Uncleared Margin Rules

In response to the financial crisis, the G-20 mandated the Basel Committee on Banking Supervision (BCBS) and Board of International Organization of Securities Commissions (IOSCO) to develop consistent standards for non-centrally cleared over-the-counter (OTC) derivatives. In September 2013 BCBS-IOSCO published a global policy framework and timetable for OTC derivative margin reform which aimed to reduce systemic risk by ensuring collateral is available to offset losses caused by the default of a derivatives trading counterparty.

This framework and base level requirements have now been implemented in multiple jurisdictions under multiple regimes (described collectively herein as the un-cleared margin rules, “UMR”) and require entities which enter into certain OTC derivative transactions on an un-cleared basis to exchange variation margin on a daily basis and in some cases collect and post initial margin (IM). IM is required to cover exposures that may arise in the period from default of one party to the time when the portfolio of OTC derivatives is closed out or replaced. Each party will both post and collect collateral to meet the IM requirement and such collateral will be subject to segregation requirements.