The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) have published guidance today in respect of two key areas for regulatory margin.
Firstly, BCBS/IOSCO acknowledge that a large number of entities will be brought into scope for regulatory initial margin for the first time in Phases 4 and 5 (on 01 September 2019 and 2020 respectively) and that this involves documentation, custodial and operational arrangements being put in place. BCBS/IOSCO go on to note that its original framework published in March 2015, which is the progenitor of the margin rules implemented under EMIR, in the US and in other jurisdictions, “does not specify documentation, custodial or operational requirements if the bilateral initial margin amount does not exceed the framework’s €50 million initial margin threshold” and that “it is expected, however, that covered entities will act diligently when their exposures approach the threshold to ensure that the relevant arrangements needed are in place if the threshold is exceeded.”
This expected and awaited guidance from BCBS/IOSCO lays the groundwork for ESMA and national regulators in other jurisdictions to issue similar guidance. In turn, this would provide a potential path for some market participants, whose initial margin threshold in respect of some or all counterparty relationships is likely to remain below €50 million, to avoid having to put in place the full scope of documentation, custodial and operational arrangements in respect of those counterparty relationships.
Secondly, BCBS/IOSCO acknowledge the fact that market participants are likely to need to amend OTC derivative contracts as a result of benchmark reforms and state that, where the amendments are made solely for the purpose of addressing benchmark reforms, then such amendments should not trigger the variation or initial margin requirements for OTC derivative contracts which would otherwise have benefited from being grandfathered.
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