BIS & IOSCO Release Second Consultative Paper on FX Margin Requirements for Non Centrally Cleared Derivatives
The Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO) have published a second consultative paper which represents a near-final proposal on margin requirements for non-centrally-cleared derivatives.
Several features of the near-final proposal are intended to manage the Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent impact of the margin requirements on financial market participants. The proposed requirements would allow for the introduction of a universal initial margin threshold of €50 million. The results of a quantitative impact study (QIS) conducted in 2012 indicate that application of the threshold could reduce the total liquidity costs by 56% relative to a margining framework with a zero initial margin threshold, which was initially proposed in the July 2012 first consultative paper.
Today's proposal also envisages a gradual phase-in 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 is proposed to be phased in over a four year period beginning 2015 and begin with the largest, most active and most systemically risky derivative market participants.
The proposed margin standards are articulated through a set of key principles that primarily seek to ensure that appropriate margining practices will be established for all non-centrally-cleared over-the-counter (OTC) derivative transactions. These principles will apply to all transactions that involve either financial firms or systemically important non-financial entities.
The Basel Committee and IOSCO seek public comment on the near-final proposal and specifically solicit feedback on the following four issues relating to:
- the treatment of physically-settled foreign exchange (FX) forwards and Swaps Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps under the framework,
- the ability to engage in limited re-hypothecation of collected initial margin,
- the proposed phase-in framework, and
- the adequacy of the conducted quantitative impact study (QIS).
The Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO) have published a second consultative paper which represents a near-final proposal on margin requirements for non-centrally-cleared derivatives.
Several features of the near-final proposal are intended to manage the Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent impact of the margin requirements on financial market participants. The proposed requirements would allow for the introduction of a universal initial margin threshold of €50 million. The results of a quantitative impact study (QIS) conducted in 2012 indicate that application of the threshold could reduce the total liquidity costs by 56% relative to a margining framework with a zero initial margin threshold, which was initially proposed in the July 2012 first consultative paper.
Today's proposal also envisages a gradual phase-in 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 is proposed to be phased in over a four year period beginning 2015 and begin with the largest, most active and most systemically risky derivative market participants.
The proposed margin standards are articulated through a set of key principles that primarily seek to ensure that appropriate margining practices will be established for all non-centrally-cleared over-the-counter (OTC) derivative transactions. These principles will apply to all transactions that involve either financial firms or systemically important non-financial entities.
The Basel Committee and IOSCO seek public comment on the near-final proposal and specifically solicit feedback on the following four issues relating to:
- the treatment of physically-settled foreign exchange (FX) forwards and Swaps Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps under the framework,
- the ability to engage in limited re-hypothecation of collected initial margin,
- the proposed phase-in framework, and
- the adequacy of the conducted quantitative impact study (QIS).