Margin Requirements for Non Cleared Derivatives in SA: Final Rules
Summary of the Press Release by the FSB on SA Margin Rules
The FMA introduces the concept of an OTC derivative provider as a regulated person. The margin rules will apply to these regulated OTC derivative providers and counterparties, but NOT to clients. This is because the BCBS guidelines spoke to reducing systemic risk using margin for the most systemically important entities. Margin requirements will not apply to any other entities not defined as a counterparty or OTC derivative provider.
The exchange of IM will not be required for FX spot transactions or physically settled commodities transactions. However VM will need to be exchanged for these products.
Intra group OTC derivatives between entities in the same group will not be captured for margin purposes.
In terms of cross border transactions, SA has decided not to implement a substituted compliance system. The margin notice provides that in a cross border OTC derivative between a local covered entity and a foreign counterparty, the local covered entity could be deemed to comply with margin requirements that are applicable to the foreign counterparty as long as certain requirements as set out in the rules are complied with.
To address liquidity concerns, cash and non cash IM collateral may be rehypothecated but only once and only by the IM collector (not third parties).
The BCBS guidelines talk about IM being immediately available in the event of counterparty default. This is challenging in a SA insolvency framework. The regulator is working on addressing these concerns.
The phase in period under SA rules will depend on finalizing other sections of the FMA and the promulgation of the FSR Act. Thus the timelines specified in the BCBS guidelines will not be followed in SA.
The IM and VM margin thresholds in the BCBS guideline will be followed, but not on a one to one basis, otherwise it is likely that these thresholds will result in no margin exchange between covered entities. The margin thresholds are as follows:
Covered entities must exchange IM on a bilateral basis subject to an IM threshold not exceeding R500m.
The full VM amount must be exchanged on a regular basis.
The transfer of margin is also subject to a de minimis minimum transfer amount of R5m.
IM will be phased in over a 4-year period, but won’t follow the timeframes in the BCBS guidelines.
An OTC derivative provider and a covered entity must bilaterally exchange VM daily from 1 January 2018 if the month end average gross notional amount of the OTC derivatives for the period July, August and September 2017 exceed a threshold of R30 trillion. From 1 July 218 VM must be exchanged on all non-centrally cleared derivatives that are entered into after 1 January 2018.
Comments are required by the public until 8 September 2017.
Details on the rules will be included in DeriviDoc courses as follows:
Friday, 13 October 2017 at The Da Vinci Hotel, Sandton
Thursday, 16 November 2017 at The Cellars-Hohenort Hotel, Constantia
Thursday, 30 November 2017 at The Da Vinci Hotel, Sandton
Friday, 17 November 2017 at The Cellars-Hohenort Hotel, Constantia
Friday, 01 December 2017 at The Da Vinci Hotel, Sandton