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Basel/Iosco reveal margin rules for OTC derivatives
02 September 2013
Institutions required to post initial and variable margin in line with counterparty risk
The Basel Committee on Banking Supervision and International Organization of Securities Commissions (Iosco) have published the final framework for margin requirements for non-centrally cleared derivatives.
The standards call for the exchange of initial and variation margin in line with the counterparty risks from the transactions for non-centrally cleared derivatives trades.
The Basel Committee said the framework was designed to reduce systemic risks arising from over-the-counter (OTC) derivatives trades and incentivise central clearing.
In the finalised version, the Basel Committee and Iosco highlighted a number of changes from previous drafts. Physically settled foreign exchange forwards and swaps are exempted from initial margin requirements, while fixed, physically settled FX transactions associated with the exchange of principal of cross-currency swaps are also exempt.
However, the Basel Committee and Iosco highlighted that variation margin requirement would still apply to all cross currency swaps.
The bodies said there were other featured intended to manage the liquidity impact on participants, such as the introduction of a €50m ($66m) universal initial margin threshold, below which firms would be allowed to not collect the initial margin, and broad collateral eligibility standards for initial margin.
The framework is intended to be phased in over time, with requirements to collect and post initial margin on non-centrally cleared trades starting in late 2015 and taking four years to complete.