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 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.
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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 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).