | Collateral Disputes Carry a High Cost

01 July 2014 | Bill Hodgson

In the Basle 3 rules, page 40, (see bcbs189 below)  you see this:

41 (ii). If a bank has experienced more than two margin call disputes on a particular netting set over the previous two quarters that have lasted longer than the applicable margin period of risk (before consideration of this provision), then the bank must reflect this history appropriately by using a margin period of risk that is at least double the supervisory floor for that netting set for the subsequent two quarters.

Given the basics of the BCBS margin requirements from Dec 2015, summarised in this article, the basic MPOR is 10 days / 99% confidence with VaR applied across four asset class groups of Rates & FX, Credit, Equities and Commodities.

In the second attachment (bcbs237 below) an FAQ on Basle 3, someone asked the question:

Question: 1b.8 Basel III sets forth the revisions to the paragraph 41(ii) of Annex 4 of the Basel II rules text in that if a bank has experienced more than two margin call disputes on a particular netting set over the previous two quarters that have lasted longer than the applicable margin period of risk, the bank is required to reflect this history appropriately by using a margin period of risk that is at least double the supervisory floor for that netting set for the subsequent two quarters. In this regard, industry seeks clarifications as to whether all margin disputes be counted even for those where the disputed amount was very small, or if there is any threshold amount that can be applied here.
Answer: Every instance of a margin call being disputed must be counted, irrespective of the amount.

So the upshot is that any two tiny disputes over a six month period, will push the IM calculation from a 10 day holding period (MPOR) to a 20 day period, meaning potentially a big increase in IM. CCPs generally use a 5 day MPOR for an OTC portfolio, so the outcome of disputes leads to a highly cautious IM calculation. Is it fair? It it justified?

Has anyone else noticed this, what are your thoughts? Bill.

Update: Omgeo covered similar ground in this briefing note, and confirms my points above: https://www.omgeo.com/page/basel_impact/?cpid=CollNewsQ32010

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