Who is In Scope for the Variation Margin Rules in South Africa – the Buy-side Need to be Prepared!
Updated: Jan 27, 2020
At a recent meeting with the Financial Sector Conduct Authority, some clarity was given on which entities will be impacted by the proposed Margin Requirements for Non-Centrally Cleared OTC Derivative Transactions (hereafter referred to as the VM Rules).
Whilst it is well understood that financial institutions will be required to transfer VM, due to the breadth of the definition in the VM Rules, other entities like FAIS-regulated financial service providers (who are authorised to trade derivatives) will be in scope too. Other in scope entities include Collective Investment Schemes, private equity funds and long- and short-term insurance companies. Whilst other regulatory regimes like EMIR and Dodd Frank include a ‘pure hedging’ exemption, where the rules carve out from their application entities which engage in OTC derivatives for pure hedging purposes, the VM Rules in South Africa do not contain a similar exemption. Other regimes, like in Hong Kong and Australia, also have an entry-level threshold that has to be breached before VM Rules will apply. Again the VM Rules in South Africa do not contain such a threshold, and the regulator is opposed to considering such exemptions and thresholds. The intention of the regulator is to ensure that any OTC Derivative Provider, or other entities listed in the definition of Counterparty in the VM Rules, be subject to the requirement to post VM.
As a result – whilst banks and other financial institutions will not be materially impacted from an operational point of view in having to comply with the VM Rules, and since collateral has formed part of their existing business for some time – buy-side firms like insurance companies, and asset managers who will be acting on behalf of collective investment schemes and private equity funds, will have a very significant impact from an operational point of view in being able to manage daily collateral calls in terms of the VM Rules.